SNSGF Sense Technologies Inc (CE)

  NOTES TO CONSOLIDATED 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 Sense Technologies, Inc. and it’s wholly-owned subsidiary, Sense Natural Products, Inc. (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, 2016 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 29, 2016.

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.

NOTE 2 – GOING CONCERN

 

At November 30, 2016, the Company had not yet achieved profitable operations, had an accumulated deficit of $22,738,725 (February 29, 2016 - $21,650,457) since its inception and incurred a net loss of $1,064,574 (2015 - $317,008) for the nine months ended November 30, 2016 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, 2017 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, 2016, included in prepaid expenses $66,351 (February 29, 2016: $12,970) is $25,063 for an insurance premium for the directors of the Company financed through AFCO.  Insurance policy is from August 23, 2016 to August 23, 2017.

Prepaid insurance of $39,100 for an insurance premium for the directors of Company, insurance policy is from September, 2017 to September, 2018 and $2,188 for utilities paid for December 2016. 

NOTE 5 – INTANGIBLES

Intangible assets are comprised of Goodwill in the amount of $5,466,241 as part of the consideration for the acquisition of the soy meal business assets as described in Note 13.

 

As of November 30, 2016, included in the related party payables is $33,495 (February 29, 2016: $33,495) and $2,389 (February 29, 2016: $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 29, 2016: $480,000) owing to stockholders of the Company in respect of royalties payable and $53,694 (February 29, 2016: $53,694) owing to the former president of the Company in respect of unpaid wages.

 

At November 30, 2016, advances payable of $73,183 (February 29, 2016: $60,158) 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 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:

 

 

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, 2016 and February 29, 2016.

 

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 November 30, 2016 and February 29, 2016, respectively.

 

 

At November 30, 2016, the Company is in arrears with respect to five of the above notes payable totaling $234,734.

At November 30, 2016, the Company is in arrears with respect to nine convertible notes payable totaling $584,447.

 

Future minimum note payments as of November 30, 2016 are as follows:

 

 

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 Class A preferred shares are payable annually on July 31 of each year. During the nine months ended November 30, 2016, the Company accrued dividends payable of $23,694 (February 29, 2016: $31,591). Dividends are currently accruing and total $ 447,974 .

The Company issued 700,000 Class B preferred stock as part of the consideration for the acquisition of the soy meal business assets as described in Note 13.

The Class B preferred shares may be redeemed in part or in whole by the Corporation at is sole option, at any time after September 7, 2016.  Redemption of the Class B preferred shares by the Corporation will be made pro-rata to the holders thereof, at a redemption price of $10 per Class B preferred shares.  The shares are convertible into common shares at the rate of 20 common shares for each $10 Class B preferred share at any time by election of the preferred shares holders.  Holders of the Class B preferred shares shall be entitled to currently vote based upon the common share equivalence.

NOTE 10 – COMMON STOCK

a)            Common stock issued for cash

During the nine months ended November 30, 2016, the Company received $220,000 of common stock subscribed in common stock payable for 770,334 shares.  During the nine months ended November 30, 2016, the Company issued 916,667 shares of common stock for cash proceeds of $282,800.  During the nine months ended November 30, 2016, the Company issued 1,030,001 shares of common stock from stock payable totaling $309,000.

During the year ended February 29, 2016, the Company issued 150,000 shares of common stock for cash proceeds of $45,000.  As of February 29, 2016, there were be 730,000 shares valued at $219,000 subscribed but not issued.

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 first quarter ended May 31, 2015.   

The Company issued 396,667 shares of common stock for cash proceeds of $119,000 which was received in prior years and was initially record in in stock issued from stock payable as of February 29, 2016.

The Company issued 733,333 shares of common stock for cash proceeds of $220,000 which was received in prior years and was recorded as 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, 2016 and February 29, 2016.

During the nine months ended November 30, 2016, the Company issued 495,000 common shares for consulting services and 56,000 common shares for interest expense and $29,200 of common stock payable for services. The fair value of each common share was $0.30 based on the closing trading price on the issue date and was recorded as consulting expense of $205,958.

During the year ended February 29, 2016, the Company issued 100,000 common shares for consulting services. The fair value of each common share was $0.30 based on the closing trading price on the grant date and was recorded as consulting expense of $30,000.

The Company issued 1,000,000 shares of common stock valued at $780,000 as part of the consideration for the acquisition of the soy meal business assets as describe in Note 13.

c)    Common stock rounding shares

On April 21, 2016, the Company completed a 10-for-one reverse split of its issued and outstanding shares of common stock.  Shares were rounded down 57 shares because of this split.

 d)           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.

At November 30, 2016, 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:

 

d)            Warrants

As of November 30, 2016 and February 29, 2016, the Company had no outstanding warrants .

 

NOTE 11 – RELATED PARTY TRANSACTIONS

The Company incurred the following items with directors and companies with common directors and shareholders:

As of November 30, 2016, included in accounts payable is $33,495 (February 29, 2016: $33,495) owing to an accounting firm in which a director of the Company is a partner and $2,389 (February 29, 2016: $2,389) to a shareholder with respect to unpaid fees and interest on promissory notes, $480,000 (February 29, 2016: $480,000) owing to shareholders of the Company in respect of royalties payable with no interest accruing, and $53,694 (February 29, 2016: $53,694) owing to the former president of the Company in respect of unpaid wages.

As of November 30, 2016, included in advances payable is $73,183 (February 29, 2016: $60,158) owed to a company controlled by a director.

As of November 30, 2016, promissory notes payable of $439,590 (February 29, 2016: $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, 2016, promissory note payable of $44,440 (February 29, 2016: $62,719) is personally guaranteed by a related party of the director of the company.

NOTE 12 – CONCENTRATIONS AND CONTINGENCIES

Concentrations

Approximately 100% of the Company’s revenues for Guardian Alert are obtained from one (1) customer. 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, 2016, one (1) customer accounted for approximately 100% of Guardian Alert revenue. For the nine months ended November 30, 2015, there were two (2) customer that accounted for 99% of Guardian Alert 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, 2016 and November 30, 2015 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:

 

 

NOTE 13 – SOY MEAL ACQUISITION

On September 7, 2016, the Company entered into a final agreement with R and D, USA, LLC for the acquisition of the business assets comprising R and D USA, LLC’s means of production of soy meal and soy oil products and non-GMO soy products, certified organic soy products, refined soy oils, agricultural soy oils, and other related specialty soy based soil enhancer crop products, including all intellectual and intangible property related thereto.

It immediately transferred these assets into its newly created wholly-owned subsidiary, Sense Natural Products, Inc.

The acquisition was accounted for as a business combination and we valued all assets and liabilities acquired at their fair value on the date of acquisition.  An independent valuation expert assisted us in determining these fair values.  The assets and liabilities of the acquired entity were recorded at their estimated fair values at the date of the acquisition.

The allocation of the purchase price to assets and liabilities based upon fair value determinations was as follows:

The following information presents unaudited pro forma consolidation results of operations for the nine months ended November 30, 0216 and the year ended February 29, 2016, as if the acquisition described above had occurred on the March 1, 2016 and March 1, 2015.  The pro forma financial information is not necessarily indicative of the operating results that would have occurred if the acquisition been consummated as of the date indicated, nor are they necessarily indicative of future operating results.

Proforma financials for the nine months ended November 30, 2016:

Proforma financials for the year ended February 29, 2016: