Quarterly Report (10-q)

Date : 05/03/2019 @ 10:19PM
Source : Edgar (US Regulatory)
Stock : Artificial Intelligence Technology Solutions Inc. (AITX)
Quote : 0.0013  -0.0002 (-13.33%) @ 2:30PM

Quarterly Report (10-q)


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q


[X]

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE QUARTERLY PERIOD ENDED NOVEMBER 30, 2018


OR


[_]

TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE TRANSITION PERIOD FROM _______________ TO _______________


COMMISSION FILE NUMBER: 0-55079


ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(Exact name of registrant as specified in its charter)


Nevada

 

27-2343603

(State or other jurisdiction of Incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

701 North Green Valley Parkway, Suite 200
Henderson, Nevada

 

89074

(Address of principal executive offices)

 

(Zip code)


(702) 990-3271

(Registrant’s telephone number, including area code)


ON THE MOVE SYSTEMS CORP.

(Former name, former address and former fiscal year, if changed since last report)


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [_]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]   No [_]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


 

Large accelerated filer

[_]

Accelerated filer

[_]

 

Non-accelerated filer

[X]

Smaller reporting company

[X]

 

 

Emerging growth company

[_]


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_]   No [X]


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 200,261,790 shares of common stock were issued and outstanding as of April 20, 2019.




 

PAGE

PART I

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements

3

 

 

 

 

Consolidated Balance Sheets as of November 30, 2018 and February 28, 2018 (Unaudited)

3

 

 

 

 

Consolidated Statements of Operations for the Three and Nine Months Ended November 30, 2018 and 2017 (Unaudited)

4

 

 

 

 

Consolidated Statements of Cash Flows for the Nine Months Ended November 30, 2018 and 2017 (Unaudited)

5

 

 

 

 

Notes to the Consolidated Financial Statements (Unaudited)

6

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

ITEM 4.

Controls and Procedures

30

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

31

 

 

 

ITEM 1A.

Risk Factors

31

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

ITEM 3.

Defaults Upon Senior Securities

31

 

 

 

ITEM 4.

Mine Safety Disclosures

31

 

 

 

ITEM 5.

Other Information

31

 

 

 

ITEM 6.

Exhibits

31

 

 

 

SIGNATURES

32


- 2 -



PART 1 – FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

CONSOLIDATED BALANCE SHEETS

(Unaudited)


 

 

November 30, 2018

 

February 28, 2018

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

17,551

 

$

24,773

 

Accounts receivable

 

 

28,879

 

 

28,000

 

Device parts inventory

 

 

241,435

 

 

316,113

 

Prepaid expenses and deposits

 

 

21,078

 

 

83,103

 

Note receivable

 

 

 

 

40,000

 

Total current assets

 

 

308,943

 

 

491,989

 

Revenue earning devices, net of accumulated depreciation of $28,434 and $0, respectively

 

 

201,524

 

 

 

Fixed assets, net of accumulated depreciation of $79,870 and $36,632, respectively

 

 

111,719

 

 

158,205

 

Intangible assets, net

 

 

46,426

 

 

56,248

 

Security deposit

 

 

30,216

 

 

30,141

 

Total assets

 

$

698,828

 

$

736,583

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,635,626

 

$

487,243

 

Advances payable

 

 

1,594

 

 

1,594

 

Balance due on acquisition of WeSecure

 

 

25,000

 

 

25,000

 

Customer deposits

 

 

10,000

 

 

10,000

 

Current portion of convertible notes payable, net of discount of $1,729,420 and $3,418,637, respectively

 

 

4,506,747

 

 

2,117,946

 

Loan payable - related party

 

 

717,615

 

 

316,142

 

Loans payable

 

 

339,402

 

 

 

Vehicle loan - current portion

 

 

17,830

 

 

17,830

 

Current portion of accrued interest payable

 

 

1,300,530

 

 

694,592

 

Derivative liability

 

 

6,152,561

 

 

31,113,844

 

Total current liabilities

 

 

14,706,905

 

 

34,784,191

 

Convertible notes payable, net of discount of $345,439 and $505,039, respectively

 

 

219,561

 

 

95,060

 

Accrued interest payable

 

 

85,344

 

 

55,917

 

Vehicle loan

 

 

50,675

 

 

64,332

 

Total liabilities

 

 

15,062,485

 

 

34,999,500

 

 

 

 

 

 

 

 

 

Shareholders’ deficit:

 

 

 

 

 

 

 

Preferred Stock, undesignated; 15,645,650 shares authorized; no shares issued and outstanding

 

 

 

 

 

Series E Preferred Stock, $0.001 par value; 4,350,000 shares authorized; 4,350,000 and 3,350,000 shares issued and outstanding ,respectively

 

 

4,350

 

 

4,350

 

Series F Convertible Preferred Stock, $1.00 par value; 4,350 shares authorized; 3,450 and 2,450 shares issued and outstanding, respectively

 

 

3,450

 

 

3,450

 

Common Stock, $0.001 par value; 480,000,000 shares authorized 16,252,014 and 1,250,046  shares issued and outstanding, respectively

 

 

16,252

 

 

1,250

 

Additional paid-in capital

 

 

3,558,028

 

 

1,232,062

 

Preferred stock to be issued

 

 

174,070

 

 

 

Accumulated deficit

 

 

(18,119,807

)

 

(35,504,029

)

Total shareholders’ deficit

 

 

(14,363,657

)

 

(34,262,917

)

Total liabilities and shareholders’ deficit

 

$

698,828

 

$

736,583

 


The accompanying notes are an integral part of these unaudited consolidated financial statements.


- 3 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


 

 

Three Months Ended November 30, 2018

 

Three Months Ended November 30, 2017

 

Nine Months Ended November 30, 2018

 

Nine Months Ended November 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

38,864

 

$

63,632

 

$

65,705

 

$

98,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

 

 

45,000

 

 

35,454

 

 

45,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

38,864

 

 

18,632

 

 

30,251

 

 

53,632

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

300,881

 

 

216,679

 

 

534,012

 

 

306,312

 

General and administrative

 

 

800,384

 

 

855,707

 

 

3,082,656

 

 

1,585,697

 

Depreciation and amortization

 

 

31,489

 

 

41,095

 

 

82,902

 

 

74,789

 

Loss on impairment of fixed assets

 

 

 

 

32,322

 

 

4,739

 

 

125,264

 

Total operating expenses

 

 

1,132,754

 

 

1,145,803

 

 

3,704,309

 

 

2,092,062

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(1,093,890

)

 

(1,127,171

)

 

(3,674,058

)

 

(2,038,430

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivative liabilities

 

 

10,223,431

 

 

(4,246,903

)

 

26,216,071

 

 

(3,495,662

)

Interest expense

 

 

(1,604,169

)

 

(4,597,875

)

 

(5,288,927

)

 

(7,446,670

)

Gain on settlement of debt

 

 

185,746

 

 

1,175,028

 

 

131,136

 

 

1,175,028

 

Total other income (expense), net

 

 

8,805,008

 

 

(7,669,750

)

 

21,058,280

 

 

(9,767,304

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

7,711,118

 

$

(8,796,921

)

$

17,384,222

 

$

(11,805,734

)

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.86

 

$

(7.41

)

$

4.32

 

$

(28.92

)

Diluted

 

$

(0.00

)

$

(7.41

)

$

(0.01

)

$

(28.92

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common share outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

8,949,875

 

 

1,186,924

 

 

4,028,324

 

 

408,206

 

Diluted

 

 

1,280,062,970

 

 

1,186,924

 

 

1,247,050,203

 

 

408,206

 


The accompanying notes are an integral part of these unaudited consolidated financial statements.


- 4 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


 

 

Nine Months Ended November 30, 2018

 

Nine Months Ended November 30, 2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

 

$

17,384,222

 

$

(11,805,734

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

82,902

 

 

74,789

 

Provision for note receivable

 

 

40,000

 

 

 

Loss on impairment of fixed assets

 

 

4,739

 

 

125,264

 

Stock based compensation

 

 

632,972

 

 

 

Change in fair value of derivative liabilities

 

 

(26,216,071

)

 

3,495,662

 

Interest expense related to derivative liability in excess of face value of debt

 

 

751,522

 

 

6,524,664

 

Amortization of  debt discounts

 

 

3,649,219

 

 

691,607

 

Gain on settlement of debt

 

 

(131,136

)

 

(1,175,028

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(879

)

 

(20,222

)

Deposits on robots

 

 

 

 

(230,170

)

Prepaid expenses

 

 

62,025

 

 

 

Device parts inventory

 

 

74,678

 

 

(107,870

)

Accounts payable and accrued expenses

 

 

1,371,979

 

 

66,048

 

Accrued interest payable

 

 

615,547

 

 

139,212

 

Customer deposits

 

 

 

 

(10,000

)

Net cash used in operating activities

 

 

(1,678,281

)

 

(2,231,778

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of fixed assets

 

 

(232,858

)

 

(245,102

)

Cash proceeds from WESecure transaction

 

 

 

 

17,000

 

Cash paid for security deposit

 

 

(75

)

 

(25,747

)

Cash acquired in reverse capitalization

 

 

 

 

2,022

 

Net cash used in investing activities

 

 

(232,933

)

 

(251,827

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from convertible notes payable, net

 

 

1,132,608

 

 

1,492,500

 

Principal payments on convertible notes payable

 

 

(125,000

)

 

(50,000

)

Proceeds from loans payable

 

 

336,490

 

 

 

Repayment of loans payable

 

 

(1,992

)

 

 

Net borrowings on loan payable - related party

 

 

401,473

 

 

237,948

 

Loan from OMVS to RAD prior to the reverse recapitalization

 

 

 

 

752,500

 

Proceeds from vehicle loan

 

 

 

 

47,661

 

Repayment of vehicle loan

 

 

(13,657

)

 

(6,591

)

Proceeds from sale of preferred shares

 

 

174,070

 

 

 

Net cash provided by financing activities

 

 

1,903,992

 

 

2,474,018

 

 

 

 

 

 

 

 

 

Net change in cash

 

 

(7,222

)

 

(9,587

)

 

 

 

 

 

 

 

 

Cash, beginning of period

 

 

24,773

 

 

56,907

 

 

 

 

 

 

 

 

 

Cash, end of period

 

$

17,551

 

$

47,320

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash and non-cash transactions:

 

 

 

 

 

 

 

Cash paid for interest

 

$

4,687

 

$

22,320

 

Cash paid for taxes

 

$

 

$

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Transfer of devices from deposits to revenue earning devices

 

$

 

$

341,280

 

Debt discount from derivative liabilities

 

$

1,309,900

 

$

2,033,475

 

Conversion of convertible notes and interest to shares of common stock

 

$

1,707,996

 

$

123,000

 

Settlement and exchange of convertible notes payable

 

$

183,766

 

$

300,000

 

Capitalization of accrued interest to convertible notes payable

 

$

67,272

 

$

 


The accompanying notes are an integral part of these unaudited consolidated financial statements.


- 5 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


1. GENERAL INFORMATION


Artificial Intelligence Technology Solutions Inc. (formerly known as On the Move Systems Corp.) (“AITX” or the “Company”) was incorporated in Florida on March 25, 2010 and reincorporated in Nevada on February 17, 2015. On August 24, 2018, Artificial Intelligence Technology Solutions Inc., changed its name from On the Move Systems Corp (“OMVS”).


Robotic Assistance Devices, LLC (“RAD”), was incorporated in the State of Nevada on July 26, 2016 as a LLC. On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc. through the issuance of 10,000 common shares to its sole shareholder.


On August 28, 2017, AITX completed the acquisition of RAD (the “Acquisition”), whereby AITX acquired all the ownership and equity interest in RAD for 3,350,000 shares of AITX Series E Preferred Stock and 2,450 shares of Series F Convertible Preferred Stock. AITX’s prior business focus was transportation services, and AITX was exploring the on-demand logistics market by developing a network of logistics partnerships. As a result of the closing of the Acquisition, AITX has succeeded to the business of RAD, in which AITX purchased all of the outstanding shares of capital stock of RAD. As a result, AITX’s business going forward will consist of one segment activity which is the delivery of artificial intelligence and robotic solutions for operational, security and monitoring needs.


The Acquisition was treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of AITX’s operations were disposed of as part of the consummation of the transaction. Therefore, no goodwill or other intangible assets were recorded by AITX as a result of the Acquisition. RAD is treated as the accounting acquirer as its stockholders control the Company after the Acquisition, even though AITX was the legal acquirer.  As a result, the assets and liabilities and the historical operations that are reflected in these financial statements are those of RAD as if RAD had always been the reporting company.


2. GOING CONCERN


The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.


For the nine months ended November 30, 2018, the Company had negative cash flow from operating activities of $1,678,281. As of November 30, 2018, the Company has an accumulated deficit of $18,119,807, and negative working capital of $14,397,962. Management does not anticipate having positive cash flow from operations in the near future. These factors raise a substantial doubt about the Company’s ability to continue as a going concern for the twelve months following the issuance of these financial statements.


The Company does not have the resources at this time to repay its credit and debt obligations, make any payments in the form of dividends to its shareholders or fully implement its business plan. Without additional capital, the Company will not be able to remain in business.


Management has plans to address the Company’s financial situation as follows:


In the near term, management plans to continue to focus on raising the funds necessary to implement the Company’s business plan. Management will continue to seek out debt financing to obtain the capital required to meet the Company’s financial obligations. There is no assurance, however, that lenders will continue to advance capital to the Company or that the new business operations will be profitable. The possibility of failure in obtaining additional funding and the potential inability to achieve profitability raises substantial doubts about the Company’s ability to continue as a going concern.


- 6 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


3. ACCOUNTING POLICIES


Basis of Presentation and Consolidation


The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and in conformity with the instructions on Form 10-Q and Rule 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto in the Company’s latest Annual Report filed with the SEC on Form 10-K. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Robotic Assistance Devices, Inc., On the Move Experience, LLC and OMV Transports, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations for the three and nine months ended November 30, 2018 are not necessarily indicative of the results that may be expected for the entire year.


Cash


The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market instruments. The Company places its cash and cash equivalents with high-quality, U.S. financial institutions and, to date has not experienced losses on any of its balances.


Accounts Receivable


Accounts receivable are comprised of balances due from customers, net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances.


Device Parts Inventory


Device parts inventory is stated at the lower of cost or market using the weighted average cost method. The Company records a valuation reserve for obsolete and slow-moving inventory, relying principally on specific identification of such inventory. The Company uses these device parts in the assembly of revenue earning devices (and demo devices) as well as research and development. Depending on use, the Company will transfer the parts to the corresponding asset or expense if used in research and development.  A charge to income is taken when factors that would result in a need for an increase in the valuation, such as excess or obsolete inventory, are noted.


Revenue Earning Devices


Revenue earning devices are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of 48 months. The Company continually evaluates revenue earning devices to determine whether events or changes in circumstances have occurred that may warrant revision of the estimated useful life or whether the devices should be evaluated for possible impairment. The Company uses a combination of the undiscounted cash flows and market approaches in assessing whether an asset has been impaired. The Company measures impairment losses based upon the amount by which the carrying amount of the asset exceeds the fair value.


Fixed Assets


Fixed assets are stated at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the respective assets which range from three to five years. Major repairs or improvements are capitalized. Minor replacements and maintenance and repairs which do not improve or extend asset lives are expensed currently.


- 7 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Demo Devices

 

4 years

Vehicles

 

3 years

Computer equipment

 

3 years

Office equipment

 

4 years

Leasehold improvements

 

5 years, the life of the lease


The Company periodically evaluates the fair value of fixed assets whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is recognized in income.


Intangible Assets


The Company’s intangible assets are stated at cost and amortized on a straight-line basis over their five year expected useful life. The Company periodically determines if there is any impairment in value every year.


Research and Development


Research and development costs are expensed in the period they are incurred in accordance with ASC 730, Research and Development unless they meet specific criteria related to technical, market and financial feasibility, as determined by Management, including but not limited to the establishment of a clearly defined future market for the product, and the availability of adequate resources to complete the project. If all criteria are met, the costs are deferred and amortized over the expected useful life or written off if a product is abandoned. At November 30, 2018 and February 28, 2018, the Company had no deferred development costs.


Contingencies


Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.


Revenue Recognition 


ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” , supersedes the revenue recognition requirements and industry specific guidance under Revenue Recognition (Topic 605) . Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Topic 606 defines a five-step process that must be evaluated and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing accounting principles generally accepted in the United States of America (“U.S. GAAP”) including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company adopted Topic 606 on March 1, 2018, using the modified retrospective method. Under the modified retrospective method, prior period financial positions and results will not be adjusted. There was no cumulative effect adjustment recognized as a result of this adoption. While the Company does not expect fiscal year 2019 net earnings to be materially impacted by revenue recognition timing changes, Topic 606 requires certain changes to the presentation of revenues and related expenses beginning March 1, 2018. Refer to Note 4 – Revenue from Contracts with Customers for additional information.


Income Taxes


On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc., through the issuance of 10,000 common shares to its sole shareholder. Prior to the conversion on July 25, 2017, income taxes are not provided in the financial statements as presented as RAD was an LLC and the income or loss flowed through to the shareholder for the two months ended February 28, 2017. Thereafter, income taxes are accounted for under the asset and liability method from that date forward. Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company will record a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized.


- 8 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Leases


Lease agreements are evaluated to determine if they are capital leases meeting any of the following criteria at inception: (a) transfer of ownership; (b) bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the leased property; or (d) the present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor.


If at its inception, a lease meets any of the four lease criteria above, the lease is classified by the Company as a capital lease; and if none of the four criteria are met, the lease is classified by the Company as an operating lease.


Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in liabilities.


Distinguishing Liabilities from Equity


The Company relies on the guidance provided by ASC Topic 480,  Distinguishing Liabilities from Equity , to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.


Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.


Initial Measurement


The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.


Subsequent Measurement – Financial Instruments Classified as Liabilities


The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other income (expenses).


Fair Value of Financial Instruments


ASC Topic 820,  Fair Value Measurements and Disclosures  (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles.


ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).


- 9 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:


 

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.

 

 

 

 

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

 

 

 

Level 3 – Inputs that are unobservable for the asset or liability.


Measured on a Recurring Basis


The following table presents information about our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fell:


 

 

Amount at

 

Fair Value Measurement Using

 

 

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

November 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability – conversion features pursuant to convertible notes payable

 

$

6,152,561

 

$

 

$

 

$

6,152,561

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability – conversion features pursuant to convertible notes payable

 

$

31,113,844

 

$

 

$

 

$

31,113,844

 


See Note 13 for specific inputs used in determining fair value.


The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and advances, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments.


Earnings (Loss) per Share


Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options and/or warrants. Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive .


Basic loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share.


- 10 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Recently Adopted Accounting Pronouncements


See discussion of the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” , above.


In August 2016, the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The Company adopted this standard on March 1, 2018, on a retrospective basis.  There was no impact of the standard on the Company’s consolidated financial statements.


In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)” , requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard on March 1, 2018, on a retrospective basis.  There was no impact of the standard on the Company’s consolidated financial statements.


In May 2017, the FASB issued ASU 2017-09,  Modification Accounting for Share-Based Payment Arrangements . The standard amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The new standard is effective for fiscal years beginning after December 15, 2017. There was no impact on the financial statements of adopting this new standard on March 1, 2018.


Recently Issued Accounting Pronouncements


In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) , which is effective for public entities for annual reporting periods beginning after December 15, 2018. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company is currently evaluating the effects of ASU 2016-02 on its financial statements for both lessees and lessors.


In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception . Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity , because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its consolidated financial statements and related disclosures.


In September 2016, the FASB issued ASU 2016-13,  Financial Instruments-Credit Losses . ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 using a modified retrospective adoption method. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently assessing the impact this accounting standard will have on its financial statements and related disclosures.


- 11 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Subsequent Events


The Company has evaluated all transactions through the date the consolidated financial statements were issued for subsequent event disclosure.


4. REVENUE FROM CONTRACTS WITH CUSTOMERS


Revenue is earned primarily from two sources: 1) direct sales of goods or services and 2) short-term rentals. Direct sales of goods or services are accounted for under Topic 606, and short-term rentals are accounted for under Topic 840 (which addresses lease accounting and will be updated after the adoption of Topic 842 on March 1, 2019) as operating leases.


As disclosed in the revenue recognition section of Note 3 – Accounting Polices, the Company adopted Topic 606 in accordance with the effective date on March 1, 2018. Note 3 includes disclosures regarding the Company’s method of adoption and the impact on the Company’s financial statements. Revenue is recognized on direct sales of goods or services when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services.


Upon adoption of Topic 842, also referred to above in Note 3, the Company plans to account for revenue earned from rental activities where an identified asset is transferred to the customer and the customer has the ability to control that asset, will be accounted for under this topic. The Company is currently evaluating the effects of Topic 842 on its financial statements.


The Company recognizes revenue from its device rental activities when persuasive evidence of a contract exists, the performance obligations have been satisfied, the transaction price is fixed or determinable and collection is reasonably assured. Performance obligations associated with device rental transactions are satisfied over the rental period. Rental periods are short-term in nature. Therefore, the Company has elected to apply the practical expedient which eliminates the requirement to disclose information about remaining performance obligations. Payments are due from customers at the completion of the rental, except for customers with negotiated payment terms, generally net 30 days or less, which are invoiced and remain as accounts receivable until collected.


The following table presents revenues from contracts with customers disaggregated by product/service:


 

 

Three Months Ended
November 30, 2018

 

Nine Months Ended
November 30, 2018

 

Device rental activities

 

$

38,864

 

$

65,295

 

Direct sales of goods and services

 

 

 

 

410

 

 

 

$

38,864

 

$

65,705

 


5. PREPAID EXPENSES AND DEPOSITS


Prepaid expenses and deposits on device parts expected to be received within one year were comprised of the following:


 

 

November 30, 2018

 

February 28, 2018

 

Prepaid insurance

 

$

21,078

 

$

22,076

 

Prepaid travel

 

 

 

 

10,488

 

Prepaid trade show expenses

 

 

 

 

50,539

 

 

 

$

21,078

 

$

83,103

 


- 12 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


6. REVENUE EARNING DEVICES


Revenue earning devices consisted of the following:


 

 

November 30, 2018

 

February 28, 2018

 

Revenue earning devices

 

$

229,958

 

$

 

Less: Accumulated depreciation

 

 

(28,434

)

 

 

 

 

$

201,524

 

$

 


During the nine months ended November 30, 2018, the Company made total additions to revenue earning devices of $229,958.


During the nine months ended November 30, 2017, the Company made total additions to revenue earning robots of $38,653.  Due to several revenue earning robots becoming non-operational during the nine months ended November 30, 2017, the Company wrote down revenue earning robots with a net book value of $82,855 to $0 as loss on impairment of fixed assets.


Depreciation expense was $13,646 and $28,434 for the three and nine months ended November 30, 2018, respectively, and $21,350 and $35,056 for the three and nine months ended November 30, 2017 respectively.


7. FIXED ASSETS


Fixed assets consisted of the following:


 

 

November 30, 2018

 

February 28, 2018

 

Automobile

 

$

136,318

 

$

136,318

 

Computer equipment

 

 

20,262

 

 

17,361

 

Office equipment

 

 

5,680

 

 

11,829

 

Leasehold improvements

 

 

29,329

 

 

29,329

 

 

 

 

191,589

 

 

194,837

 

Less: Accumulated depreciation

 

 

(79,870

)

 

(36,632

)

 

 

$

111,719

 

$

158,205

 


During the nine months ended November 30, 2018, the Company made additions to fixed assets of $2,900 and wrote -off fixed assets having a net book value of $4,739 and recorded a corresponding loss on impairment of fixed assets.


During the nine months ended November 30, 2017, the Company acquired total fixed assets of $206,449.  Due to several demo robots becoming non-operational during the nine months ended November 30, 2017, the Company wrote down fixed assets with a net book value of $42,409 to $0 as loss on impairment of fixed assets.


Depreciation expense was $14,748 and $44,646 for the three and nine months ended November 30, 2018, respectively, and $17,695 and $37,683 for the three and nine months ended November 30, 2017, respectively.


- 13 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


8. INTANGIBLE ASSETS


Intangible assets consisted of the following:


 

 

November 30, 2018

 

February 28, 2018

 

Customer lists and relationships

 

$

61,901

 

$

61,901

 

Less accumulated amortization

 

 

(15,475

)

 

(5,653

)

 

 

$

46,426

 

$

56,248

 


On October 2, 2017, the Company acquired goods and other intangibles through an asset purchase agreement with WeSecure Robotics, Inc. (“WeSecure”) in exchange for $125,000 payable in 5 monthly $25,000 installments commencing in October 2017 and ending February 2018. The intangible asset primarily consisted of customer relationships and lists acquired as a part of the asset purchase agreement. The Company is treating this transaction as a business combination under ASU 2017-01 – Business Combinations: Clarifying the Definition of a Business .


Under the asset purchase agreement, the two principals of WeSecure were also hired on an at will basis: one as a sales director for a salary of $8,000 per month and the other as a consultant at $1,000 per month. The salary has been committed to until September 1, 2019, regardless of employment within the Company, In addition, the two principals will receive collectively a commission of $500/month for each SMP robot rented by an identified customer for one year, as long as the customer stays with the Company for two years and an additional year of commission if the two principals remain employed with the Company through September 1, 2020. They will also receive a commission of 5% of net revenues on sales to identified customers for non-SMP robots for 2 years.  In addition, the Company agreed to issue 4,500 options to the two principals to purchase shares its common stock at an exercise price of $5.00 per share that vest on October 2, 2021.


The purchase price was allocated to the following assets as a part of this transaction:


Assets Acquired:

 

 

 

Cash

$

17,000

 

Robots, parts, and equipment

 

46,099

 

Intangible assets

 

61,901

 

Total assets acquired

$

125,000

 


Amortization expense was $3,095 and $9,822 for the three and nine months ended November 30, 2018, respectively, and $2,050 for both the three and nine months ended November 30, 2017.


At both November 30, 2018 and February 28, 2018, the balance due on acquisition to WeSecure was $25,000. The acquisition was to be fully paid by February 28, 2018 per the agreement, however no notices have been sent.


9. NOTE RECEIVABLE


On March 13, 2017, the Company loaned $40,000 to a third party vendor. The note bore interest at 18% per annum and was payable on April 13, 2017. The note was not repaid by the due date. The note was subsequently amended to bear interest of 2% per month plus a $10,000 fee. It was payable on December 31, 2017 and is secured in senior rank on all assets of the borrower. The Company evaluated the note receivable to determine whether its lending activities create a variable interest entity that would require consolidation and determined that it does not create a variable interest entity. Based on the current information available, the Company recorded a full allowance for this note of $40,000, during March 2018 with a corresponding adjustment to bad debt expense.


- 14 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


10. CONVERTIBLE NOTES PAYABLE


Convertible notes payable consisted of the following:


 

 

 

 

 

 

 

 

Balance

 

Balance

 

 

 

 

Interest

 

Conversion

November 31,

 

February 28,

Issued

 

Maturity

 

Rate

 

Rate per Share

2018

 

2018

February 28, 2011

 

February 26, 2013 *

 

7%

 

$0.015

 

$32,600

 

$32,600

January 31, 2013

 

February 28, 2017 *

 

10%

 

$0.010

 

119,091

 

119,091

May 31, 2013

 

November 30, 2016 *

 

10%

 

$0.010

 

261,595

 

261,595

August 31, 2014

 

November 30, 2016 *

 

10%

 

$0.002

 

355,652

 

355,652

November 30, 2014

 

November 30, 2016 *

 

10%

 

$0.002

 

103,950

 

103,950

February 28, 2015

 

February 28, 2017 *

 

10%

 

$0.001

 

63,357

 

63,357

May 31, 2015

 

August 31, 2017*

 

10%

 

$1.000

 

65,383

 

65,383

August 31, 2015

 

August 31, 2017*

 

10%

 

$0.300

 

91,629

 

91,629

November 30, 2015

 

November 30, 2018

 

10%

 

$0.300

 

269,791

 

269,791

February 29, 2016

 

February 28, 2019

 

10%

 

60% discount (2)

 

95,245

 

95,245

May 31, 2016

 

May 31, 2019

 

10%

 

$0.003

 

35,100

 

35,100

July 18, 2016

 

July 18, 2017*

 

10%

 

$0.003

 

3,500

 

3,500

December 31, 2016

 

December 31, 2020

 

8%

 

35% discount (2)

 

65,000

 

65,000

January 15, 2017

 

January 15, 2021

 

8%

 

35% discount (2)

 

50,000

 

50,000

January 15, 2017

 

January 15, 2021

 

8%

 

35% discount (2)

 

100,000

 

100,000

January 16, 2017

 

January 16, 2021

 

8%

 

35% discount (2)

 

150,000

 

150,000

March 8, 2017

 

March 8, 2020

 

10%

 

40% discount (2)

 

100,000

 

100,000

March 9, 2017

 

March 9, 2021

 

8%

 

35% discount (2)

 

50,000

 

50,000

March 21, 2017

 

March 21, 2018

 

8%

 

40% discount (2)

 

 

30,000

April 4, 2017

 

December 4, 2017

 

10%

 

40% discount (2)

 

 

12,066

April 19, 2017

 

April 19, 2018*

 

15%

 

50% discount (2)

 

96,250

 

96,250

April 20, 2017

 

January 30, 2018

 

8%

 

40% discount (1)

 

 

28,000

April 26, 2017

 

April 26, 2018*

 

0%

 

$0.001

 

68

 

67

May 1, 2017

 

May 1, 2021

 

8%

 

35% discount (2)

 

50,000

 

50,000

May 4, 2017

 

May 4, 2018*

 

8%

 

40% discount (2)

 

131,450

 

150,000

May 15, 2017

 

May 15, 2018*

 

0%

 

$0.001

 

1,280

 

1,280

May 17, 2017

 

May 17, 2020

 

10%

 

40% discount (1)

 

85,000

 

85,000

June 7, 2017

 

June 7, 2018*

 

8%

 

40% discount (2)

 

191,750

 

200,000

June 16, 2017

 

June 16, 2018*

 

0%

 

$0.001

 

750

 

750

July 6, 2017

 

July 6, 2018*

 

8%

 

40% discount (2)

 

200,000

 

200,000

August 8, 2017

 

August 8, 2018*

 

8%

 

40% discount (2)

 

125,000

 

125,000

July 28, 2017

 

July 28, 2018

 

15%

 

50% discount (2)

 

 

116,875

August 29, 2017

 

August 29, 2018*

 

15%

 

50% discount (2)

 

147,500

 

247,500

September 1, 2017

 

September 1, 2018*

 

0%

 

lower of 50% discount/$0.005 (2)

 

62,000

 

187,000

September 12, 2017

 

September 12, 2018

 

8%

 

40% discount (2)

 

 

128,000

September 25, 2017

 

September 25, 2018

 

15%

 

50% discount (2)

 

 

398,750

October 4, 2017

 

May 4, 2018*

 

8%

 

40% discount (2)

 

150,000

 

150,000

October 16, 2017

 

October 16, 2018*

 

15%

 

50% discount (2)

 

319,366

 

345,000

November 22, 2017

 

November 22 ,2018*

 

15%

 

50% discount (2)

 

500,250

 

500,250

December 28, 2017

 

December 28 ,2017*

 

10%

 

40% discount (2)

 

28,150

 

60,500

December 29, 2017

 

December 29 ,2018

 

15%

 

50% discount (2)

 

330,000

 

330,000

January 9, 2018

 

January 9,2019

 

8%

 

40% discount (2)

 

82,500

 

82,500

January 30, 2018

 

January 30, 2019

 

15%

 

50% discount (2)

 

300,000

 

300,000

February 21, 2018

 

February 21,2019

 

15%

 

50% discount (2)

 

300,000

 

300,000

March 14, 2018

 

March 14, 2019

 

10%

 

40% discount (2)

 

50,000

 

March 16, 2018

 

March 16, 2019

 

15%

 

50% discount (2)

 

 

June 7, 2017

 

June 9 ,2019

 

8%

 

40% discount (2)

 

200,000

 

April 9, 2018

 

April 9, 2019

 

15%

 

50% discount (2)

 

55,000

 

March 21, 2017

 

March 21, 2018*

 

8%

 

40% discount (2)

 

2,870

 

March 21, 2017

 

March 21, 2018*

 

8%

 

40% discount (2)

 

40,000

 

April 17, 2018

 

April 17, 2019

 

8%

 

45% discount (2)

 

 

April 20, 2018

 

April 20, 2019

 

8%

 

40% discount (2)

 

49,904

 

May 2, 2018

 

December 2, 2018

 

10%

 

40% discount (2)

 

77,000

 

May 4, 2018

 

May 4, 2019

 

12%

 

50% discount (2)

 

89,545

 

May 14, 2018

 

December 14, 2018

 

10%

 

50% discount (2)

 

33,542

 

May 23, 2018

 

May 23, 2019

 

10%

 

50% discount (2)

 

110,000

 

June 6, 2018

 

June 6,2019

 

15%

 

50% discount (2)

 

296,279

 

June 19, 2018

 

March 19, 2019

 

15%

 

50% discount (2)

 

96,407

 

July 6, 2017

 

June 9, 2019

 

8%

 

40% discount (2)

 

95,000

 

August 1, 2018

 

August 1, 2019

 

15%

 

50% discount (2)

 

32,500

 

August 23, 2018

 

August 23, 2019

 

8%

 

45% discount (2)

 

86,634

 

September 13, 2018

 

June 30, 2019

 

12%

 

45% discount (2)

 

53,000

 

September 17, 2018

 

March 17, 2019

 

10%

 

50% discount (2)

 

4,945

 

September 20, 2018

 

September 20, 2019

 

15%

 

50% discount (2)

 

39,350

 

September 24, 2018

 

June 24, 2019

 

8%

 

40% discount (2)

 

44,000

 

August 8, 2017

 

June 9, 2019

 

8%

 

40% discount (2)

 

125,000

 

November 1, 2018

 

August 15, 2019

 

12%

 

45% discount (2)

 

53,000

 

November 26, 2018

 

May 26, 2019

 

10%

 

50% discount (2)

 

53,984

 

 

 

6,801,167

 

6,136,681

 

 

 

 

 

Less: current portion of convertible notes payable

 

(6,236,167)

 

(5,536,582)

Less: discount on noncurrent convertible notes payable

 

(345,439)

 

(505,039)

Noncurrent convertible notes payable, net of discount

 

$219,561

 

$95,060

 

 

 

 

 

Current portion of convertible notes payable

 

$6,236,167

 

$5,536,582

Less: discount on current portion of convertible notes payable

 

(1,729,420)

 

(3,418,637)

Current portion of convertible notes payable, net of discount

 

$4,506,747

 

$2,117,946


- 15 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


__________

*

The indicated notes were in default as of November 30, 2018 .

(1)

The note is convertible beginning six months after the date of issuance.

(2)

The notes are convertible at a discount (as indicated) to the average market price and are accounted for and evaluated under ASC 480 as discussed in Note 3.

(3)

The conversion price is not subject to adjustment from forward or reverse stock splits.


During the three months ended November 30, 2018 and 2017, the Company incurred original issue discounts of $16,250 and $229,500, respectively, and debt discounts from derivative liabilities of $385,891 and $1,468,475, respectively, related to new convertible notes payable. These amounts are included in discounts on convertible notes payable and are being amortized to interest expense over the life of the convertible notes payable. During the three months ended November 30, 2018 and 2017, the Company recognized interest expense related to the amortization of debt discount of $1,296,997 and $691,607, respectively.


During the nine months ended November 30, 2018 and 2017, the Company incurred original issue discounts of $79,103 and $229,500, respectively, and debt discounts from derivative liabilities of $1,309,900 and $2,043,475, respectively, related to new convertible notes payable. These amounts are included in discounts on convertible notes payable and are being amortized to interest expense over the life of the convertible notes payable. During the nine months ended November 30, 2018 and 2017, the Company recognized interest expense related to the amortization of debt discount of $3,649,219 and $691,607, respectively. The Company recorded penalty interest of $221,055 during the nine months ended November 30, 2018 that is payable upon maturity if not already converted or settled prior to maturity.


All the notes above are unsecured. As of November 30, 2018, the Company had total accrued interest payable of $1,385,874, of which $1,300,530 is classified as current and $85,344 is classified as noncurrent.


See description below for description of the convertible notes issued during the nine months ended November 30, 2018.


Convertible notes issued


The Company determined that the embedded conversion features in the convertibles notes described below should be accounted for as derivative liabilities as a result of their variable conversion rates.


On January 5, 2018, the Company issued a convertible promissory note to an investor with an aggregate principal amount of $250,000, due on January 5, 2019 for cash proceeds of $225,000 payable in tranches, with an original issue discount of $25,000. Each tranche matures one year after disbursement. The promissory note is convertible into common shares of the Company and a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 25 trading days prior to conversion, and has a 10% per annum interest rate commencing on January 5, 2018. On March 14, 2018, this note was amended to include the issuance of warrants to purchase 333,333 shares of the Company’s common stock with an exercise price of $0.15 with a 3-year maturity, and to change the date of the note to March 14, 2018, coinciding with the payment of the first tranche of $50,000 including cash proceeds of $43,000, fees of $2,000 and an original issue discount of $5,000.


On March 1, 2018, the Company issued a convertible redeemable note to an investor with an aggregate principal amount of $95,000, due on March 1, 2019 for cash proceeds of $95,000. The promissory note is convertible into units of the Company comprised of one share of common stock and one warrant to purchase a share of common stock with a three-year maturity and a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 15% per annum interest rate.


In March 2018 and April 2018, an investor paid the Company $200,000 in exchange for a June 7, 2017 back-end note for $200,000, whose maturity was extended to June 9, 2019. The note is convertible into common shares of the Company and a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has an 8% per annum interest rate.


On April 9, 2018, the Company issued a convertible redeemable note to an investor with an aggregate principal amount of $55,000, due on April 9, 2019 for cash proceeds of $55,000. The promissory note is convertible into units of the Company comprised of one share of common stock and one warrant to purchase a share of common stock with a three-year maturity and a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 15% per annum interest rate.


- 16 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


In April 2018, the Company received $76,000 of proceeds from an investor for two back-end notes with a total principal amount of $80,000, including original issue discounts of $4,000 and a one-year maturity. The back-end notes are convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and have an 8% per annum interest rate.


On May 2, 2018, the Company received $70,000 of proceeds from an investor for a promissory note with a principal amount of $77,000, including an original issue discounts of $7,000 and an eight-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 10% per annum interest rate.


On May 4, 2018, the Company received $71,500 of proceeds from an investor for a promissory note with a principal amount of $82,500, including an original issue discounts of $11,000 and a one-year maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 12% per annum interest rate.


On May 23, 2018, the Company received $90,108 of proceeds from an investor for a promissory note with a principal amount of $110,000, including an original issue discounts of $19,892 and an eight-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 10% per annum interest rate.


In July and August 2018, the Company received $85,000 of proceeds from an investor for a back-end note date July 6, 2017 principal amount of $95,000, including an original issue discounts of $10,000 and a twelve-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has an 8% per annum interest rate.


In July and August 2018, the Company received $32,500 of proceeds from an investor for a promissory note with a principal amount of $32,500, and a one-year maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 15% per annum interest rate commencing on August 1, 2018.


On September 13, 2018, the Company received $50,000 of proceeds from an investor for a promissory note with a principal amount of $53,000, including an original issue discounts of $3,000 and a nine-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 45% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 12% per annum interest rate.


On September 20, 2018, the Company received $39,350 of proceeds from an investor for a promissory note with a principal amount of $39,350 and a one-year maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 15% per annum interest rate.


On September 24, 2018, the Company received $40,000 of proceeds from an investor for a promissory note with a principal amount of $44,000, including an original issue discounts of $4,000 and a nine-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 40% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 8% per annum interest rate.


On November 1, 2018, the Company received $50,000 of proceeds from an investor for a promissory note with a principal amount of $53,000, including an original issue discounts of $3,000 maturing August 15, 2019. The promissory note is convertible into common shares of the Company at a conversion price equal to 45% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 12% per annum interest rate.


On November 30, 2018, the Company received $118,750 of proceeds from an investor for a back-end promissory note dated August 8, 2017 with a principal amount of $125,000, including an original issue discounts of $6,250 maturing June 9, 2019. The promissory note is convertible into common shares of the Company at a conversion price equal to 40% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 8% per annum interest rate.


- 17 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


During the nine months ended November 30, 2018, the Company also had the following convertible note activity:


A debt holder transferred debt of $344,040, including accrued interest, to third parties who exchanged it for new convertible notes totaling $344,040, $100,000 with a one-year maturity, maturing on April 17, 2019, bearing interest at 8% per annum and are convertible into common shares of the Company at a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion; $144,404, with a one-year maturity, maturing on April 20, 2019, bearing interest at 8% per annum, and are convertible into common shares of the Company at a conversion price equal to 60% of the lowest bid price of the Company’s common stock for the last 30 trading days prior to conversion; and $100,000 with an eight-month maturity, maturing on December 14, 2018, bearing interest at 10% per annum, and are convertible into common shares of the Company at a conversion price equal to 55% of the lowest bid price of the Company’s common stock for the last 30 trading days prior to conversion. A gain on settlement of debt of $268,145 was recorded that includes the amount of associated derivative liability that was written-off.

 

 

A debt holder transferred debt of $299,200, including accrued interest, to third parties who exchanged it for a replacement convertible note totaling $299,200, a one-year maturity, maturing on September 25, 2018, and bearing interest at 15% per annum. The replacement convertible note is convertible into units of the Company comprised of one share of common stock and one warrant to purchase a share of common stock with a three-year maturity and a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion. A loss on settlement of debt of $484,484 was recorded that includes the amount of associated derivative liability that was written-off.

 

 

A debt holder transferred debt of $132,149, including accrued interest, to third parties who exchanged it for a replacement convertible note totaling $132,149, with an eight-month maturity, maturing on March 19, 2019, bearing interest at 15% per annum, and are convertible into common shares of the Company at a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion. A gain on settlement of debt of $71,100 was recorded that includes the amount of associated derivative liability that was written-off.

 

 

The Company exchanged a replacement note issued on April 17, 2018 with a principal of $100,000 and a one-year maturity, maturing on April 17, 2019, and bearing interest at 8% per annum for another replacement note issued on August 23, 2018 with a principal of $100,000 and a one-year maturity, maturing on August 23, 2019, and bearing interest at 8% per annum, and are convertible into common shares of the Company at a conversion price equal to 55% of the lowest bid price of the Company’s common stock for the last 30 trading days prior to conversion.  A gain on settlement of debt of $90,629 was recorded that includes the amount of associated derivative liability that was written-off.

 

 

A debt holder transferred debt of $103,984, including accrued interest, to third parties who exchanged it for new convertible notes totaling $344,040: $50,000 with a six-month maturity, maturing on March 17, 2019, bearing interest at 10% per annum, and are convertible into common shares of the Company at a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 20 trading days prior to conversion; $53,984, with a six-month maturity, maturing on May 26, 2019, bearing interest at 10% per annum, and are convertible into common shares of the Company at a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 20 trading days prior to conversion. A gain on settlement of debt of $121,305 was recorded that includes the amount of associated derivative liability that was written-off.

 

 

The Company settled a September 1, 2017 note for repayment $125,000, and a gain of $64,441 was recorded due to the associated derivative liability that was written-off.

 

 

During the nine months ended November 30, 2018, holders of certain convertible notes payable elected to convert a total of $690,193 of principal and $24,715 accrued interest, and $5,000 of fees into 15,001,414 shares of common stock and warrants to purchase 1,288,765 shares of common stock (see Note 15 for detail of warrants issued). No gain or loss was recognized on conversions as they occurred within the terms of the agreement that provided for conversion.


- 18 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


11. RELATED PARTY TRANSACTIONS


For the nine months ended November 30, 2018, the Company received advances of $401,473 from its loan payable with a related party. The loan payable is non-interest bearing, unsecured and payable upon demand. At November 30, 2018, the balance due to this related party was $502,106, and $316,142 at February 28, 2018.


During the three and nine months ended November 30, 2018, the Company paid $288,143 and $484,251 in consulting fees for research and development to a company owned by a principal shareholder. At November 30, 2018, the balance due to this related party was $215,509, and $0 at February 28, 2018.


12. OTHER DEBT – VEHICLE LOAN


In December 2016, RAD entered into a vehicle loan for $47,704 secured by the vehicle. The loan is repayable over 5 years maturing November 9, 2021, and repayable $1,019 per month including interest and principal. In November 2017, RAD entered into another vehicle loan secured by the vehicle for $47,661. The loan is repayable over 5 years, maturing October 24, 2022 and repayable at $923 per month including interest and principal. The principal repayments were $13,657 and $6,591 for the nine months ended November 30, 2018 and 2017, respectively. The balances of the amounts owed on the vehicle loan were $68,505 and $82,162 as of November 30, 2018 and February 28, 2018, respectively, of which $17,830 and $17,830 were classified as current and $50,675 and $64,332 as long-term, respectively.


13. LOANS PAYABLE


Loans payable consisted of the following:


 

 

 

 

 

 

 

Annual

 

 

 

 

 

 

 

 

Interest

 

Date

Maturity

Type

 

Principal

 

Rate

 

June 11, 2018

June 11, 2019

Promissory note

(3)

$

48,000

 

25%

*

June 20, 2018

August 20, 2018

Promissory note

 

 

50,000

 

20%

*

July 30, 2018

December 1, 2018

Promissory note

(2)

 

12,000

 

15%

*

August 10, 2018

September 1, 2018

Promissory note

 

 

10,000

 

25%

*

August 16, 2018

August 16, 2019

Promissory note

(1)

 

25,000

 

25%

*

August 16, 2018

October 1, 2018

Promissory note

 

 

10,000

 

25%

*

August 23, 2018

October 20, 2018

Promissory note

 

 

20,000

 

20%

*

September 14, 2018

November 14, 2018

Promissory note

 

 

50,000

 

20%

*

October 10, 2018

October 10, 2019

Promissory note

(6)

 

7,500

 

20%

 

October 11, 2018

October 11, 2019

Promissory note

(7)

 

23,000

 

20%

 

October 18, 2018

December 1, 2018

Promissory note

(5)

 

11,000

 

0%

 

November 8, 2018

March 15, 2019

Merchant sales agreement

(4)

 

18,902

 

(4)

 

November 8, 2018

Demand

Demand secured loan

(8)

 

54,000

 

25%

 

 

 

 

 

$

339,402

 

 

 

__________

*

Note is in default. No notice has been given by the note holder.

(1)

Repayable in 12 monthly installments of $2,376 commencing on September 16, 2018, and secured by the revenue earning devices of the Company having a net book value of at least $25,000. No repayments have been made by the Company and no notices have been received.

(2)

Including an original issue discount of $3,000.

(3)

Repayable in 12 monthly installments of $4,562 commencing August 11, 2018, and secured by the revenue earning devices of the Company having a net book value of  at least $48,000. No repayments have been made by the Company and no notices have been received.

(4)

Repayable at $166 per day, including fees and interest of $5,850. Balance consists of original proceeds received of $20,850 less repayment of $1,948.

(5)

Including an original issue discount of $900.

(6)

Repayable in 10 monthly installments of $900 commencing January 10, 2019, and secured by the revenue earning devices of the Company having a net book value of  at least $186,000.


- 19 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(7)

Principal repayable in one year. Interest repayable in 10 monthly installments of $460 commencing January 11, 2019, and secured by the revenue earning devices of the Company having a net book value of at least $186,000.

(8)

Demand loan, with a 5% fee in addition to the 25% per annum interest is due when repaid. If the Company is unable to repay the loan when the demand is made, an additional 10% interest is levied on any unpaid amounts.  Secured by the revenue earning devices of the Company having a net book value of at least $186,000.


14. DERIVATIVE LIABILITES


As of November 30, 2018, the Company revalued the fair value of all of the Company’s derivative liabilities associated with the conversion features on the convertible notes payable and determined that it had a total derivative liability of $6,152,561.


The Company estimated the fair value of the derivative liabilities using the Monte-Carlo model using the following key assumptions during the nine months November 30, 2018:


Strike price

$1.00 - $0.001

Fair value of Company common stock

$0.3375 - $0.0110

Dividend yield

0.00%

Expected volatility

424% - 102%

Risk free interest rate

1.20% - 2.59%

Expected term (years)

0.00 - 3.66


During the three and nine months ended November 30, 2018, the Company released $233,178 and $990,400, respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes.


The changes in the derivative liabilities (Level 3 financial instruments) measured at fair value on a recurring basis for the nine months ended November 30, 2018 were as follows:


Balance as of February 28, 2018

 

$

31,113,844

 

 

 

 

 

 

Release of derivative liability on conversion of convertible notes payable

 

 

(990,400

)

Debt discount due to derivative liabilities

 

 

1,309,900

 

Derivative liability in excess of face value of debt recorded to interest expense

 

 

751,522

 

Increase in derivative liability due to debt settlement

 

 

183,766

 

Change in fair value of derivative liabilities

 

 

(26,216,071

)

Balance as of November 30, 2018

 

$

6,152,561

 


15. SHAREHOLDERS’ EQUITY (DEFICIT)


Summary of Preferred Stock Activity


During the nine months ended November 30, 2018, the Company received $174,070 for the sale of 65 Series F preferred shares. As of the reporting date, these shares have not been issued and are included in preferred stock to be issued on the balance sheet.


Summary of Common Stock Activity


On August 24, 2018, the Company undertook a 100:1 reverse stock split. The share capital has been retrospectively adjusted accordingly to reflect this reverse stock split, except for the conversion price of certain convertible notes as the conversion price is not subject to adjustment from forward and reverse stock splits (see Note 10).


During the nine months ended November 30, 2018, the Company issued 15,001,414 shares of its common stock for the conversion of debt and related interest and fees totaling $719,908 including $690,193 for of principal, $24,715 interest, $5,000 in fees in connection with debt converted during the period, as well as the release of the related derivative liability (see Note 14).


- 20 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


Summary of Stock Option Activity


As part of the asset purchase agreement described in Note 8, the Company issued 4,500 options to purchase shares at an exercise price of $5.00 per share that vest on October 2, 2021.


The options have a grant date fair value of $27,843, based on the Black-Scholes Option Pricing model with the following assumptions:


Strike price

$0.05

Fair value of Company’s common stock

$0.06

Dividend yield

0.00%

Expected volatility

303.81%

Risk free interest rate

1.94%

Expected term (years)

4.00


The Company will amortize the $27,843 over the four-year term on a straight-line basis as stock-based compensation. For the three and nine-months periods ended November 30, 2018, the Company amortized $1,741 and $5,221, respectively, to stock-based compensation with a corresponding adjustment to additional paid-in capital. At November 30, 2018, the unamortized expense was $19,782 and the intrinsic value was $0.


 

 

Number of Options

 

Weighted Average Exercise Price

 

Weighted Average Remaining Years

 

 

 

 

 

 

 

Outstanding at March 1, 2018

 

4,500

 

$   5.00

 

2.84

Granted

 

 

 

 

 

Exercised

 

 

 

 

 

Forfeited and cancelled

 

 

 

 

 

Outstanding at November 30, 2018

 

4,500

 

$   5.00

 

2.84


During the nine months ended November 30, 2018, the Company issued the following warrants:


On April 16, 2018, the Company issued warrants to purchase 64,000 shares of the Company’s common stock in connection with its issuance of 64,000 shares of the Company’s common stock to an investor. The warrants have an exercise price of $2.00 per share and a three-year term.

 

 

On June 6, 2018, the Company issued warrants to purchase 6,640 shares of the Company’s common stock in connection with its issuance of 6,640 shares of the Company’s common stock to an investor. The warrants have an exercise price of $0.44 per share and a three-year term.

 

 

On August 24, 2018, the Company issued warrants to purchase 102,000 shares of the Company’s common stock in connection with its issuance of 102,000 shares of the Company’s common stock to an investor. The warrants have an exercise price of $0.15 per share and a three-year term.

 

 

In September and October 2018, the Company issued warrants to purchase 1,116,125 shares of the Company’s common stock in connection with its issuance of 1,116,125 shares of the Company’s common stock to an investor. The warrants have an exercise price ranging from $0.015-$0.035 per share and a three-year term.


- 21 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


The Company also issued 2,500 warrants with an exercise price of $3.00 per share and a 3-year term on June 11, 2018, and 3,333 warrants with an exercise price of $15.00 and a three year term on March 14, 2018 in connection with loan payables (see Note 13).


 

 

Number of Warrants

 

Weighted Average Exercise Price

 

Weighted Average Remaining Years

 

 

 

 

 

 

 

Outstanding at March 1, 2018

 

 

$       —

 

Issued

 

1,294,598

 

0.19

 

2.79

Exercised

 

 

 

Forfeited and cancelled

 

 

 

Outstanding at November 30, 2018

 

1,294,598

 

$    0.19

 

2,79


The above warrants have an aggregate grant date fair value of $627,751, based on the Black-Scholes Option Pricing model with the following assumptions:


Strike price

$0.02 - $3.00

Fair value of Company’s common stock

$0.05- $7.00

Dividend yield

0.00%

Expected volatility

305.71% - 341.5%

Risk free interest rate

2.52% - 2.94%

Expected term (years)

3.00 - 5.00


For the nine months ended November 30, 2018, the Company recorded a total of $632,972 to stock-based compensation for options and warrants with a corresponding adjustment to additional paid-in capital.


16. COMMITMENTS AND CONTINGENCIES


Litigation


Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.


In February 2016, the Company received notice that it had been sued in the Clark County District Court of Nevada. The plaintiff alleges that the Company obtained certain trade secrets through a third party also named in the suit. An arbitration was conducted on May 9, 2017, and the Plaintiff filed a Notice of Trial de Novo, seeking a review of the merit dismissal. The outcome of this matter is uncertain and there is no specific timeline available as of the date of this filing.


Operating Lease


The Company’s principal facility is located in Orange County, California. The lease agreement includes, escalating lease payments, renewal provisions and other provisions. The lease began in April 2017 and expires in March 2022. Rent expense is recorded over the lease terms on a straight-line basis.  The security deposit of $25,747 was recorded as a long-term asset as of August 31, 2017.


The Company also leases premises in Northern California. The lease began in August 2017 and expires in August 2020. The security deposit of $5,126 was paid on September 1, 2017. The Company shares premises with a supplier, who is the co-lessee. Through agreement with the supplier, the Company agreed to pay 75% of the lease costs and the supplier agreed to pay 25%.


- 22 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


On February 1, 2018, the Company entered into an additional lease for premises for a robotic control center. The lease runs from February 1, 2018 to January 31, 2021 for $550 per month.


The Company’s leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $30,155 and $89,917 for the three and nine months ended November 30, 2018. Rent expense was $31,834 and $58,056 for the three and nine months ended November 30, 2017.


At November 30, 2018, the Company’s future minimum payments are as follows:


Twelve Months Ended

 

Amount

 

November 30, 2019

 

$

105,792

 

November 30, 2020

 

 

96,922

 

November 30, 2021

 

 

58,495

 

November 30, 2022

 

 

19,314

 

 

 

$

280,528

 


17. EARNINGS (LOSS) PER SHARE


The net income (loss) per common share amounts were determined as follows:


 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

November 30,

 

November 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

7,711,118

 

$

(8,796,921

)

$

17,384,222

 

$

(11,805,734

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of common stock equivalents

 

 

 

 

 

 

 

 

 

 

 

 

 

Add:  interest expense on convertible debt

 

 

316,411

 

 

 

 

726,595

 

 

 

Less: gain on change of derivative liabilities

 

 

(10,223,431

)

 

 

 

(26,216,071

)

 

 

Net income (loss) adjusted for common stock equivalents

 

$

(2,195,901

)

$

(8,796,921

)

$

(8,105,254

)

$

(11,805,734

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares – basic

 

 

8,949,875

 

 

1,186,924

 

 

4,028,324

 

 

408,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of common stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants

 

 

432,324

 

 

 

 

299,404

 

 

 

Convertible debt

 

 

1,214,611,324

 

 

 

 

1,186,653,028

 

 

 

Preferred shares

 

 

56,069,447

 

 

 

 

56,069,447

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares – diluted

 

 

1,280,062,970

 

 

1,186,9274

 

 

1,247,050,203

 

 

408,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – basic

 

$

0.86

 

$

(7.41

)

$

4.32

 

$

(28.92

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – diluted

 

$

(0.00

)

$

(7.41

)

$

(0.01

)

$

(28.92

)


- 23 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(FORMERLY ON THE MOVE SYSTEMS CORP.)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


The anti-dilutive shares of common stock equivalents for the three and nine months ended November 30, 2018 and 2017 were as follows:


 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

November 30,

 

November 30,

 

 

 

2018

 

2017

 

2018

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options and warrants

 

 

71,833

 

 

 

 

71,833

 

 

 

Convertible debt

 

 

 

 

230,167

 

 

 

 

230,167

 

Preferred stock

 

 

 

 

4,312,650

 

 

 

 

4,312,650

 

Total

 

 

71,833

 

 

4,542,817

 

 

71,833

 

 

4,542,817

 


18. SUBSEQUENT EVENTS


Subsequent to November 30, 2018, convertible note holders converted $202,621 of principal, $11,122 interest and $3,500 in fees into 184,181,276 shares of the Company’s common stock.


In addition, an investor canceled 171,500 shares relating to an October 2018 conversion. The Company reinstated the $2,658 of principal relating to this transaction.


Subsequent to November 30, 2018, the Company issued warrants to purchase 19,141,711 shares of the Company’s common stock in connection with its issuance of 19,141,711 shares of the Company’s common stock to an investor as a part of a debt conversion.


The above warrants have an aggregate grant date fair value of $111,678, based on the Black-Scholes Option Pricing model with the following assumptions:


Strike price

$0.001 - $0.0031

Fair value of Company’s common stock

$0.004- $0.01

Dividend yield

0.00%

Expected volatility

334.0% - 335.5%

Risk free interest rate

2.46% - 2.78%

Expected term (years)

3.00


On December 7, 2018, the Company received the balance of $95,000 of proceeds from an investor for a $200,000 back-end note dated July 6, 2017 with an original principal amount of $105,000, including an original issue discount of $10,000, and maturing June 9, 2019. The note’s original maturity was July 6, 2018, but this maturity was extended on December 19, 2018.  The other installments, totaling $95,000 (including an original issue discount of $10,000), on this note were received July and August 2018. The back-end note is convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has an 8% per annum interest rate.


On February 1, 2019 the Company entered into an agreement with an investor whereby the investor would pay up to $900,000 (including a $92,000 payment made in January 2019) in exchange for a perpetual 9% royalty on the Company’s reported quarterly revenue. These royalty payments are to be made 90 days after the fiscal quarter. If the royalty payments would deplete RAD’s available cash by more than 20%, the payment may be deferred. The investor has agreed to pay the remaining $808,000 over an eleven-month period in minimum $60,000 monthly installments, commencing February 1, 2019. If the total investment turns out to be less than $900,000, this would not constitute a breach of the agreement, rather the royalty rate would be adjusted on a pro-rata basis.


- 24 -



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


Forward-Looking Statements


The following discussion of our financial condition and results of operations for the three and nine months ended November 30, 2018 and November 30, 2017 should be read in conjunction with our unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K/A for the year ended February 28, 2018, as filed on June 22, 2018 with the SEC as well as Form 8-K as filed with the SEC on August 31, 2017. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.


Unless expressly indicated or the context requires otherwise, the terms “AITX”, the “Company”, “we”, “us”, and “our” refer to Artificial Intelligence Technology Solutions Inc.


Overview


Artificial Intelligence Technology Solutions Inc. (formerly On the Move Systems Corp.) was incorporated in Florida on March 25, 2010 and reincorporated in Nevada on February 17, 2015. On August 24, 2018 AITX changed its name from On the Move Systems Corp. (“OMVS”).


Robotic Assistance Devices, LLC (“RAD”), was incorporated in the State of Nevada on July 26, 2016 as a LLC. On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc. through the issuance of its 10,000 authorized common shares to its sole shareholder.


On August 28, 2017, AITX completed the acquisition of RAD (the “Acquisition”), whereby AITX acquired all the ownership and equity interest in RAD for 3,350,000 shares of AITX Series E Preferred Stock and 2,450 shares of Series F Convertible Preferred Stock. AITX’s prior business focus was transportation services, and AITX was exploring the on-demand logistics market by developing a network of logistics partnerships. As a result of the closing of the Acquisition, AITX has succeeded to the business of RAD, in which AITX purchased all of the outstanding shares of capital stock of RAD. As a result, AITX’s business going forward will consist of one segment activity which is the delivery of artificial intelligence and robotic solutions for operational, security and monitoring needs.


The Acquisition was treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of AITX’s operations were disposed of as part of the consummation of the transaction. Therefore, no goodwill or other intangible assets were recorded by AITX as a result of the Acquisition. RAD is treated as the accounting acquirer as its stockholders control the Company after the Acquisition, even though AITX was the legal acquirer.  As a result, the assets and liabilities and the historical operations that are reflected in these financial statements are those of RAD as if RAD had always been the reporting company.


Results of Operations for the Three Months Ended November 30, 2018 and 2017


The following table shows our results of operations for the three months ended November 30, 2018 and 2017. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.


- 25 -



 

 

Period

 

Change

 

 

 

Three Months
Ended
November 30, 2018

 

Three Months
Ended
November 30, 2017

 

Dollars

 

Percentage

 

Revenues

 

$

38,864

 

$

63,632

 

$

(24,768

)

(39%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

38,864

 

 

18,632

 

 

20,232

 

109%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

1,132,754

 

 

1,145,803

 

 

(13,049

)

(1%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations  

 

 

(1,093,890

)

 

(1,127,171

)

 

33,281

 

(3%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

8,805,008

 

 

(7,669,750

)

 

16,474,758

 

(215%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

7,711,118

 

$

(8,796,921

)

$

16,508,039

 

(188%

)


Revenue


Total revenue for the three-month period ended November 30, 2018 was $38,864 which represented a decrease of $24,768, compared to total revenue of $63,632 for the period ended November 30, 2017. The decrease resulted from the 2017 sale of a revenue earning device for $45,000 that was acquired in the acquisition of WeSecure’s assets, costing $45,000; thus affecting gross profit below.


Gross profit


Total gross profit for the three-month period ended November 30, 2018 was $38,864, which represented an increase of $20,232, compared to total gross profit of $18,632 for the three months ended November 30, 2017. The increase resulted from the cost of goods on the above-mentioned 2017 sale of the WeSecure asset.


Operating Expenses


 

 

Period

 

Change

 

 

 

Three Months
Ended
November 30, 2018

 

Three Months
Ended
November 30, 2018

 

Dollars

 

Percentage

 

Research and development

 

$

300,881

 

$

216,679

 

$

84,202

)

39%

 

General and administrative

 

 

800,384

 

 

855,707

 

 

(55,323

)

(6%

)

Depreciation and amortization

 

 

31,489

 

 

41,095

 

 

(9,606

)

(23%

)

Loss on impairment of fixed assets

 

 

 

 

32,322

 

 

(32,322

)

(100%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

$

1,132,754

 

$

1,145,803

 

$

(13,049

)

(1%

)


Our operating expenses were comprised of general and administrative expenses, research and development, depreciation and a loss on impairment of fixed assets. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and rent. Our operating expenses during the three-month period ended November 30, 2018 and November 30, 2017, were $1,132,754 and $1,145,803, respectively. The overall decrease of $13,049 was primarily attributable to the following changes in operating expenses of:


General and administrative expenses decreased by $55,323, primarily due to decreases in office and marketing expenses, totaling $222,000, partially offset by increases in salaries of approximately $92,000. The Company had 5 more employees in 2018, compared to 2017, and spent more on office and marketing in 2017 as this was its first year of operations. This was partially offset by increases in professional fees.

 

 

Research and development increased by $84,202 due to higher fees paid to consultants in 2018.

 

 

Depreciation and amortization decreased by $9,606 due to higher additions to fixed assets in 2017.  Loss on impairment of fixed assets decreased by $32,322, because of old revenue earning devices that were written off in 2017.


- 26 -



Other Income (Expense)


Other income (expense) consisted of the change of fair value of derivative instruments and interest. Other income (expense) during the three months ended November 30, 2018 and November 30, 2017, was $8,805,008 and ($7,669,750), respectively. The $16,474,758 increase in other income was primarily attributable to the change in the fair value of derivatives, interest expense, including interest expense related to derivative liability in excess of the face value of debt) and loss on settlement of debt. Fair value of derivatives was largely affected by the decrease in the market price of the Company’s common stock during the current period.


Change in fair value of derivative liabilities increased by $14,470,334 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock.

 

 

Interest expense decreased by $2,993,706 due to a decrease in interest expense related to the derivative liability in excess of debt, partially offset by an increase in interest expense on debt.

 

 

Gain on settlement of debt decreased by $989,282 due to a decrease in the number and amount of debt settlements this quarter over the prior year’s quarter.


Net Loss


We had net income of $7,711,118 for the three months ended November 30, 2018, compared to a net loss of $8,796,921 for the three months ended November 30, 2017. The change is primarily the result of the change in the fair value of the derivative liabilities and other items discussed above.


Results of Operations for the Nine Months Ended November 30, 2018 and 2017


The following table shows our results of operations for the six months ended November 30, 2018 and November 30, 2017. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.


 

 

Period

 

Change

 

 

 

Nine Months
Ended
November 30, 2018

 

Nine Months
Ended
November 30, 2017

 

Dollars

 

Percentage

 

Revenues

 

$

65,705

 

$

98,632

 

$

(32,927

)

(33%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

30,251

 

 

53,632

 

 

(23,381

)

(44%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

3,704,309

 

 

2,092,062

 

 

1,612,247

 

77%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(3,674,058

)

 

(2,038,430

)

 

(1,635,628

)

80%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

21,058,280

 

 

(9,767,304

)

 

30,825,584

 

(316%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

17,384,222

 

$

(11,805,734

)

$

29,189,956

 

(247%

)


Revenue


Total revenue for the nine-month period ended November 30, 2018 was $65,705, which represented a decrease of $32,927, compared to total revenue of $98,632 for the nine-month period ended November 30, 2017. The decrease resulted from the 2017 sale of a revenue earning device for $45,000 that was acquired in the acquisition of WeSecure’s assets, costing $45,000 thus affecting gross profit below which was partially offset by slightly higher rental revenues in 2018.


Gross profit


Total gross profit for the nine-month period ended November 30, 2018 was $30,251, which represented a decrease of $23,831, compared to total gross profit of $53,632 for the nine months ended November 30, 2017. The decrease resulted from the cost of goods on the above-mentioned 2017 sale of the WeSecure asset.


- 27 -



Operating Expenses


 

 

Period

 

Change

 

 

 

Nine Months
Ended
November 30, 2018

 

Nine Months
Ended
November 30, 2018

 

Dollars

 

Percentage

 

Research and development

 

$

534,012

 

$

306,312

 

$

227,700

 

74%

 

General and administrative

 

 

3,082,656

 

 

1,585,697

 

 

1,496,959

 

94%

 

Depreciation and amortization

 

 

82,902

 

 

74,789

 

 

8,113

 

11%

 

Loss on impairment of fixed assets

 

 

4,739

 

 

125,264

 

 

(120,525

)

(96%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total operating expenses

 

$

3,704,309

 

$

2,092,062

 

$

1,612,247

 

77%

 


Our operating expenses were comprised of general and administrative expenses, research and development, depreciation and a loss on impairment of fixed assets. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and rent. Our operating expenses during the nine-month period ended November 30, 2018 and 2017 were $3,704,309 and $2,092,062, respectively. The overall increase of $1,612,247 in operating expenses was primarily attributable to the following increases in operating expenses of:


General and administrative expenses – $1,496,959 primarily due to the increase in stock-based compensation due to the issuance of warrants during the nine months ended November 30, 2018 of $632,972, higher salary and wages of approximately $211,363 due to an increase in staff from in staff from 8 to 15 people, professional fees increased by $371,571 in 2018 due to increased accounting costs, with the remainder of the increases the result of the start of RAD and AITX’s combined operations in 2018, compared to only RAD’s operations that were starting up in 2017.

 

 

Research and development increased by $227,700 due to higher consulting fees paid in 2018 for the development of new devices.

 

 

Depreciation and amortization increased by $8,113 due to higher additions to fixed assets in 2018.

 

 

Loss on impairment of fixed assets decreased by $120,525 because the old revenue earning devices were written-off in 2017.


Other Income (Expense)


Other income (expense) consisted of the change of fair value of derivative instruments and interest expense. Other income (expense) during the nine months ended November 30, 2018 and 2017, was $21,058,280 and ($9,767,304), respectively. The $30,825,584 increase in other income was primarily attributable to the change in the fair value of derivatives and interest expense, including interest expense related to derivative liability in excess of the face value of debt and loss on settlement of debt. Fair value of derivatives was largely affected by the decrease in the market price of the Company’s common stock during the current period.


Change in fair value of derivative liabilities increased by $29,711,733 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock.

 

 

Interest expense decreased by $2,157,743 due to a decrease in interest expense related to the derivative liability in excess of debt, partially offset by an increase in interest expense on debt.

 

 

Gain on settlement of debt decreased by $1,043,982 due to a decrease in the number and amount of debt settlements this year over last year.


Net Income (Loss)


We had a net income of $17,384,222 for the nine months ended November 30, 2018, compared to net loss of $11,805,734 for the nine months ended November 30, 2017. The change is primarily the result of the change in the fair value of the derivative liabilities and other items discussed above.


- 28 -



Liquidity, Capital Resources and Cash Flows


Management believes that we will continue to incur losses for the immediate future. Therefore, we will need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern. Our unaudited consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern. For the nine months ended November 30, 2018, we have generated revenue and are trying to achieve positive cash flows from operations.


As of November 30, 2018, we had a cash balance of $17,551, accounts receivable of $28,879 and $14,706,905 in current liabilities. At the current cash consumption rate, we may need to consider additional funding sources going forward. We are taking proactive measures to reduce operating expenses and drive growth in revenue.


The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.


Capital Resources


The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated:


 

 

November 30, 2018

 

February 28, 2018

 

Current assets

 

$

308,943

 

$

491,989

 

Current liabilities (1)

 

 

14,706,905

 

 

34,784,191

 

Working capital (deficit)

 

$

(14,397,962

)

$

(34,292,202

)

________

(1)

As of November 30, 2018 and February 28, 2018, current liabilities included approximately $6.1 million and $31.1 million, respectively, of derivative liabilities that are expected to be settled in shares of the Company in accordance with the various conversion terms.


As of November 30, 2018 and February 28, 2018, we had a cash balance of $17,551 and $24,773, respectively.


Summary of Cash Flows


 

 

For the Nine
Months Ended
November 30, 2018

 

For the Nine
Months Ended
November 30, 2018

 

Net cash used in operating activities

 

$

(1,678,281

)

$

(2,231,778

)

Net cash used in investing activities

 

$

(232,933

)

$

(251,827

)

Net cash provided by financing activities

 

$

1,903,992

 

$

2,474,018

 


Net cash used in operating activities.


Net cash used in operating activities for the nine months ended November 30, 2018 was $1,678,281, which included a net income of $17,384,222, non-cash activity such as the change in fair value of derivative liabilities of $26,216,071, gain on settlement of debt of $131,136, change in operating assets of $1,911,729, interest expense related to derivative liabilities in excess of face value of debt of $751,522, amortization of debt discount of $3,649,219, penalties from debt defaults of $221,055, loss on impairment of fixed assets $4,739, stock-based compensation of $632,972,  and depreciation and amortization of $82,902 to derive the uses of cash in operations.


Net cash used in investing activities.


Net cash used in investing activities for the nine months ended November 30, 2018 was $232,933. This consisted primarily of the purchase of fixed assets of $232,858.


Net cash provided by financing activities.


Net cash provided by financing activities was $1,903,992 for the nine months ended November 30, 2018. This consisted of proceeds from convertible notes payable of $1,132,608, proceeds from loans payable $336,490, net borrowings from loan payable – related party of $401,473, and proceeds from the sale of preferred stock of $174,070, offset by principal payments on convertible notes of $125,000 and payments of vehicle loans of $13,657.


- 29 -



Off-Balance Sheet Arrangements


None.


Critical Accounting Policies and Estimates


Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K/A for the year ended February 28, 2018 filed with the SEC on June 22, 2018 and should be read in conjunction with the Original filing on Form 10-K filed with the SEC on June 14, 2018.


Related Party Transactions


For the nine months ended November 30, 2018, the Company received net advances of $401,473 from its loan payable with a related party. At November 30, 2018, the balance due to the related party was $502,106, and $316,142 at February 28, 2018.


During the nine months ended November 30, 2018, the Company accrued a total of $215,509 in consulting fees for research and development to a company owned by a principal shareholder.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable for a smaller reporting company.


ITEM 4. CONTROLS AND PROCEDURES


Management’s Report on Internal Control over Financial Reporting


We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of November 30, 2018. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of November 30, 2018, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.


 

1.

As of November 30, 2018, we did not maintain effective controls over our control environment. Specifically, we have not developed and effectively communicated to our employees our accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

 

 

 

 

2.

As of November 30, 2018, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.


Our management, including our principal executive officer and principal financial officer, who is the same person, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.


Change in Internal Controls over Financial Reporting


There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


- 30 -



PART II — OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


On October 12, 2015, we received notice that the Company had been sued in the United States District Court for the Central District of California. The plaintiff alleges that we obtained certain trade secrets through a third party also named in the suit. The case was dismissed in December 2015 for lack of jurisdiction.


In February 2016, we received notice that the Company had been sued in the Clark County District Court of Nevada. The plaintiff alleges that we obtained certain trade secrets through a third party also named in the suit. We believe the suit is without merit and intend to vigorously defend it. An Arbitration was conducted on May 9, 2017, Plaintiff filed a Notice of trial de Novo, seeking a review of the merit dismissal. It is counsel’s opinion this Trial de Novo is without merit and the Company should prevail.


ITEM 1A. RISK FACTORS


This item is not applicable to smaller reporting companies.


ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Each issuance of securities was issued without registration in reliance of the exemption from registration Section 3(a)9 of the Securities Act of 1933.


ITEM 3. DEFAULTS UPON SENIOR SECURITIES


The Company has not defaulted upon senior securities.


ITEM 4. MINE SAFETY DISCLOSURES


Not applicable to the Company.


ITEM 5. OTHER INFORMATION


None.


ITEM 6. EXHIBITS


3.1

Articles of Incorporation (1)

 

 

3.2

Bylaws (2)

 

 

14

Code of Ethics (2)

 

 

21

Subsidiaries of the Registrant (3)

 

 

31.1

Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer and principal financial and accounting officer. (3)

 

 

32.1

Section 1350 Certification of principal executive officer and principal financial accounting officer. (3)

 

 

101

XBRL data files of Financial Statement and Notes contained in this Quarterly Report on Form 10-Q. (4)

__________

(1)

Incorporated by reference to our Form 10-KT file with the Securities and Exchange Commission on March 12, 2018.

 

 

(2)

Incorporated by reference to our Form S-1 filed with the Securities and Exchange Commission on August 4, 2010.

 

 

(3)

Filed or furnished herewith.

 

 

(4)

To be submitted by amendment.


- 31 -



SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


 

Artificial Intelligence Technology Solutions Inc.

 

 

 

 

Date: May 3, 2019

BY: /s/ Garett Parsons

 

Garett Parsons

 

President, Chief Executive Officer, Chief Financial Officer,
Principal Accounting Officer, Treasurer and Director


- 32 -


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