NOTES TO FINANCIAL STATEMENTS
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Background
The Company was incorporated pursuant to the British Columbia Companies Act on May 25, 1988 as Graham Gold Mining Corporation. On October 27, 1997, the Company changed its name to Sense Technologies Inc. and on December 14, 2001, the Company was continued in the Yukon Territory, Canada and during the year ended February 29, 2008, the Company changed its jurisdiction of organization from the Yukon Territory back to British Columbia, Canada.
The Company holds a non-exclusive license to manufacture, distribute, market and sell the ScopeOut® product, a system of specially designed mirrors which are placed at specific points on automobiles, trucks, sport utility vehicles or commercial vehicles to offer drivers a more complete view behind the vehicle.
During the years ended February 28, 2014 and 2013, the Company had assets and generated sales primarily in the United States of America.
Use of Estimates
The preparation of financial statements in accordance with United States 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 revenue and expenses in the reporting period. The Company regularly evaluates estimates and assumptions related to deferred income tax asset valuations, asset impairment, stock based compensation and loss contingencies. The Company bases its estimates and assumptions on current facts, historical experience and various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the accrual of costs and expenses that are not readily apparent from other sources. The actual results experienced by the Company may differ materially and adversely from the Company’s estimates. To the extent there are material differences between the estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents
For purposes of reporting cash flows, the Company considers all short-term investments with an original maturity of three months or less to be cash equivalents. We had no cash equivalents at either February 28, 2014 or February 28, 2013.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary of a fair presentation have been included.
Accounts Receivable
Accounts Receivable are stated at the amounts management expects to collect from the outstanding balances. Management provides for probable uncollectible amounts through a charge to earnings and a credit to a valuation allowance based upon its assessment of the current collection status of individual accounts. Delinquent amounts that are outstanding after management has conducted reasonable collection efforts are written of through a charge to the valuation allowance and a credit to accounts receivable. Total Allowance for Doubtful Accounts during the years ended 2014 and 2013 was zero and zero, respectfully. The net Accounts Receivable is $8,500 and $52,710 at February 28, 2014 and 2013, respectively. No balances due from related parties.
Inventory
Inventory consists of finished goods which are recorded at the lower of average cost and net realizable value. Average cost is determined using the weighted-average method and includes invoice cost, duties and freight where applicable plus direct labor applied to the product and an applicable share of manufacturing overhead. A provision for obsolescence for slow moving inventory items is estimated by management based on historical and expected future sales and is included in cost of goods sold. Inventory was expensed at year-end as the Company did not have title or access.
Prepaid Royalties
Prepaid royalties consist of guaranteed royalties the company has paid but for which sales have not yet been completed. Royalty expense that will not be recognized in the next year is classified as long-term. On December 31, 2011, the Company issued a promissory note for $189,000 for guaranteed royalty payments due under the Escort licensing agreement. Due to limited cash flows to insure the payment of this note, an impairment equal to the promissory note has been recorded. All prepaid royalties are considered impaired at February 28, 2013, due to the uncertainty of future sales.
Property and Equipment
Property and equipment are recorded at cost. Depreciation is provided on the straight-line method and the declining balance method over the estimated useful lives of the assets, which range from five to seven years. Expenditures for major renewals and betterments that extend the original estimated economic useful lives of the applicable assets are capitalized. Expenditures for normal repairs and maintenance are charged to expense as incurred. The cost and related accumulated depreciation of assets sold or otherwise disposed of are removed from the accounts, and any gain or loss is included in operations.
Intangible Assets
The Company’s intangible assets are comprised of licenses fees. Licensing fees are generally amortized on a straight-line basis over the periods of benefit and recognized on the statements of loss.
Foreign Currency Transactions
The functional and reporting currency of the Company is the United States dollar. Monetary assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the fiscal year-end rate of exchange. Non-monetary assets and liabilities denominated in other currencies are translated at historic rates and revenues and expenses are translated at average exchange rates prevailing during the month of transaction.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence of an arrangement, goods are shipped and title passes, collection is probable, and the fee is fixed or determinable. Provisions are established for estimated product returns and warranty costs at the time the revenue is recognized. The Company records deferred revenue when cash is received in advance of the revenue recognition criteria being met.
Credit Risk
Sense Technologies does not require collateral from its customers with respect to accounts receivable. Sense determines any required allowance by considering a number of factors including lengths of time accounts receivable are past due. Reserves for accounts receivable are made when accounts become uncollectible. Payments subsequently received are credited to allowance for doubtful accounts.
Income Taxes
The Company accounts for income taxes in accordance with the asset and liability method. Under this method, deferred income taxes are recognized for the future income tax consequences attributable to differences between the financial statement carrying amounts and their respective income tax bases and for loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period of enactment. Deferred income tax assets are evaluated and if their realization is not considered to be "more likely than not", a valuation allowance is provided.
(Loss) Per Share
The Company computes net loss per share in accordance with FASB literature. Basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the year. Diluted EPS gives effect to all dilutive potential common shares outstanding during the year including stock options, using the treasury stock method, and convertible preferred stock, using the if-converted method. In computing diluted EPS, the average stock price for the year is used in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential common shares if their effect is anti-dilutive.
For the year ended February 28, 2014, potentially dilutive common shares relating to options, convertible promissory notes payable and convertible preferred shares outstanding totaling 4,957,199 (2013 – 4,957,199) were not included in the computation of loss per share because the effect was anti-dilutive.
Product Warranty
The Company generally sells products with a limited warranty on product quality and accrues for known warranty if a loss is probable and can be reasonably estimated. The Company accrues for estimated incurred based on historical activity. The accrual and the related expense for known issues were not significant during the periods presented.
Advertising Costs
The Company expenses the costs of advertisements and marketing at the time the expenditure occurs, and expenses the costs of communicating advertisements in the period in which the advertising space or airtime is used.
Impairment of Long-Lived Assets
Long-lived assets are continually reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Stock-Based Compensation
The Company is required to record compensation expense, based on the fair value of the awards, for all awards granted after the date of the adoption and for the unvested portion of previously granted awards that remain outstanding as at the date of adoption. 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.
Fair Value of Financial Instruments
The carrying value of cash, bank indebtedness, accounts payable, advances payable, dividends payable and promissory notes payable approximate fair value because of the demand or short-term maturity of those instruments. The carrying value of the convertible promissory notes payable also approximates fair value. Unless otherwise noted, it is management’s opinion that the Company is not exposed to significant interest, currency or credit risks arising from these financial instruments
.
The Company discloses the assets and liabilities that are recognized and measured at fair value on a non-recurring basis, presented in a three-tier fair value hierarchy, as follows:
|
·
|
Level 1. Observable inputs such as quoted prices in active markets;
|
|
·
|
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
·
|
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The following schedule summaries the gross value of assets and liabilities that are measured and recognized at fair value on a non-recurring basis at February 28, 2014.
|
|
|
Fair Value Measurements at February 28, 2014
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Convertible promissory notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
584,447
|
|
|
|
|
Fair Value Measurements at February 28, 2013
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Convertible promissory notes payable
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
584,447
|
|
There were no gains or losses in fair value during the years ended February 28, 2014 or February 28, 2013.
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 July 2013, FASB issued ASU No. 2013-11,
"Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists."
The provisions of ASU No. 2013-11 require an entity to present an unrecognized tax benefit, or portion thereof, in the statement of financial position as a reduction to a deferred tax asset for a net operating loss carryforward or a tax credit carryforward, with certain exceptions related to availability. ASU No. 2013-11 is effective for interim and annual reporting periods beginning after December 15, 2013. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company's Consolidated Financial Statements.
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02,
Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
, to improve the transparency of reporting these reclassifications. Other comprehensive income includes gains and losses that are initially excluded from net income for an accounting period. Those gains and losses are later reclassified out of accumulated other comprehensive income into net income. The amendments in the ASU do not change the current requirements for reporting net income or other comprehensive income in financial statements. All of the information that this ASU requires already is required to be disclosed elsewhere in the financial statements under U.S. GAAP. The new amendments will require an organization to:
|
-
|
Present (either on the face of the statement where net income is presented or in the notes) the effects on the line items of net income of significant amounts reclassified out of accumulated other comprehensive income - but only if the item reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period; and
|
|
-
|
Cross-reference to other disclosures currently required under U.S. GAAP for other reclassification items (that are not required under U.S. GAAP) to be reclassified directly to net income in their entirety in the same reporting period. This would be the case when a portion of the amount reclassified out of accumulated other comprehensive income is initially transferred to a balance sheet account (e.g., inventory for pension-related amounts) instead of directly to income or expense.
|
The amendments apply to all public and private companies that report items of other comprehensive income. Public companies are required to comply with these amendments for all reporting periods (interim and annual). The amendments are effective for reporting periods beginning after December 15, 2012, for public companies. Early adoption is permitted. The adoption of ASU No. 2013-02 is not expected to have a material impact on our financial position or results of operations.
In January 2013, the FASB issued ASU No. 2013-01,
Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities
, which clarifies which instruments and transactions are subject to the offsetting disclosure requirements originally established by ASU 2011-11. The new ASU addresses preparer concerns that the scope of the disclosure requirements under ASU 2011-11 was overly broad and imposed unintended costs that were not commensurate with estimated benefits to financial statement users. In choosing to narrow the scope of the offsetting disclosures, the Board determined that it could make them more operable and cost effective for preparers while still giving financial statement users sufficient information to analyze the most significant presentation differences between financial statements prepared in accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the amendments in this update will be effective for fiscal periods beginning on, or after January 1, 2013. The adoption of ASU 2013-01 is not expected to have a material impact on our financial position or results of operations.
In October 2012, the FASB issued Accounting Standards Update ASU 2012-04, “Technical Corrections and Improvements” in Accounting Standards Update No. 2012-04. The amendments in this update cover a wide range of Topics in the Accounting Standards Codification. These amendments include technical corrections and improvements to the Accounting Standards Codification and conforming amendments related to fair value measurements. The amendments in this update will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 is not expected to have a material impact on our financial position or results of operations.
In August 2012, the FASB issued ASU 2012-03, “Technical Amendments and Corrections to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin (SAB) No. 114, Technical Amendments Pursuant to SEC Release No. 33-9250, and Corrections Related to FASB Accounting Standards Update 2010-22 (SEC Update)” in Accounting Standards Update No. 2012-03. This update amends various SEC paragraphs pursuant to the issuance of SAB No. 114. The adoption of ASU 2012-03 is not expected to have a material impact on our financial position or results of operations.
In July 2012, the FASB issued ASU 2012-02, “Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment” in Accounting Standards Update No. 2012-02. This update amends ASU 2011-08,
Intangibles – Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment
and permits an entity first to assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30,
Intangibles - Goodwill and Other - General Intangibles Other than Goodwill
. The amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if a public entity’s financial statements for the most recent annual or interim period have not yet been issued or, for nonpublic entities, have not yet been made available for issuance. The adoption of ASU 2012-02 has not had a material impact on our financial position or results of operations.
NOTE 2 – GOING CONCERN
At February 28, 2014, the Company had not yet achieved profitable operations, had an accumulated deficit of $20,269,560 (2013 - $19,484,755) since its inception and incurred a net loss of $753,214 (2013 - $568,823) for the year 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, 2015 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 February 28, 2014, included in prepaid expenses is $22,297 (February 28, 2013: $19,466) for an insurance premium for the directors of the Company financed through Flatiron Capital. Insurance policy is from August 23, 2013 to August 23, 2014.
NOTE 4 – EQUIPMENT
The following is a summary of this category, including estimated useful lives of the assets:
|
|
|
February 28,
2014
|
|
|
February 28,
2013
|
|
|
Computer Equipment (5 yrs)
|
|
|
38,297
|
|
|
|
38,297
|
|
|
Furniture and Fixtures (7 yrs)
|
|
|
11,217
|
|
|
|
11,217
|
|
|
Testing Equipment (5 yrs)
|
|
|
27,137
|
|
|
|
27,137
|
|
|
Product Molds (7 yrs)
|
|
|
66,056
|
|
|
|
66,056
|
|
|
Subtotal
|
|
|
142,707
|
|
|
|
142,707
|
|
|
Less: Accumulated Depreciation
|
|
|
(134,952
|
)
|
|
|
(125,516
|
)
|
|
Total
|
|
$
|
7,755
|
|
|
$
|
17,191
|
|
NOTE 5 – INTANGIBLES
Intangible assets are comprised as follows:
|
|
|
February 28,
2014
|
|
|
February 28,
2013
|
|
|
Guardian Alert License
|
|
$
|
50
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
Scope Out Mirror License
|
|
|
1
|
|
|
|
1
|
|
|
Net carrying cost
|
|
$
|
51
|
|
|
$
|
51
|
|
Guardian Alert License
By an Assignment Agreement dated April 30, 1992 and amendments thereto dated May 27, 1992, July 14, 1992, April 5, 1993, August 13, 1993, March 10, 1997, May 29, 1997 and February 25, 1999 the Company has been assigned the right, title, interest and obligations in a License Agreement to manufacture, market and distribute a microwave radar collision avoidance device for motor vehicles. Pursuant to this license, the Company is required to make royalty payments to the licensor as follows: a) $6.00(US) per unit on the first one million units sold; b) thereafter, the greater of $4.00(US) per unit sold or 6% of the wholesale selling price on units sold; and c) 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.
At February 28, 2014, the royalty payable - related party to the Guardian Alert License was $480,000 (2013: $480,000). We intend to repay these payables upon successful completion of our business plan and raising of capital via debt or equity instruments.
In order to retain the exclusive right to manufacture market and distribute the Guardian Alert, the Company had been required, upon being assigned the license, to manufacture and sell various minimum numbers of units by certain milestone dates. As a result of not being able to meet the minimum milestone requirements under the license agreement, during the year ended February 28, 2004, the Company determined that it did not wish to retain the exclusive right to manufacture, market and distribute the Guardian Alert unit and, with agreement of the licensor, ceased accruing the minimum royalty due to the licensor. Any product sales subsequent to this date are considered to be part of the minimum royalty until such time that amounts exceed the minimum royalty accrued.
During the year ended February 28, 2005, based on an assessment of recoverability that took into consideration a history of operating losses and a forecast that demonstrated continuing losses associated with the use of the Guardian Alert, the Company wrote-down the license rights to a nominal value of $50.
Scope Out Mirror License
During the year ended February 28, 2005, the Company acquired a license with a unlimited life to manufacture, sell, deliver and install the Lateral-View Mirror (“Scope Out Mirror”). As consideration, the Company paid a license fee of $150,000.
During the year ended February 28, 2007, the Company determined the license was impaired and accordingly, wrote it down to a nominal value of $1.
Pursuant to the ScopeOut® Mirror License agreement, the Company is obligated to pay a royalty of 10% of the wholesale price for each ScopeOut® Mirror sold which, in any event, shall not be less than $2.00 per unit.
In order to retain the exclusive right to manufacture, sell, deliver and install the ScopeOut® Mirror, the Company is required to pay the royalty due on the following minimum number of units sold:
i) 30,000 units per year for the years ended September 23, 2005 and 2006;
ii) 60,000 units for the year ended September 23, 2007; and
iii) 100,000 units per year in the years ended September 23, 2008 and thereafter.
During the year ended February 28, 2014, the Company accrued $nil (2013: $nil) in respect of the royalty owed in respect of the ScopeOut® Mirror License agreement. Under the terms and conditions of the license agreement, the Company is obligated to pay interest on the outstanding royalty payable to the extent that the minimum royalties due under the agreement have not been paid and is calculated at a rate of 8% per annum. As of February 28, 2014, the Company has accrued $59,929 as interest payable. The Company had been unable to make this payment timely, causing the license to revert to non-exclusive.
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 following table presents the changes in the accrued royalties – related party balance from February 28, 2014 to February 28, 2013:
|
Guardian Alert
|
|
February 28,
2014
|
|
|
February 28,
2013
|
|
|
Beginning balance
|
|
|
480,000
|
|
|
|
480,000
|
|
|
Accrued
|
|
|
-
|
|
|
|
-
|
|
|
Paid
|
|
|
-
|
|
|
|
-
|
|
|
Total Guardian Alert
|
|
|
480,000
|
|
|
|
480,000
|
|
|
Scope Out
|
|
|
|
|
|
|
|
|
|
Beginning balance
|
|
|
-
|
|
|
|
-
|
|
|
Accrued
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
Total Accrued Royalties
|
|
|
480,000
|
|
|
|
480,000
|
|
NOTE 6 – ACCRUED EXPENSES/ACCRUED EXPENSES – RELATED PARTY
Other liabilities and accrued expenses consisted of the following:
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Bank overdraft
|
|
$
|
14,022
|
|
|
$
|
-
|
|
|
Accounts payable
|
|
|
564,291
|
|
|
|
283,159
|
|
|
Accounts payable – related party
|
|
|
35,884
|
|
|
|
35,884
|
|
|
Deferred Revenue
|
|
|
-
|
|
|
|
157,500
|
|
|
Accrued royalties payable – Guardian Alert
|
|
|
480,000
|
|
|
|
480,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Detail of Accrued Expenses:
|
|
|
|
|
|
|
|
|
|
Accrued interest payable
|
|
|
893,035
|
|
|
|
741,483
|
|
|
Accrued non-resident withholding taxes, including accrued interest
|
|
|
173,388
|
|
|
|
163,304
|
|
|
Credit card
|
|
|
3,054
|
|
|
|
5,397
|
|
|
Commissions Payable
|
|
|
48,679
|
|
|
|
13,285
|
|
|
Accrued taxes payable
|
|
|
44,117
|
|
|
|
46,187
|
|
|
Total accrued expenses
|
|
|
1,162,273
|
|
|
$
|
969,656
|
|
|
|
|
|
|
|
|
|
|
|
|
Detail of Accrued Expense – Related party:
|
|
|
|
|
|
|
|
|
|
Accrued payroll – related party
|
|
|
53,694
|
|
|
|
53,694
|
|
|
Other accrued liabilities – related party
|
|
|
17,117
|
|
|
|
17,117
|
|
|
Total accrued expenses – related party
|
|
$
|
70,811
|
|
|
$
|
70,811
|
|
As of February 28, 2014, included in the trade payables is $33,495 (2013: $33,495) and $2,389 (2013: $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 (2013: $480,000) owing to stockholders of the Company in respect of royalties payable and $53,694 (2013: $53,694) owing to the former president of the Company in respect of unpaid wages.
At February 28, 2014, advances payable of $103,521 (2013: $121,020) are due to a company controlled by a director of the Company.
At February 28, 2014, promissory notes payable of $439,590 (2013: $439,590) is due to a profit sharing and retirement plan which is administered 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.
The Company is in arrears with respect to fifteen notes payable totaling $1,437,037.
NOTE 7 – 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:
|
|
a)
|
30,000 units per year beginning in years 1-2
|
|
|
b)
|
60,000 units per year beginning in years 3-4
|
|
|
c)
|
100,000 units per year beginning in years 5 and above.
|
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 February 28, 2014 and February 28, 2013.
Pursuant to the Guardian Alert licenses, we are required to make royalty payments to the licensors and meet sales targets as follows:
|
|
a)
|
$6.00(US) per unit on the first one million units sold;
|
|
|
b)
|
thereafter, the greater of $4.00(US) per unit sold or 6% of the wholesale selling price on units sold; and
|
|
|
c)
|
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.
|
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 February 28, 2014 and February 28, 2013, respectively.
NOTE 8 – NOTES PAYABLE, CONVERTIBLE NOTES PAYABLE, AND NOTES PAYABLE – RELATED PARTY
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Promissory notes payable, unsecured, bearing interest at the rate of 12% per annum with repayment terms between August 2012 and July, 2012. In default.
|
|
$
|
243,000
|
|
|
$
|
243,000
|
|
|
Promissory notes payable to related party, unsecured, bearing interest at the rate of 12% per annum with repayment due December 15, 2012. In default.
|
|
|
439,590
|
|
|
|
439,590
|
|
|
Promissory notes payable, unsecured, bearing interest at the rate of 12% per annum with repayment due January 12, 2012. In default.
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Promissory notes payable, unsecured, bearing interest at the rate of 12% per annum with repayment due March 30, 2012. In default.
|
|
|
10,000
|
|
|
|
10,000
|
|
|
Promissory note payable, personally guaranteed by a director of the Company, bearing interest at 5.5% per annum and maturing May 11, 2016.
|
|
|
-
|
|
|
|
73,874
|
|
|
Finance agreement on directors and officers liability policy,secured by the unearned insurance premium, bearing interest at 7.75%, maturing June 23, 2014. This agreement is repayable in monthly principal and interest payments of $1,814.
|
|
|
7,312
|
|
|
|
6,076
|
|
|
Finance agreement on directors and officers liability policy, bearing interest at 7.75% per annum, no maturity date.
|
|
|
8,508
|
|
|
|
6,985
|
|
|
Promissory note payable, unsecured, bearing interest at the rate of 5.25% per annum, no maturity date.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
Promissory note payable, unsecured, bearing interest at the rate of 12.0% per annum, no maturity date.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
Promissory note payable, unsecured, bearing interest at the rate of 6% per annum, maturing June 1, 2014.
|
|
|
99,134
|
|
|
|
156,665
|
|
|
Promissory note payable, unsecured, bearing interest at the rate of 6% per annum, maturing January 31, 2014. In default.
|
|
|
100,000
|
|
|
|
100,000
|
|
|
Promissory note payable, unsecured, bearing interest at the rate of 7% per annum, maturing October 16, 2013. In default.
|
|
|
50,000
|
|
|
|
25,000
|
|
|
Promissory note payable, unsecured, bearing interest at the rate of 7% per annum, maturing August 19, 2014.
|
|
|
75,000
|
|
|
|
-
|
|
|
Promissory note payable, personally guaranteed by a director of the Company, bearing interest at 4.0% per annum and maturing August 27, 2018.
|
|
|
108,877
|
|
|
|
-
|
|
|
Promissory note payable, unsecured, bearing interest at the rate of 7% per annum, maturing July 20, 2014.
|
|
|
10,000
|
|
|
|
-
|
|
|
Promissory note payable, no stated interest or maturity date
|
|
|
2,000
|
|
|
|
2,000
|
|
|
|
|
|
1,363,421
|
|
|
|
1,273,190
|
|
|
Less: current portion
|
|
|
(1,363,421
|
)
|
|
|
(1,236,524
|
)
|
|
Long-term portion
|
|
$
|
-
|
|
|
$
|
36,666
|
|
The Company is in arrears with respect to six of the above notes payable totaling $852,590.
|
Convertible notes payable:
|
|
February 28,
2014
|
|
|
February 28,
2013
|
|
|
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 may be redeemed at any time after August 30, 2005. These notes may 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 February 28, 2014 and February 28, 2013, these notes were in default.
|
|
$
|
534,447
|
|
|
$
|
534,447
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
$
|
584,447
|
|
|
$
|
584,447
|
|
The Company is in arrears with respect to nine convertible notes payable totaling $584,447.
Future minimum note payments as of February 28, 2014 are as follows:
|
Years Ending February 28,
|
|
|
|
|
2015
|
|
$
|
1,947,828
|
|
|
2016
|
|
|
-
|
|
|
Thereafter
|
|
|
-
|
|
NOTE 9 – 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 year ended February 28, 2014, the Company accrued dividends payable of $31,591 (2013: $31,591). Dividends are currently accruing and total $361,098.
NOTE 10 – COMMON STOCK
a)
Common stock issued for cash
During the year ended February 28, 2014, the company issued 4,900,000 shares of common stock for cash proceeds of $147,000.
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. $17,374 recorded as a debt discount. As the debt was due on demand, the discount was fully expensed in the second quarter ended August 31, 2013. The Company issued 1,025,000 shares during the quarter ended November 30, 2013 for this inducement.
The Company issued 1,200,000 shares of common stock for cash proceeds of $36,000 which was received in prior years and record as Common Stock Payable.
The Company received $66,000 of common stock subscribed in common stock payable for 3,366,667 shares.
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 February 28, 2014 and February 28, 2013.
During the year ended February 28, 2013, the Company issued 500,000 common shares to secure a promissory note. The fair value of each common share was $0.04 on the issue date and was recorded as debt discount of $20,000. The Company issued 1,500,000 common shares for consulting services. The fair value of each common share was $0.03 based on the closing trading price on the issue date and was recorded as consulting expense of $45,000.
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.
|
|
|
February 28, 2014
|
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding and exercisable at beginning of the year
|
|
|
3,000,000
|
|
|
$
|
0.04
|
|
|
Expired during the year
|
|
|
(1,000,000
|
)
|
|
$
|
(0.05
|
)
|
|
Issued during the year
|
|
|
1,000,000
|
|
|
|
0.03
|
|
|
Outstanding and exercisable, February 28, 2014
|
|
|
3,000,000
|
|
|
$
|
0.04
|
|
|
|
|
February 28, 2013
|
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Outstanding and exercisable at beginning of the year
|
|
|
3,000,000
|
|
|
$
|
0.04
|
|
|
Expired during the year
|
|
|
(1,000,000
|
)
|
|
|
(0.05
|
)
|
|
Issued during the year
|
|
|
1,000,000
|
|
|
|
0.03
|
|
|
Outstanding and exercisable, February 28, 2013
|
|
|
3,000,000
|
|
|
$
|
0.04
|
|
The weighted average remaining contractual life of the share purchase options at February 28, 2014 is 4 years (February 28, 2013: 4 years).
For the year ended February 28, 2010, the Company granted a total of 1,000,000 options expiring on December 31, 2014 to the directors of the Company. These options vested at the grant date with exercise price of $0.03 per share. The fair value of these options was $0.02 per share, totaling $19,729 which was recognized as management fee in the year ended February 28, 2010. For the year ended February 28, 2011, the Company granted a total of 1,000,000 options expiring on December 31, 2014 to a director of the Company. These options vested at the grant date with exercise price of $0.03 per share. The fair value of these options was $0.03 per share, $19,626 was recognized as management fee in the year ended February 28, 2011. For the year ended February 28, 2013, the Company granted a total of 1,000,000 options expiring on December 31, 2014 to directors of the Company. These options vested at the grant date with exercise price of $0.03 per share. The fair value of these options was $0.03 per share, $26,303 was recognized as management fee in the year ended February 28, 2013. The fair value of the options was estimated using the Black-Scholes option pricing model with the following assumptions:
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
Expected dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Expected volatility
|
|
|
400.00
|
%
|
|
|
400.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate
|
|
|
0.25
|
%
|
|
|
0.25
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Expected term in years
|
|
|
1.0
|
|
|
|
1.0
|
|
At February 28, 2014, 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:
|
|
|
|
Exercise
|
|
|
|
Number
|
|
|
Price
|
|
Expiry Date
|
|
|
|
|
|
|
|
|
|
3,000,000
|
|
|
$
|
0.03
|
|
December 31, 2014
|
Warrants
As of February 28, 2014 and February 28, 2013, the Company had no outstanding warrants
.
NOTE 11 – LEASE
The Company has a commercial lease for real estate. Rent expense for years ended February 28, 2014 and 2013 was $15,493 and $14,463, respectively. The terms of the lease range from November 1, 2013 through October 31, 2014.
Future minimum lease payments under this agreement as of February 28, 2014 are as follows:
|
Years Ending February 28,
|
|
|
|
|
2014
|
|
$
|
7,840
|
|
|
Thereafter
|
|
|
-
|
|
NOTE 12 – INCOME TAXES
The tax effects of the temporary differences that give rise to the Company's estimated deferred tax assets and liabilities are as follows:
|
|
|
February 28,
|
|
|
February 28,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
|
|
|
(35.00%)
|
|
|
|
(35.00%)
|
|
|
Net operating loss carryforwards
|
|
$
|
3,369,675
|
|
|
$
|
3,112,131
|
|
|
Valuation allowance for deferred tax assets
|
|
|
(3,369,675
|
)
|
|
|
(3,112,131
|
)
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of February 28, 2014, the Company had net operating loss carryforwards of approximately $9,627,643 available to offset future taxable income.
The Company evaluates its valuation allowance requirements based on projected future operations. When circumstances change and this causes a change in management’s judgment about the recoverability of deferred tax assets, the impact of the change on the valuation allowance is reflected in current income. As management of the Company does not currently believe that it is more likely than not that the Company will receive the benefit of this asset, a valuation allowance equal to the deferred tax asset has been established at both February 28, 2014 and February 28, 2013.
Uncertain Tax Positions
The Company files income tax returns in the U.S. federal jurisdiction, various state and foreign jurisdictions. All our tax returns are subject to tax examinations by U.S. federal and state tax authorities, or examinations by foreign tax authorities until respective statute of limitation. The Company currently has no tax years under examination.
Based on the management’s assessment of pronouncements, they concluded that no significant impact on the Company’s results of operations or financial position, and required no adjustment to the opening balance sheet accounts. The year-end analysis supports the same conclusion, and the Company does not have an accrual for uncertain tax positions as of February 28, 2014. As a result, tabular reconciliation of beginning and ending balances would not be meaningful. If interest and penalties were to be assessed, we would charge interest to interest expense, and penalties to other operating expense. It is not anticipated that unrecognized tax benefits would significantly increase or decrease within 12 months of the reporting date.
The Company is in arrears on filing its statutory income tax returns and is therefore has estimated the expected amount of loss carry forwards available once the outstanding returns are filed. The Company expects to have significant net operating loss carry forwards for income tax purposes available to offset future taxable income.
NOTE 13 – RELATED PARTY TRANSACTIONS
The Company incurred the following items with directors and companies with common directors and shareholders:
|
|
|
February 28,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
Interest expense
|
|
$
|
52,751
|
|
|
$
|
51,304
|
|
As of February 28, 2014, included in accounts payable and accrued expenses are $33,495 (February 28, 2013: $33,495) owing to an accounting firm in which a director of the Company is a partner and $2,389 (February 28, 2013: $2,389) to a shareholder with respect to unpaid fees and interest on promissory notes, $480,000 (February 28, 2013: $480,000) owing to shareholders of the Company in respect of royalties payable with no interest accruing, and $53,694 (February 28, 2013: $53,694) owing to the former president of the Company in respect of unpaid wages.
As of February 28, 2014, included in advances payable is $103,521 (February 28, 2013: $121,020) owed to a company controlled by a director.
As of February 28, 2014, promissory notes payable of $439,590 (February 28, 2013: $439,590) are 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 February 28, 2014, promissory note payable of $108,877 (February 28, 2013: $nil) is personally guaranteed by a related party of the director of the company.
NOTE 14 – DEFERRED REVENUE
During the year ended February 28, 2013, advanced deposit of $157,500 on 1500 Guardian Alert® units ordered from customer AWTI. Revenues were earned in the current fiscal year ended February 28, 2014.
NOTE 15 – CONCENTRATIONS AND CONTINGENCIES
Concentrations
Approximately 93% of the Company’s revenues are obtained from three (3) customers and one of these customers represents a significant portion of the accounts receivable. 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 year ended February 28, 2014, three (3) customers accounted for approximately 93% of revenue. For the year ended February 28, 2013 these three (3) customers accounted for 92% of revenue.
For the year ended February 28, 2014, one (1) customer accounted for approximately 100% of accounts receivable. For the year ended February 28, 2013, one (1) customer accounted for approximately 93% on accounts receivable.
Contingencies
During the normal course of business we may from time to time be involved in litigation or other possible loss contingencies. As of February 28, 2014 and 2013 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:
End of calendar year containing the second anniversary: 30,000 units
End of calendar year containing the third anniversary: 60,000 units
NOTE 16 – SUBSEQUENT EVENTS
Management has evaluated subsequent events through July 24, 2014, the date of which the financial statements were issued.
Subsequent to February 28, 2014, the company issued 8,500,002 shares of common stock for cash proceeds of $255,000.