UNITED STATES
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
FORM 10-K
/A
Amendment
No. 1
[X] ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended February 28, 2019
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 000-55079
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS
INC.
(Exact name of registrant as
specified in its charter)
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Nevada
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27-2343603
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(State or other jurisdiction
of
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(I.R.S. Employer
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incorporation or
organization)
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Identification No.)
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1 East Liberty, 6th
Floor
Reno, NV 89501
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89501
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(Address of principal
executive offices)
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(Zip Code)
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Registrant’s telephone number, including area code: (702)
990-3271
ON THE MOVE SYSTEMS
CORP.
(Former name, former address
and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
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Title of each class
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Name of each exchange on which
registered
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Common stock, $0.001 par
value
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OTC PINK
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Indicate by check mark
if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
[ ]
Yes [X] No
Indicate by check mark
if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.
[ ]
Yes [X] No
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).
[X]
Yes [ ] No
Indicate by check mark
if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, a smaller reporting company, or
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.
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Large accelerated
filer
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Accelerated filer
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Non-accelerated
filer
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[X]
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Smaller reporting
company
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[X]
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Emerging growth company
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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 Act).
[ ]
Yes [X] No
The aggregate market
value of the voting and non-voting common equity held by
non-affiliates of the registrant as of August 31, 2018 based upon
the closing price reported on such date was approximately $917,325
Shares of voting stock held by each officer and director and by
each person who, as of August 31, 2018, may be deemed as have
beneficially owned more than 10% of the outstanding voting stock
have been excluded. This determination of affiliate status is not
necessarily a conclusive determination of affiliate status for any
other purpose.
As of August 15, 2019,
there were 753,031720 shares of the registrant’s common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY
REFERENCE
None.
EXPLANATORY NOTE
The purpose of this
Amendment No. 1 to our Annual Report on Form 10-K for the year
ended February 28, 2019 as filed with the Securities and Exchange
Commission on August 26, 2019 (“Form 10-K”) is to submit Exhibit
101 to the Form 10-K in accordance with Rule 405 of Regulation S-T.
Exhibit 101 consists of the Interactive Data Files from the
Registrant’s Form 10-K.
Additionally, we made
the following changes:
1) Page F-3,
Consolidated Balance Sheets: we changed certain line item labels
from “shareholders’” to “stockholders’”.
2) Page F-5,
Consolidated Statement of Stockholders’ Deficit: we changed a
column heading label from “shareholders’” to “stockholders’”.
3) Page F-6,
Consolidated Statements of Cash Flows: we corrected a rounding
error.
4) Page F-24,
Note 17: we changed note heading from “SHAREHOLDERS’ DEFICIT” to
“STOCKHOLDERS’ DEFICIT”.
Table of Contents
CAUTIONARY STATEMENT
REGARDING FORWARD-LOOKING INFORMATION
Certain
statements in this report contain or may contain forward-looking
statements. These statements, identified by words such as “plan”,
“anticipate”, “believe”, “estimate”, “should”, “expect” and similar
expressions include our expectations and objectives regarding our
future financial position, operating results and business strategy.
These statements are subject to known and unknown risks,
uncertainties and other factors, which may cause actual results,
performance, or achievements to be materially different from any
future results, performance or achievements expressed or implied by
such forward-looking statements. These forward-looking statements
were based on various factors and were derived utilizing numerous
assumptions and other factors that could cause our actual results
to differ materially from those in the forward-looking statements.
These factors include, but are not limited to, our ability to
secure suitable financing to continue with our existing business or
change our business and conclude a merger, acquisition or
combination with a business prospect, economic, political and
market conditions and fluctuations, government and industry
regulation, interest rate risk, U.S. and global competition, and
other factors. Most of these factors are difficult to predict
accurately and are generally beyond our control. You should
consider the areas of risk described in connection with any
forward-looking statements that may be made herein. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this report. Readers
should carefully review this report in its entirety, including but
not limited to our financial statements and the notes thereto and
the risks described in our Annual Report on Form 10-K for the
fiscal year ended February 28, 2019. We advise you to carefully
review the reports and documents we file from time to time with the
Securities and Exchange Commission (the “SEC”), particularly our
quarterly reports on Form 10-Q and our current reports on Form 8-K.
Except for our ongoing obligations to disclose material information
under the Federal securities laws, we undertake no obligation to
release publicly any revisions to any forward-looking statements,
to report events or to report the occurrence of unanticipated
events.
PART I
ITEM 1.
BUSINESS
Business
Overview
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 (“AITX”).
Robotic Assistance Devices, LLC (“RAD”), was incorporated in the
State of Nevada on July 26, 2016 as a LLC and was founded by
current President Steve Reinharz. 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 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.
AITX’s
prior business focus was transportation services, and we were
previously exploring the on-demand logistics market by seeking to
develop a network of logistics partnerships. On August 28, 2017,
AITX acquired all the outstanding shares of RAD . Following the RAD
acquisition, the Company is focused on applying advanced artificial
intelligence (AI) driven technologies, paired with multi-use
hardware and supported by custom software and cloud services, to
intelligently automate and integrate a variety of high frequency
security, concierge and operational tasks.
RAD’s
solutions are offered as a recurring monthly subscription,
typically with a minimum 12 month subscription contract. RAD’s
solutions earn over 75% gross margin over the life of each deployed
asset. Specifically, RAD provides workflow automation solutions
delivered through a system of hardware, software and cloud
services. All elements of hardware and software design offered by
RAD are 100% designed, developed and owned by RAD.
Mission
AITX’
mission is to apply Artificial Intelligence (AI) technology to
solve enterprise problems that can be categorized as expensive,
repetitive and outside of the core competencies of the prospect
organization.
A
short list of basic examples include:
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Typical security guard
related functions such as monitoring a parking lot during and after
hours and responding appropriately. This scenario applies to
perimeters, interior yard areas and related similar
environments.
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Integrated
hardware/software with Artificial Intelligence driven responses,
simulating and expanding on what legacy or manned solutions could
perform.
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Automation of common
access control functions through technology utilized facial
recognition and machine vision, leapfrogging most legacy solutions
in use today.
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RAD
solutions are unique in the fact they:
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Start with an AI-driven
response with the easy ability to connect to manned response.
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Use unique hardware
purpose built by RAD for delivery of these solutions.
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Deliver services through
RAD-developed software and cloud services, allowing enterprise IT
groups to focus on core competencies instead of maintenance of
complex video and security platforms.
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RAD’s
first industry focus is the $ 100B+ global security services
market. (1)
RAD’s
founder, Steve Reinharz, has 20+ years in various
leadership/ownership roles in the security industry and was part of
a successful exit to a global multinational security company in
2004. Mr. Reinharz has built a committed team of employees that
have demonstrated tremendous productivity and self-sacrifice to
advance the stated mission.
RAD’s
current goal is to disrupt and capture a significant portion of
both the human security guard market ($30B +) (2) and
‘physical security’ (cctv, access control, etc.) market ($20B +)
through it’s innovative RAD solution ecosystem.
(1)
https://www.statista.com/statistics/323113/distribution-of-the-security-services-market-worldwide/
(2)
https://www.statista.com/statistics/294206/revenue-of-security-services-in-the-us/
AITX Expected
Acquisitions
It is
expected that AITX will acquire 2 remaining complementary companies
owned by Mr. Reinharz sometime before the end of fiscal year 2020.
These companies will be completely rolled into AITX as-is with no
special compensation to Mr. Reinharz as setout below.
Mr.
Reinharz has not taken any cash salary or earnings from RAD, AITX
or any related entity since inception of the RAD in 2016.
BOLO
Technologies, Inc., wholly owned by Mr. Reinharz, has had its
limited assets of Intellectual Property and software formally
integrated into RAD without necessity of any acquisition by RAD.
BOLO created an innovative security-centric platform that
integrates additional technologies to give security directors and
law enforcement the easiest access to create, manage and track ‘Be
On The Lookout’ (BOLO) alerts. ‘BOLO’ is a security industry term
used to label interesting suspects such as disgruntled former
employees, persons of interest wanted for questioning related to
suspicious events and several other similar types of functions and
services. BOLO Technologies will use advanced AI for data
correlation and pattern matching and is focused on giving customers
the ability to pre-empt, predict and prevent possible incidents.
BOLO uses a service model similar to RAD’s robots-as-a-service
model.
‘RAD
Canada’, wholly owned by Mr. Reinharz, provides most of the
Research & Development for RAD’s solutions. Specifically, all
RAD hardware solutions are designed and developed by this entity as
well as some firmware, software and cloud software elements. All
but two RAD Canada resources have been absorbed into RAD.
AITX,
with these acquisitions, will enjoy the benefits of a skilled
R&D group that includes skilled industrial and software
engineers plus a security-focused platform that provides unique
services in high demand. Mr. Reinharz will remain President of all
AITX subsidiaries.
Background - First
Commercial Rugged Outdoor Security Robot
RAD
was started by Mr. Reinharz in the summer of 2016. RAD originally
partnered with SMP Robotics Systems Corp (SMP). and commercialized
the SMP S5 Robot for the security market. RAD’s commercialization
of the platform focused on integrating traditional security
industry manufacturers’ solutions onto the robotics platform. After
two paid Proof of Concepts for large utility companies (under NDA)
and over 18 months of development and testing RAD began deployments
with various Fortune 500 customers. These deployments were
scheduled to begin in October 2017 but were delayed until December
2017 due to various supply chain challenges.
By
March 2018 it was apparent that S5 platform promotion and
development was not sustainable and RAD began to pull robots out of
service.
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The
Robots were rejected by customers due to unsatisfactory reliability
and some technical flaws that could not be solved despite full
efforts by SMP and RAD. RAD now considers this phase of the company
‘Phase 1’ into robotics. Over 40 deployments were attempted during
this period.
RAD
has had no contact with SMP Robotics since April 2018.
Much of RAD’s existing
convertible debt was acquired in support of the RAD/SMP robotics
program.
Background – RAD’s
2nd Generation Ecosystem
RAD’s
primary strategy has always been to use AI technology and modern
systems to transform the security industry. Mobile robots, indoor
and outdoor, are a part of that strategy. However, to completely
realize the delivery of these solutions a set of ’stationary
robots’ required development.
These
stationary robots launched in April 2018 with the Security Control
and Observation Tower (SCOT, development of which began in August
2017. SCOT performs many of the same functions of a stationary
human security guard, plus many features that human guards cannot
perform, and at approximately 15% of the cost. There is no known
comparable solution available today that blends technology,
usability, special features and cost. This is why SCOT has growing
demand and has received considerable accolades.
SCOT’s
positive market reception reinvigorated RAD and the focus turned to
accelerating the development of the software and cloud services
that support SCOT.
SCOT
runs on the RAD Software Suite™, as all RAD
security solutions do. This software suite is a cloud and mobile
solution that is the heart of RAD’s security
solution.
After
extraordinary efforts by the team, beta SCOT was first shown to
customers in Ohio at the end of February 2018. This beta exposition
was to test customer reception and receive final
voice-of-the-customer input. Security representatives from
Cincinnati Reds, Cincinnati Bengals, Cincinnati Police Departments
and County of Hamilton Sheriff’s Department were shown this early
SCOT and gave SCOT and the preliminary RAD Software Suite a
tremendous endorsement. Feedback was incorporated into SCOT and
ideas on SCOT derivatives were added to the hardware development
roadmap.
At the
ISC West show in April 2018 SCOT won three awards: (1) a SIA New
Product Award for Law Enforcement/Guarding, (2) 2018 Secure Campus
Award from Campus Security and Life Safety and (3) a ‘Govie’ award
for government security solutions from Security Today.
(1) SIA’s New Product Showcase recognizes innovative
products, services and solutions in electronic physical security,
and SCOT™’s award
comes in the Law Enforcement/Guarding Systems category.
Technologies within the program are used in the protection of life
and property in residential, commercial and institutional settings,
displaying SCOT™’s importance
in long-range human detection and acting as a force multiplier for
safety and defense against outside threats.
(2) RAD’s pivot to SCOT and its future
derivatives is complete and current facilities can produce a mix of
up to 100 units per month with moderate additional investment in
equipment and manpower.
RAD
has not submitted for any awards since mid-2018 but expects future
awards participation.
Currently
Available Hardware Solutions
RAD’s
hardware lineup has improved and expanded since initial launch in
April 2018. RAD’s hardware lineup includes:
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’SCOT 2.0’ has replaced
SCOT 1.x. SCOT 1 went through three significant upgrades over the
first 12 months of launch to arrive at SCOT 1.3. SCOT 1.3 features
a mature software platform and a refined hardware platform. SCOT
solutions have operated with over 99% uptime since inception.
’SCOT’ is an acronym for ’Security Control and Observation Tower’.
It embodies and offers the full complement of solutions driven by
the RAD Cloud.
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SCOT 2.0 is a SCOT 1.3
enclosed in an appealing modern enclosure. It also features
additional LCD monitors (like a Wally), curved LED panels to
support visibility and flexible messaging (as opposed to SCOT 1.x
flat LED panels) and an advanced locking system. SCOT 2.0 is the
realization of the concepts pioneered, demonstrated and tested
throughout the 1.x lineup. The SCOT lineup is indoor/outdoor
rated.
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All SCOT1.x units
continue to perform and generate revenue for the company. There are
no immediately plans to replace 1.x units with 2.0 units. SCOT 1.x
units can be supported indefinitely under RAD’s software
architecture. It is expected that in time these 1.x units will be
applied to industrial applications where aesthetics are secondary
to functionality.
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‘WALLY’ was announced in
June 2018 in the Allied Universal Services, Inc., booth at the BOMA
International Show in San Antonio. WALLY is a wall-mounted
derivative of SCOT that is also indoor/outdoor rated. It’s designed
to bring the RAD ecosystem to areas such as main lobbies, elevator
lobbies, dock access areas and more.
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3.
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‘FRED’ was announced in
September 2018 and is a complement to the RAD ecosystem by just
focusing on various verified entry methods. Appropriate for office
access and to be mounted on gate stanchions.
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‘ROSA’ was announced to
specific dealers and customers in May 2019. Official general market
introduction should happen by August of 2019. ROSA is an acronym
for Responsive Observation Security Agent.
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Software
Solutions
RAD
has created a variety of front-end and back-end software solutions
to power its ecosystem. Customer facing software includes RADGUARD
(on the touchscreens of RAD’s field devices) and RADSOC (Security
Operations Center) and RADPMC (Property Management Center).
RAD
has developed a variety of utilities that allow automatic
over-the-air updates, most of which is within a back-end
application called SCOT Manager.
RAD
has written world class Visitor Management, Access Control and
other applications instead of seeking to partner with legacy
manufacturers. It is RAD’s opinion that the legacy paradigm in the
physical space underserves the markets in terms of cost,
functionality and integration.
RAD
has recently integrated its own Video Management System into RADSOC
that includes full integration to a variety of features related to
security and properly management functions.
RAD’s
ability to deliver easy to use, easy to obtain, and easy to support
software, combined with custom workflow-automation applications, is
the key to RAD’s value proposition.
Manufacturing
& Assembly
RAD
uses a variety of domestic and overseas machine shops for raw
material procurement and machining of the required plastic and
metal pieces that build RAD devices.
RAD’s
sourcing has redundancy through use of multiple machine shops
producing the same products for RAD.
There
is no piece of any RAD device that can only be procured from one
supplier.
RAD’s
margins are based on current small batch production and assembly.
Economies of scale will drive greater gross margin as quantities
and efficiencies increase.
RAD’s
primary assembly and configuration location is in Southern
California. It is anticipated that as RAD outgrows its existing
facility these functions will be moved out of state, most likely to
mid-west location. RAD’s California location would remain as the
West Coast Sales & Service Center.
Anticipated location for a comprehensive assembly location is
Michigan. This location provides central access to RAD’s largest
markets as well as easy access from RAD’s R&D center outside of
Toronto, Canada.
Tariff
Impact
Anticipated tariffs of 25% across all imported items, not yet in
effect, would impact US production costs by an additional 10%. If
this happens RAD anticipates absorbing this cost for US units but
supplying Canadian demand from local Canadian production (instead
of from the US).
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Roadmap
RAD
anticipates two major hardware product releases in fiscal 2020.
First,
RAD announced a return to the mobile unmanned ground vehicle market
at the end of July 2019. This ground drone will benefit from
significant innovations during the first 12 months following
launch. It’s expected these advanced applications will spawn
several ‘killer apps’ that will put this unit, and the RAD
Ecosystem, in high demand.
Second, RAD anticipates release of an entirely new solution
currently in early stage development. This new solution will become
a critical component of the RAD ecosystem.
Furthermore there could be a third significant addition depending
on technical and market conditions.
RAD
expects to release Wally 2.0 and FRED 2.0 in fiscal 2020. These
upgrades are minor.
Team and
Culture
AITX has built a strong
start-up culture based on performance, sacrifice and rewards. RAD
begins every interview with a review of the eight elements that
comprise RAD Culture and candidates are encouraged to understand
that this is not a traditional company. As a startup
RAD faces challenges
of limited resources and time and as such, the team members are
open to multitasking and wearing multiple hats, as the situation
demands, thus allowing the management team to focus on the larger
goals and steer the company in the right direction. Our solid RAD
team, all share in the same beliefs and core values of the Company;
so we easily adjust to changes thus giving RAD an edge in the
market. The core team really determines the fate of a company
and RAD is no
stranger to the difficulties that face a startup, such as
unexpected setbacks, delays in funding or a cash crunch. At RAD the
whole team has pitched in, doing whatever they can, from working to
meet tight deadlines; or willing partaking in financial sacrifices;
to assisting where and whenever needed, creating a core team
willing to standby the company through the testing
times.
RAD’s
culture has provided strength throughout the difficult period of
robot deployments and the transition to 2nd generation
solutions.
Market
Environment
RAD
experience has proved that the security market is ripe for
disruption. Having captured the interest of many Fortune 500
companies (names generally protected under NDA) including
Microsoft, Verizon, Boeing, Lockheed Martin, among many others, no
other known company has the solutions, distribution channel,
reputation, sales or support model to rival RAD in the near
term.
Furthermore, the launch of RAD’s mobile solutions will create
additional significant distance between any would-be competitors.
RAD will be a one-stop shop for proven and comprehensive mobile and
stationary workflow improvement devices and systems.
RAD’s technology model
includes a ‘new paradigm’ for the security industry: Security in a
box. Every RAD solution features connection to the RAD Software
Suite which is a platform for AI processing, usage analytics, cloud
served video, communications interface, audit logs and much
more.
Positive market reception for RAD solutions are due to the
following existing conditions:
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The security guard
industry is characterized by poor customer satisfaction and
industry consolidation. It’s self-described to be a ‘race to the
bottom’ to provide the lowest cost services to end users because
generally speaking end users require some security for
general crime deterrent and insurance purposes. There are 1.1M
security guards in the United States and the security guard
industry represents over $20B in annual sales and the average
security guard bill rate is $20/hour.
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Enterprise
organizations’ security divisions/groups are continuously
challenged to reduce cost. For example, Universal Parcel Service
(UPS) spends over $120M/year in security guard services, Lockheed
Martin over $60M/year and NBC Universal over $25M/year. The
security guard industry has not had any significant disruption or
innovation since inception.
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Guarding companies
struggle to offer quality service at a reasonable price. Security
organizations are eagerly receptive to solutions that improve
performance and reduce cost.
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RAD’s device rental
model allows clients to immediately save significant operating
costs. With RAD’s current stationary solutions retailing from under
$1/hour to $5/hour we can immediately provide substantial savings
and significant additional security.
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5.
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RAD’s services options
allow end users to incorporate or fully replace their existing
Security Operation Centers with RAD solutions. This integrated with
RAD’s “Solutions-As-A-Service” Rental Program offers customized
options to help organizations achieve operational and security
goals.
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The
above conditions speak to the historical lack of innovation in the
guarding market largely driven by the lack of development of truly
revolutionary systems. This market is now positioned for major
disruption with the application of AI based solutions, as lead by
RAD. As such, the interest in RAD solutions has been overwhelming.
Major companies, including the U.S. largest guarding company Allied
Universal Services, are aligning with RAD to offer these services
to their customer base.
RAD Solutions
Customer Acceptance
RAD
end users include one Top 10 company and many Fortune 500
companies. RAD is currently deployed in logistics, commercial real
estate, healthcare and retail industries. If RAD deployed to only
5% of any one of these industries facilities the company would
enjoy tremendous profitability.
Due to
the nature of existing non-disclosure agreements RAD does not
normally share customer lists or specific deployment details.
RAD’s
batch production of SCOTs & WALLYS have all been committed
prior to the completion of the production cycle, with an average
delivery time of 45 days. RAD has set a goal, predicated on regular
demand, to reduce delivery time to 15 days.
RAD Industry
Leadership Role
Mr.
Reinharz has earned a prominent role as a spokesperson for AI and
change in the security industry. He has lectured and participated
in several panels for some of the security industries largest
events and organizations. Mr. Reinharz sits on the SIA’s Autonomous
Working Group committee which is dedicated to helping shape the
industry and support progressive legislation. Most recently Mr.
Reinharz provided NY City’s ASIS CPP group a lecture that qualified
as a continuing education credit.
RAD
gets exposure to prospects, customers and investors through Mr.
Reinharz’s efforts to educate the security market. Blogs and
industry published articles can be found in the news section of
www.roboticassistancedevices.com
It is
expected that Mr. Reinharz continues his promotion of the new
paradigm for the next few years until adoption is widespread.
Financing
RAD
has entered into three royalty revenue agreements and taken on
limited additional direct debt to sustain operations and research
and development as the company drives towards positive cash flow.
Furthermore Steve Reinharz has provided over an additional $250,000
plus 100% deferred earnings during this rebuilding period. Steve
Reinharz has received no cash salary and has pledged to receive no
salary payouts until RAD has positive cash flow. All RAD employees
have also made financial contributions and sacrifices during this
period of focus on profitability.
However, positive cash flow cannot fund the pace of expected
deployments. As such RAD has been working on alternative funding
options. The expected success and durability of RAD’s solutions,
and depth and breadth of the sales funnel has attracted the
attention of various asset funding companies.
RAD
has engaged with one such company that has provided RAD with a term
sheet for a starting line of credit up to $2,000,000. The terms
provide RAD enough capital for the deployment of units that can
generate annual revenue between $2,500,000 and $ 4,000,000
depending on product mix and sales channel. The company that has
provided this term sheet has assured RAD that the financing can be
expanded well beyond $10,000,000 under expected circumstances. RADs
largest client has updated contracts required to allow this
financing to take place. RAD estimates they are in the last 50% of
work required to secure this financing.
- 6 -
RAD is
engaged in supplemental financing efforts based on existing and
future streams of revenue that will provide additional non-dilutive
funding to the company. As these efforts mature updates will be
issued or shared in the relevant filings.
Go To Market
Strategy
RAD’s
strategy continues to focus on creation and support of a strong
dealer channel. This affords multiple benefits to RAD with few
downsides. RAD has successfully integrated through the largest US
guarding company and recently signed another top 3 guarding company
as a RAD dealer. Furthermore, RAD has been signing up and
developing mid-sized and smaller dealers. RAD is on track to
develop a focused group of dealers of which most will exclusively
represent RAD solutions.
Supplemental to that RAD will, under certain circumstances, accept
subscriptions directly from end users. These situations are largely
characterized by the end user not having a guarding company, having
a guarding company that RAD does not want as a dealer or other
extenuating circumstances. RAD has no desired ratio of dealer vs
direct subscriptions. Dealer subscriptions remain the primary
focus.
Competition
RAD
has no direct competition save for one immediate competitor and one
potential competitor as disclosed in Risk factors on page 11.
RAD is
considered part of the ‘drones’ category of the security industry
although at RAD we consider ourselves to be in the workflow
automation industry.
RAD
deliberately restricts information that is public for three main
reasons:
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1.
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Usually activities are
covered by mutual non-disclosure agreements and RAD generally will
not ask for permission to publicize customer activities.
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2.
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These are generally
security applications and most companies prefer to not advertise
the details of their security systems.
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3.
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Until RAD hits the
‘tipping point’ we prefer to keep our solutions stealthy to some
extent so as not to give our would-be competitors tips to copy
us.
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It is
anticipated that at some point some competition may enter the
market. RAD seeks to maintain a 2+ year competitive advantage
through a broad line of hardware solutions, the fastest and
smoothest user interface and the strongest feature set with the
most mature back-end. Furthermore RAD seeks to expand its sales
staff and become the dominant incumbent in this new market that it
has created.
RAD Results and
Forecasts
At the
time of this writing RAD has a contracted monthly run rate of over
$ 30,000, the bulk of which is based on 2018 RAD pricing. RAD
completed a price increase March 1, 2019 which allows positive cash
flow achievement with 35% fewer deployments. Moreover, future
orders that are allegedly in the final stages of customer
procurement should allow RAD to achieve positive cash flow within 6
months or less.
RAD
views itself as a fast growth technology company poised for
exponential growth. RAD’s sales funnel is over 300 accounts strong
in various stages of the sales process. Complementing that could be
several hundred more accounts in progress with the dealer base that
do not generally provide RAD with current or accurate sales funnel
information. As an example, one dealer has shared a CRM report with
over 180 accounts yet incoming subscriptions were never listed in
the CRM.
Employees
As of
June 7, 2019, we had 19 full-time employees and 2 contracted
employees. None of our employees are represented by a union. We
consider our relations with our employees to be excellent.
Legal
Proceedings
See Item 3 - Legal
Proceedings.
- 7 -
ITEM 1A. RISK
FACTORS
YOU
SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED
BELOW AND THE OTHER INFORMATION CONTAINED OR INCORPORATED BY
REFERENCE IN THIS TRANSITIONAL REPORT ON FORM 10-K BEFORE DECIDING
WHETHER TO INVEST IN THE REGISTRANT’S COMMON STOCK. ADDITIONAL
RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO THE REGISTRANT OR
THAT THE REGISTRANT CURRENTLY DEEMS IMMATERIAL MAY ALSO IMPAIR THE
REGISTRANT’S BUSINESS OPERATIONS.
IF ANY
OF THE FOLLOWING RISKS ACTUALLY OCCUR, THE REGISTRANT’S BUSINESS,
FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY
ADVERSELY AFFECTED. IN SUCH CASE, THE TRADING PRICE OR THE
REGISTRANT’S COMMON STOCK COULD DECLINE AND YOU MAY LOSE PART OR
ALL OF YOUR INVESTMENT.
THE
FOLLOWING ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE
RISKS AND UNCERTAINTIES. PLEASE SEE “CAUTIONARY NOTE REGARDING
FORWARD-LOOKING STATEMENTS”.
Risks Related to Our Industry and Our
Company
Our business is at
an early stage and we have not yet generated any profits or
significant revenues.
RAD
was formed in 2016 and made its first sale in 2016. Accordingly,
the Company has a limited operating history upon which to evaluate
its performance and prospects. Our current and proposed operations
are subject to all the business risks associated with new
enterprises. These include likely fluctuations in operating results
as the Company makes significant investments in research,
development and product opportunities, and reacts to developments
in its market, including purchasing patterns of customers, and the
entry of competitors into the market. We cannot assure you that we
will generate enough revenue to be profitable in the next three
years or at all, which could lead to a loss of part or all of an
investment in the Company.
We have a limited
number of deployments and our success depends on an unproven
market.
The
market for advanced physical security technology is relatively new
and unproven and is subject to a number of risks and uncertainties.
In order to grow our business and extend our market position, we
will need to place into service additional robots, expand our
service offerings, and expand our presence. Our ability to expand
the market for our products depends on a number of factors,
including the cost, performance and perceived value associated with
our products and services. Furthermore, the public’s perception of
the use of robots to perform tasks traditionally reserved for
humans may negatively affect demand for our products and services.
Ultimately, our success will depend largely on our customers’
acceptance that security services can be performed more efficiently
and cost effectively through the use of our robots and ancillary
services, of which there can be no assurance.
We cannot assure
you that we can effectively manage our growth.
RAD
expects to continue hiring additional employees. The growth and
expansion of our business and products create significant
challenges for our management, operational, and financial
resources, including managing multiple relationships and
interactions with users, distributors, vendors, and other third
parties. As the Company continues to grow, our information
technology systems, internal management processes, internal
controls and procedures and production processes may not be
adequate to support our operations. To ensure success, we must
continue to improve our operational, financial, and management
processes and systems and to effectively expand, train, and manage
our employee base. As we continue to grow, and implement more
complex organizational and management structures, we may find it
increasingly difficult to maintain the benefits of our corporate
culture, including our current team’s efficiency and expertise,
which could negatively affect our business performance.
Our costs may grow
more quickly than our revenues, harming our business and
profitability.
We
expect our expenses to continue to increase in the future as we
expand our product offerings, expand production capabilities and
hire additional employees. We expect to continue to incur
increasing costs, in particular for working capital to purchase
inventory, marketing and product deployments as well as costs
associated with customer support in the field. Our expenses may be
greater than we anticipate which would have a negative impact on
our financial position, assets and ability to invest further in the
growth and expansion of our business.
- 8 -
The loss of one or
more of our key personnel, or our failure to attract and retain
other highly qualified personnel in the future, could harm our
business.
RAD
currently depends on the continued services and performance of key
members of the management team, in particular, founder and CEO,
Steven Reinharz, and Chief Technology Officer, Aziz Sekander. If we
cannot call upon them or other key management personnel for any
reason, our operations and development could be harmed. The Company
has not yet developed a succession plan. Furthermore, as the
Company grows, it will be required to hire and attract additional
qualified professionals such as accounting, legal, finance,
production, service and engineering experts. The Company may not be
able to locate or attract qualified individuals for such positions,
which will affect the Company’s ability to grow and expand its
business.
We have no
employment agreements in place with our executive officers or
directors.
We
currently do not have any employment agreements in place with our
only executive officer and director. Since the Company has no such
agreements currently in place, there is a risk that our only
executive officer and director may terminate their association with
the Company. The loss of our only executive officer and director
would have a material and adverse effect on our Company and our
business prospects. Further, in the future, the Company may attract
additional persons to serve as its executive officers and directors
and may negotiate and consummate employment agreements with its
executive officers and directors and such agreements may contain
issuance of the Company’s securities as part of the compensation,
which would lead our shareholders to experience dilution.
Because we do not
currently have an audit committee, compensation committee or any
other form of corporate governance committee, shareholders will
have to rely on our only director, who is not independent, to
perform these functions.
We do
not have an audit committee, compensation committee or any form of
corporate governance committees comprised of an independent
director. The Board, which currently consists of our only director,
performs these functions as a whole and the only member of the
Board is not an independent director.
If we are unable
to protect our intellectual property, the value of our brand and
other intangible assets may be diminished and our business may be
adversely affected.
RAD
relies and expects to continue to rely on a combination of
confidentiality agreements with its employees, consultants, and
third parties with whom it has relationships, as well as trademark,
copyright, patent, trade secret, and domain name protection laws,
to protect its proprietary rights. As of the date of this report,
there are no patents filed on behalf of the Company. The Company
plans to file various applications in the United States for
protection of certain aspects of its intellectual property.
However, third parties may knowingly or unknowingly infringe our
proprietary rights, may challenge proprietary rights held by us and
pending and future trademark and patent applications may not be
approved. In addition, effective intellectual property protection
may not be available in every country in which we intend to operate
in the future. In any or all of these cases, we may be required to
expend significant time and expense in order to prevent
infringement or to enforce our rights. Although we plan to take
measures to protect our proprietary rights, there can be no
assurance that others will not offer products or concepts that are
substantially similar to those of RAD and compete with our
business. If the protection of our proprietary rights is inadequate
to prevent unauthorized use or appropriation by third parties, the
value of our brand and other intangible assets may be diminished
and competitors may be able to more effectively mimic our service
and methods of operations. Any of these events could have an
adverse effect on our business and financial results.
Our financial
results will fluctuate in the future, which makes them difficult to
predict.
RAD’s
financial results may fluctuate in the future. Additionally, we
have a limited operating history with the current scale of our
business, which makes it difficult to forecast future results. As a
result, you should not rely upon the Company’s past financial
results as indicators of future performance. You should take into
account the risks and uncertainties frequently encountered by
rapidly growing companies in evolving markets. Our financial
results in any given quarter can be influenced by numerous factors,
many of which we are unable to predict or are outside of our
control, including, but not limited to the following:
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Our ability to maintain
and grow our client base;
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Our clients may suffer
downturns, financial instability or be subject to mergers or
acquisitions;
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The development and
introduction of new products by RAD or our competitors;
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Increases in marketing,
sales, service and other operating expenses that we may incur to
grow and expand our operations and to remain competitive;
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RAD ability to maintain
gross margins and operating margins;
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Changes affecting our
suppliers and other third-party service providers;
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Adverse litigation
judgments, settlements, or other litigation-related costs; and
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Changes in business or
macroeconomic conditions including regulatory changes.
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Our business is subject to data
security risks, including security breaches.
Our products employ
technologies which are subject to various data security risks
including security breaches and hacking and we cannot guarantee
that our products may not be negatively affected by these risks
causing them to suffer damages. Any occurrence of the foregoing may
damage our brand and increase our costs. Any of these events or
circumstances could materially adversely affect our business,
financial condition and operating results.
Economic factors
generally may negatively affect our operations.
The
Company is subject to the general risks of the marketplace in which
the Company does business. Moreover, the results of operations of
the Company will depend on a number of factors over which the
Company will have no control, including changes in general economic
or local economic conditions, changes in supply of or demand for
similar and/or competing products and services, and changes in tax
and governmental regulations that may affect demand for such
products and services. Any significant decline in general economic
conditions or uncertainties regarding future economic prospects
that affect industrial and consumer spending could have a material
adverse effect on the Company’s business. For these and other
reasons, no assurance of profitable operations can be given.
Our business success depends on
large part on the success of our efforts to rent our products
through dealerships.
The Company plans to
primarily look to rent its robots through dealerships with guarding
companies. The Company believes that the guarding partnership model
is valuable. The Company currently has such partnerships with 5
dealers and plans to sign on additional dealers. However, there can
be no assurance that the Company can successfully secure agreements
with dealerships for the use of our products, which could
materially impair our sales and our business prospects.
We may not be able to develop
automatic charging for our products, which could negatively affect
our growth strategy.
Part of the Company’s growth
strategy is to implement automatic charging for our products. The
Company plans to implement autonomous charging capabilities for its
products as part of its long-term efforts. The Company believes
that adding this feature would allow companies to add security to
areas that are either not suitable for humans or cost effective for
permanent security and thus expanding the market for our products.
If the Company cannot implement automatic charging for its products
it would impact the size of the market for its products and could
negatively affect its growth strategy.
We currently face
some competition and may face additional competition in the future
and if we are not able to compete effectively, our business
prospects and operations would be harmed.
RAD’s
re-entry into the mobile security robotics market opens the company
to one immediate competitor and one potential competitor.
Knightscope, Inc., states availability of one outdoor security
robot called the ‘K5’ with another outdoor robotic device under
development, the ‘K9’. Cobalt Robotics Inc., offers an indoor
robotic device that states various security functions. It is
possible that either or both of these companies create direct
competition to RAD. We are aware of other companies that are
already active in our industry and others that are developing
physical security technology in the U.S. and abroad that may
potentially compete with our technology and services. These, or
new, competitors may have more resources than us or may be better
capitalized, which may give them a significant advantage, for
example, in offering better pricing than the Company, surviving an
economic downturn or in reaching profitability. We cannot guarantee
that we will be able to compete successfully against existing or
emerging competitors. Additionally, existing private security firms
may also compete on price by lowering their operating costs,
developing new business models or providing other incentives. We
cannot give any assurance that we can adequately compete with
existing or new competitors which could lead us to expend
additional funds toward our marketing efforts and would further
adversely affect our business operations.
- 10 -
Our ability to
operate and collect digital information on behalf of our clients is
dependent on the privacy laws of jurisdictions in which our
machines operate, as well as the corporate policies of our clients,
which may limit our ability to fully deploy our technologies in
various markets.
Our
robots collect, store and analyze certain types of personal or
identifying information regarding individuals that interact with
the machines. While we maintain stringent data security procedures,
the regulatory framework for privacy and security issues is rapidly
evolving worldwide and is likely to remain uncertain for the
foreseeable future. Federal and state government bodies and
agencies have in the past adopted, and may in the future adopt,
laws and regulations affecting data privacy, which in turn affect
the breadth and type of features that we can offer to our clients.
In addition, our clients have separate internal policies,
procedures and controls regarding privacy and data security with
which we may be required to comply. Because the interpretation and
application of many privacy and data protection laws are uncertain,
it is possible that these laws may be interpreted or applied in a
manner that is inconsistent with our current data management
practices or the features of our products. If so, in addition to
the possibility of fines, lawsuits and other claims and penalties,
we could be required to fundamentally change our business
activities and practices or modify our products, which could have
an adverse effect on our business. Any inability to adequately
address privacy and security concerns, even if unfounded, or comply
with applicable privacy and data security laws, regulations, and
policies, could result in additional cost and liability to us,
damage our reputation, inhibit sales, and adversely affect our
business. Furthermore, the costs of compliance with, and other
burdens imposed by, the laws, regulations, and policies that are
applicable to the businesses of our clients may limit the use and
adoption of, and reduce the overall demand for, our products.
Privacy and data security concerns, whether valid or not valid, may
inhibit market adoption of our products, particularly in certain
industries and foreign countries. If we are not able to adjust to
changing laws, regulations, our business may be harmed.
Our success depends on the growth
of our industry and specifically on the growing adoption and use of
physical security technology in general and of our
products.
The market for products and
for physical security technology is relatively unproven and new, as
well as being subject to many risks and uncertainties. Our ability
to gain growing market acceptance and adoption of our products,
depends on the market’s acceptance of physical security technology
in general. If we are unable to increase acceptance of our products
and if the market for physical security technology generally does
not develop we will not be able to sell our products and our
financial performance will be adversely affected.
Our shareholders do not have
voting control over the Company due to the Company’s issued and
outstanding shares of its Series E Preferred
Stock.
Mr. Parsons, the Company’s
President, Chief Executive Officer and Chief Financial Officer
currently owns 1,000,000 shares of our Series E Preferred Stock
and; Steve Reinharz is the CEO of RAD, and is currently the holder
of 3,350,000 shares of our Series E Preferred Stock. The
outstanding shares of Series E Preferred Stock have the right to
take action by written consent or vote based on the number of votes
equal to twice the number of votes of all outstanding shares of
common stock. As a result, the holders of Series E Preferred Stock
have 2/3rds of the voting power of all shareholders at any time
corporate action requires a vote of shareholders, and therefore our
other shareholders do not have voting control over the
Company.
Risks Related to our Common Stock
The Company’s continued operations may
be dependent on the Company raising additional capital.
To the
extent that the cash flow from operations are insufficient to fund
the Company’s operations, we will be required to raise additional
capital through equity or debt financing. Any additional equity
financing may be dilutive to shareholders, and debt financing, if
available, may involve significant restrictive covenants. The
Company’s failure or inability to raise capital when needed, or on
terms acceptable to the Company and our shareholders, could have a
material adverse effect on the Company’s business, financial
condition and results of operations. There can be no assurance that
such financing will be available on terms satisfactory to the
Company, if at all. If we are unable to obtain such financing when
needed, in addition to having an adverse effect on our business
operations, it would also have a negative adverse effect on the
price of our Common Stock.
The Company may
conduct further offerings in the future, in which case your
shareholdings will be diluted.
The
Company may rely on equity sales of common stock to fund
operations. The Company may conduct further equity and/or
convertible debt offerings in the future to finance operations or
other projects that it decides to undertake. If common stock is
issued in return for additional funds, or upon conversion or
exercise of outstanding convertible debentures or warrants, the
price per share could be lower than that paid by existing common
stockholders. The Company anticipates continuing to rely on equity
sales of
- 11 -
common stock and
issuances of convertible debt and/or warrants convertible or
exercisable into shares of common stock in order to fund its
business operations. If the Company issues additional shares of
common stock, your percentage interest in the Company will be
lower. This is often referred to as “dilution,” which could result
in a reduction in the per share value of your shares of common
stock.
The trading price of our common stock
may fluctuate significantly.
Volatility in the trading price of our common stock may prevent our
shareholders from being able to sell their shares of our common
stock at prices equal to or greater than their purchase price. The
trading price of our common stock could fluctuate significantly for
various reasons, including:
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our operating and
financial performance and prospects;
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our quarterly or annual
earnings or those of other companies in our industry;
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the public’s reaction
to our press releases, other public announcements and filings with
the Securities and Exchange Commission;
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changes in earnings
estimates or recommendations by research analysts who track our
common stock or the stock of other companies in our industry;
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strategic actions by us
or our competitors;
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new laws or regulations
or new interpretations of existing laws or regulations applicable
to our business;
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changes in accounting
standards, policies, guidance, interpretations or principles;
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changes in general
economic conditions in the U.S. and global economies or financial
markets, including such changes resulting from war or incidents of
terrorism; and
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sales of our common
stock by us or members of our management team.
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In
addition, in recent years, the stock market has experienced
significant price and volume fluctuations. This volatility has had
a significant impact on the trading price of securities issued by
many companies. The changes frequently occur irrespective of the
operating performance of the affected companies. Hence, the trading
price of our common stock could fluctuate based upon factors that
have little or nothing to do with our business.
The Company does
not anticipate paying dividends in the future.
We
have never declared or paid any cash dividends on our common stock.
Our current policy is to retain earnings to reinvest in our
business. Therefore, we do not anticipate paying cash dividends in
the foreseeable future. The Company’s dividend policy will be
reviewed from time to time by the Board of Directors in the context
of its earnings, financial condition and other relevant factors.
Until the Company pays dividends, which it may never do, its
shareholders will not be able to receive a return on shares of our
common stock unless they are able to sell them, of which there can
be no assurance. In addition, there is no guarantee that our common
stock will appreciate in value or even maintain the price at which
stockholders have purchased their shares or that our stockholders
will be able to sell their shares of our common stock at all.
Our shares are
subject to the Securities and Exchange Commission’s “penny stock”
rules that limit trading activity in the market, which may make it
more difficult for our shareholders to sell their common
stock.
Penny
stocks generally are equity securities with a price of less than
$5.00. Since our common stock is trading at less than $5.00 per
share, we are subject to the penny stock rules adopted by the
Securities and Exchange Commission that require broker-dealers to
deliver extensive disclosure to its customers prior to executing
trades in penny stocks not otherwise exempt from the rules. The
broker-dealer must also provide its customers with current bid and
offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction, and monthly
account statements showing the market value of each penny stock
held by the customer. Under the penny stock regulations, a
broker-dealer selling a penny stock to anyone other than an
established customer or accredited investor must make a special
suitability determination regarding the purchaser and must receive
the purchaser’s written consent to the transaction prior to the
sale, unless the broker-dealer is otherwise exempt. Generally, an
individual with a net worth in excess of $1,000,000, or annual
income exceeding $200,000 individually, or $300,000 together with
his or her
- 12 -
spouse, is considered an
accredited investor. The additional burdens from the penny stock
requirements may deter broker-dealers from effecting transactions
in our securities, which could limit the liquidity and market price
of our securities. These disclosure requirements may cause a
reduction in the trading activity of our common stock, which likely
would make it difficult for our stockholders to resell their
securities.
FINRA sales
practice requirements may also limit a stockholder’s ability to buy
and sell our stock.
In
addition to the “penny stock” rules described above, FINRA has
adopted Rule 2111 that requires a broker-dealer to have reasonable
grounds for believing that an investment is suitable for a customer
before recommending the investment. Prior to recommending
speculative low priced securities to their non-institutional
customers, broker-dealers must make reasonable efforts to obtain
information about the customer’s financial status, tax status,
investment objectives and other information. Under interpretations
of these rules, FINRA believes that there is a high probability
that speculative low priced securities will not be suitable for at
least some customers. The FINRA requirements make it more difficult
for broker-dealers to recommend that their customers buy our common
stock, which may limit your ability to buy and sell our stock and
have an adverse effect on the market for our shares.
Because we are a
small company with a limited operating history, stockholders may
find it difficult to sell their common stock in the public
markets.
The
number of persons interested in purchasing our common stock s at
any given time may be relatively small. This situation is
attributable to a number of factors, including the fact that we are
a small company which is still relatively unknown to stock
analysts, stock brokers, institutional investors, and others in the
investment community that generate or influence sales volume, and
that even if we came to the attention of such persons, they tend to
be risk-averse and would likely be reluctant to follow an unproven
company such as ours. Additionally, many brokerage firms may not be
willing to effect transactions in our securities. As a consequence,
there may be periods when trading activity in our common stock is
minimal or even non-existent, as compared to a seasoned issuer
which has a large and steady volume of trading activity. We cannot
give you any assurance that an active public trading market for our
common stock will develop or be sustained, or that trading levels
will be sustained.
We will continue
to incur significant costs to ensure compliance with United States
corporate governance and accounting requirements.
We
will continue to incur significant costs associated with our public
company reporting requirements, costs associated with applicable
corporate governance requirements, including requirements under the
Sarbanes-Oxley Act of 2002 and other rules implemented by the
Securities and Exchange Commission. We expect all of these
applicable rules and regulations will result in significant legal
and financial compliance costs and to make some activities more
time consuming and costly. We are currently evaluating and
monitoring developments with respect to these rules, and we cannot
predict or estimate the amount of additional costs we may incur or
the timing of such costs.
An investment in
the Company’s common stock is extremely speculative and there can
be no assurance of any return on any such investment.
An
investment in the Company’s common stock is extremely speculative
and there is no assurance that investors will obtain any return on
their investment. Investors will be subject to substantial risks
involved in an investment in the Company, including the risk of
losing their entire investment. The market price of our common
stock is subject to significant fluctuations in response to
variations in our quarterly operating results, general trends in
the market and other factors, many of which we have little or no
control over. In addition, broad market fluctuations, as well as
general economic, business and political conditions, may adversely
affect the market for our common stock, regardless of our actual or
projected performance.
Our shareholders’
percentage of ownership may become diluted upon conversion of
shares of our Series F convertible preferred stock, 1,000 shares of
which are currently issued and outstanding and held by Garett
Parsons, our President, Chief Executive Officer and Chief Financial
Officer and 2,450 shares of which are currently issued and
outstanding and held by Steve Reinharz, the CEO of RAD.
Garett
Parsons, our President, Chief Executive Officer and Chief Financial
Officer, is the current holder of 1,000 shares of the Company’s
Series F Convertible Preferred Stock, and Steve Reinharz, the CEO
of RAD, is currently the holder of 2,450 shares of Series F
Convertible Preferred Stock. As the holders of such stock, Mr.
Parsons and Mr. Reinharz, can each, at any time, convert all, but
not less than all of their shares of Series F Convertible Preferred
Stock into a number of fully paid and nonassessable shares of the
Company’s common stock determined by multiplying the number of
issued and outstanding shares of common stock of the Company on the
date of conversion by three and 45 100ths (3.45). The conversion of
such shares shall cause substantial dilution to the Company’s
current shareholders.
- 13 -
ITEM 1B. UNRESOLVED
STAFF COMMENTS
Not
applicable.
ITEM 2.
PROPERTIES
We
maintain our corporate offices at 1 East Liberty. 6th
Floor, Reno, Nevada 89501, pursuant to a month-to-month lease. Our
annual rental cost for this facility is approximately $936
annually. RAD currently maintains an office at 1218-1222 Magnolia
Ave, Suite 106 Bldg. H, Corona, California 92881 pursuant to a
month to month lease commencing March 1, 2019. RAD’s annual rent is
$12,000 per year. RAD maintains a mailing address for 31103 Ranch
Viejo Road, Suite d2114 for a nominal fee of $ 264/yr. RAD
previously had its offices at 23121 La Cadena Suite B/C Laguna
Hills, California 92675, pursuant to a five-year term ending March
31, 2022. Its annual rental cost for this facility was
approximately $65,000, plus a proportionate share of operating
expenses of approximately $35,000 annually. The Company also leased
premises in northern California. The lease was for three years,
beginning in August 2017, and would expire in August 2020. The
Company shared these premises with a former supplier who was the
co-lessee. Through agreement with the supplier, the Company was to
pay 75% of the lease costs and the supplier was to pay 25%. The
Company’s share of rent costs was approximately $43,000 annually.
On February 1, 2018 the
Company entered into an additional lease for premises for a robotic
control center. The lease ran from February 1, 2018 to January 31,
2021 for $6,600 annually. At the end of fiscal 2019 the Company
terminated all three preceding leases through verbal arrangement
with the landlord. Regarding the lease at La Cadena, the Company
agreed to a settlement amount to cover unpaid rent, commissions and
leasehold improvements paid by the landlord totaling $62,039 to be
paid by the Company in 4 monthly installments of $5,000 commencing
August 1, 2019 with the remaining balance to be paid in $10,000
monthly installments thereafter. The Company recorded the $62,039
as a loss on settlement. No further liability was recorded for both
the northern California and robotic control center
leases.
ITEM 3. LEGAL
PROCEEDINGS
From
time to time, we may become involved in various lawsuits and legal
proceedings which arise in the ordinary course of business.
Litigation is subject to inherent uncertainties, and an adverse
result in these or other matters may arise from time to time that
may harm our business. There are no legal proceedings pending at
this time.
In
February 2016, AITX received notice that it had been sued in the
Clark County District Court of Nevada. The plaintiff alleges that
AITX obtained certain trade secrets through a third party also
named in the suit. AITX believes 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 AITX should prevail.
In
April 2019 the principals of WeSecure (see Note 8) filed lawsuit in
California Superior Court seeking damages for non-payment balance
of sale of WeSecure assets totaling $25,000, unpaid consulting fees
payable to the two principals through to September 2019 totaling
$125,924.48, and labor code violations of $48,434.40 all totaling
$199,358.88 plus attorney’s fees and damages. The parties finally
settled all claims with a full release for $180,000 in June 2019
payable in 14 monthly instalments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
Total
|
|
|
6/30/19
|
$
|
5,000
|
|
1/26/2020
|
$
|
15,000
|
|
|
|
|
|
7/30/19
|
$
|
5,000
|
|
2/25/2020
|
$
|
15,000
|
|
|
|
|
|
8/29/19
|
$
|
7,500
|
|
3/26/2020
|
$
|
15,000
|
|
|
|
|
|
9/28/19
|
$
|
7,500
|
|
4/25/2020
|
$
|
15,000
|
|
|
|
|
|
10/28/19
|
$
|
10,000
|
|
5/25/2020
|
$
|
20,000
|
|
|
|
|
|
11/27/19
|
$
|
10,000
|
|
6/25/2020
|
$
|
20,000
|
|
|
|
|
|
12/27/19
|
$
|
15,000
|
|
7/24/2020
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
60,000
|
|
|
$
|
120,000
|
|
$
|
180,000
|
|
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
- 14 -
PART II
ITEM 5. MARKET FOR
COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE
OF EQUITY SECURITIES
Market
Information
AITX’s
common stock began trading on the “Over the Counter” Bulletin Board
(“OTC”) under the symbol “AITX” in June 2011 and as AITX on August
24, 2018. The following table sets forth, for the period indicated,
the prices of the common stock in the over-the-counter market, as
reported and summarized by OTC Markets Group, Inc. 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 17).
These
quotations represent inter-dealer quotations, without adjustment
for retail markup, markdown, or commission and may not represent
actual transactions. There is an absence of an established trading
market for the Company’s common stock, as the market is limited,
sporadic and highly volatile, which may affect the prices listed
below.
|
|
|
|
|
|
|
|
|
|
High
|
|
Low
|
|
Fiscal Year Ended February 28,
2019:
|
|
|
|
|
|
|
|
Quarter ended February
28, 2019
|
|
$
|
0.01
|
|
$
|
0.001
|
|
Quarter ended November
30, 2018
|
|
$
|
0.21
|
|
$
|
0.01
|
|
Quarter ended August
31, 2018
|
|
$
|
1.48
|
|
$
|
0.32
|
|
Quarter ended May 31,
2018
|
|
$
|
7.52
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended February 28,
2018:
|
|
|
|
|
|
|
|
Quarter ended February
28, 2018
|
|
$
|
11.50
|
|
$
|
4.93
|
|
Quarter ended November
30, 2017
|
|
$
|
14.09
|
|
$
|
4.12
|
|
Quarter ended August
31, 2017
|
|
$
|
27.40
|
|
$
|
2.95
|
|
Quarter ended May 31,
2017
|
|
$
|
8.00
|
|
$
|
1.60
|
On August 15, 2019, the closing price per
share of the Company’s common stock as quoted on the OTC was
$0.0006.
Dividends
To
date, we have not paid dividends on shares of the Company’s common
stock and we do not expect to declare or pay dividends on shares of
our common stock in the foreseeable future. The payment of any
dividends will depend upon our future earnings, if any, AITX’s
financial condition, and other factors deemed relevant by its Board
of Directors.
Holders of Common
Stock
As of
June 8, 2019, there were 64 holders of AITX’s common stock of which
12 were active. . The number of foregoing holders does not include
beneficial owners of common stock whose shares are held in the
names of banks, brokers, nominees or other fiduciaries.
Common Stock
The
Company is authorized to issue 5,000,000,000 shares of common
stock, with a par value of $0.00001. The closing price of its
common stock on June 7, 2019, as quoted by OTC Markets Group, Inc.,
was $0.0015. There were 371,306,493 shares of common stock issued
and outstanding as of June 7, 2019. All shares of common stock have
one vote per share on all matters including election of directors,
without provision for cumulative voting. The common stock is not
redeemable and has no conversion or preemptive rights. The common
stock currently outstanding is validly issued, fully paid and
non-assessable. In the event of liquidation of the Company, the
holders of common stock will share equally in any balance of its
assets available for distribution to them after satisfaction of
creditors and preferred shareholders, if any. The holders of the
Company’s common are entitled to equal dividends and distributions
per share with respect to the common stock when, as and if,
declared by the Board of Directors from funds legally
available.
Our
Articles of Incorporation, Bylaws, and the applicable statutes of
the state of Nevada contain a more complete description of the
rights and liabilities of holders of our securities.
- 15 -
During
the year ended February 28, 2019, there was no modification of any
instruments defining the rights of holders of the Company’s common
stock and no limitation or qualification of the rights evidenced by
the Company’s common stock as a result of the issuance of any other
class of securities or the modification thereof.
On
March 5, 2015, AITX effected a 500-for-1 reverse split, upon its
reincorporation in Nevada. Each common shareholder received one
common share in the Nevada company for every 500 common shares they
held in the Florida company. Fractional shares were rounded up, and
each share shareholder received at least 5 shares.
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
12).
Non-cumulative voting
Holders of shares of the Company’s common stock do not have
cumulative voting rights, which means that the holders of more than
50% of the outstanding shares, voting for the election of
directors, can elect all of the directors to be elected, if they so
choose, and, in that event, the holders of the remaining shares
will not be able to elect any of our directors.
Securities Authorized for Issuance under
Equity Compensation Plans
The
following table shows the number of shares of common stock that
could be issued upon exercise of outstanding options and warrants,
the weighted average exercise price of the outstanding options and
warrants, and the remaining shares available for future
issuance.
|
|
|
|
|
|
|
|
Plan Category
|
|
Number of Securities
to
be issued upon
exercise
of outstanding
options,
warrants and rights
|
|
Weighted average
exercise price of
outstanding
options,
warrants and rights
|
|
Number of
securities
remaining available
for
future issuance
|
|
Equity compensation plans approved by
security holders.
|
|
—
|
|
—
|
|
9,000
|
|
|
|
|
|
|
|
|
|
Equity compensation plans not approved by
security holders.
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
Total
|
|
—
|
|
—
|
|
9,000
|
Preferred Stock
The
Company is authorized to issue up to 20,000,000 shares of $0.001
par value preferred stock. The board of directors is authorized to
designate any series of preferred stock up to the total authorized
number of shares.
Series E Preferred Stock
The
board of directors has designated 4,350,000 shares of Series E
Preferred Stock. As of the date of this report, there are 4,350,000
shares of Series E Preferred Stock outstanding. The Series E
Preferred Stock ranks subordinate to the Company’s common stock.
The Series E preferred stock is non-redeemable, does not have
rights upon liquidation of the Company and does not receive
dividends. The outstanding shares of Series E Preferred Stock have
the right to take action by written consent or vote based on the
number of votes equal to twice the number of votes of all
outstanding shares of common stock. As a result, the holder of
Series E Preferred Stock has 2/3rds of the voting power of all
shareholders at any time corporate action requires a vote of
shareholders.
Series F Convertible Preferred
Stock
The
board of directors has designated 4,350 shares of Series F
Convertible Preferred Stock with a par value of $1.00 per share. As
of the date of this report, there are 4,350 shares of Series F
Convertible Preferred Stock outstanding. The Series F Convertible
Preferred Stock is non-redeemable, does not have rights upon
liquidation of the Company, does not have voting rights and does
not receive dividends. The each holder may, at any time and from
time to time convert all, but not less than all, of their shares
of
- 16 -
Series F Convertible
Preferred Stock into a number of fully paid and nonassessable
shares of common stock determined by multiplying the number of
issued and outstanding shares of common stock of the Company on the
date of conversion by three and 45 100ths (3.45) on a pro rata
basis. So long as any shares of Series F Convertible Preferred
Stock are outstanding, the Company shall not, without first
obtaining the approval of the majority of the holders: (a) alter or
change the rights, preferences or privileges of any capital stock
of the Company so as to affect adversely the Series F
convertible preferred stock; (b) create any Senior Securities; (c)
create any pari passu Securities; (d) do any act or thing not
authorized or contemplated by the Certificate of Designation which
would result in any taxation with respect to the Series F
Convertible Preferred Stock under Section 305 of the Internal
Revenue Code of 1986, as amended, or any comparable provision of
the Internal Revenue Code as hereafter from time to time amended,
(or otherwise suffer to exist any such taxation as a result
thereof).
Series G Preferred Stock
The
board of directors has designated 1,000 shares of Series G
Preferred Stock. As of the date of this report, there are no shares
of Series G Preferred Stock outstanding. The Series G preferred
stock does not have voting rights, does not have rights upon
liquidation of the Company and does not receive dividends.
Transfer Agent and Registrar
The Transfer Agent for our
capital stock is Transhare with an address at 15500 Roosevelt
Boulevard, Suite 302, Clearwater, Florida 33760. Their telephone
number is Office phone: 303-662-1112.
Recent Sales of Unregistered
Securities
The
following is a summary of transactions by AITX involving sales of
its securities that were not registered under the Securities
Act.
On
August 28, 2017, AITX entered into a Stock Purchase Agreement with
RAD and Steve Reinharz, as sole stockholder of RAD. Pursuant to the
terms of the Stock Purchase Agreement, AITX acquired, on August 28,
2017, 10,000 shares of RAD’s common stock, representing all of
RAD’s issued and outstanding capital stock, from Mr. Reinharz in
exchange for the issuance by AITX of (i) 3,350,000 shares of our
Series E Preferred Stock and, (ii) 2,450 shares of our Series F
Convertible Preferred Stock. In connection with the foregoing, the
Registrant relied upon the exemption from registration under the
Securities Act of 1933, as amended and the rules and regulations of
the Securities and Exchange Commission thereunder, in reliance upon
Section 4(a)(2) thereof and Regulation D thereunder.
During
the period from June 1, 2017 through July 25, 2017, AITX issued
8,922,279 shares of common stock upon cashless exercise of warrants
held by one of the Company’s lenders who also converted $3,358 in
interest and principal for 395,667 shares for a total of 9,317,946
shares issued.
On
July 8, 2017, AITX issued a convertible note payable for $200,000
which bears interest at 8% per annum and is due July 6, 2018. The
note is convertible into common stock of the Company at a 40%
discount to the lowest trading price in during the 20 trading days
prior to conversion.
In
connection with the foregoing, the Registrant relied upon the
exemption from registration under the Securities Act of 1933, as
amended and the rules and regulations of the Securities and
Exchange Commission thereunder, in reliance upon Section 4(a)(2)
thereof and Regulation D thereunder.
On
February 16, 2017, AITX closed on a Share Purchase Agreement with
Capital Venture Holdings LLC (“Capital Venture”), a Wyoming Limited
Liability Company, whereby AITX issued Capital Venture 1,000 shares
of Series F Convertible Preferred Stock, representing all of the
issued and outstanding shares of Series F Convertible Preferred
Stock to Capital Venture in consideration for $5,000. Mr. Garett
Parsons is the sole and managing member of Capital Venture.
In
connection with the foregoing, AITX relied upon the exemption from
registration under the Securities Act of 1933, as amended and the
rules and regulations of the Securities and Exchange Commission
thereunder, in reliance upon Section 4(a)(2) thereof and Regulation
D thereunder.
- 17 -
Penny Stock Regulations
The
Securities and Exchange Commission has adopted regulations which
generally define “penny stock” to be an equity security that has a
market price of less than $5.00 per share. Our Common Stock falls
within the definition of penny stock and therefore is subject to
rules that impose additional sales practice requirements on
broker-dealers who sell such securities to persons other than
established customers and accredited investors (generally those
with assets in excess of $1,000,000, or annual incomes exceeding
$200,000 individually, or $300,000, together with their spouse).
For transactions covered by these rules, the broker-dealer must
make a special suitability determination for the purchase of such
securities and have received the purchaser’s prior written consent
to the transaction. Additionally, for any transaction, other than
exempt transactions, involving a penny stock, the rules require the
delivery, prior to the transaction, of a risk disclosure document
mandated by the Securities and Exchange Commission relating to the
penny stock market. The broker-dealer must also make a special
written determination that the penny stock is a suitable investment
for the purchaser and receive the purchaser’s written agreement to
the transaction. In addition, the broker-dealer must disclose the
commissions payable to both the broker-dealer and the registered
representative, current quotations for the securities and, if the
broker-dealer is the sole market-maker, the broker-dealer must
disclose this fact and the broker-dealer’s presumed control over
the market. Finally, monthly statements must be sent disclosing
recent price information for the penny stock held in the account
and information on the limited market in penny stocks.
Consequently, the “penny stock” rules may restrict the ability of
broker-dealers to sell our Common Stock and may affect the ability
of investors to sell their Common Stock in the secondary market. In
addition to the “penny stock” rules promulgated by the Securities
and Exchange Commission, the Financial Industry Regulatory
Authority (“FINRA”) has adopted rules that require that in
recommending an investment to a customer, a broker-dealer must have
reasonable grounds for believing that the investment is suitable
for that customer. Prior to recommending speculative low-priced
securities to their non-institutional customers, broker-dealers
must make reasonable efforts to obtain information about the
customer’s financial status, tax status, investment objectives and
other information. Under interpretations of these rules, FINRA
believes that there is a high probability that speculative
low-priced securities will not be suitable for at least some
customers. The FINRA requirements make it more difficult for
broker-dealers to recommend that their customers buy our common
stock, which may limit the investors’ ability to buy and sell our
stock.
Purchases of Equity
Securities by the Registrant and Affiliated Purchasers
We have not repurchased any
shares of our common stock during the fiscal year ended February
28, 2019.
ITEM 6. SELECTED
FINANCIAL DATA
Not
applicable.
ITEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion of our financial condition and results of
operations should be read in conjunction with the consolidated
financial statements and the notes to those financial 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 the Risk Factors, Forward-Looking
Statements and Business sections in this report. 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.
Overview
AITX
was incorporated in Florida on March 25, 2010. AITX reincorporated
into Nevada on February 17, 2015. AITX’ fiscal year end is February
28. AITX is located at 1 East Liberty, 6th Floor, Reno,
NV 89501 and our telephone number is 702-990-3271.
On
August 28, 2017, AITX entered into a Stock Purchase Agreement (the
“Stock Purchase Agreement”) with RAD and Steve Reinharz, as sole
stockholder of RAD. Pursuant to the terms of the Stock Purchase
Agreement, AITX acquired, on August 28, 2017, 10,000 shares of
RAD’s common stock, representing all of RAD’s issued and
outstanding capital stock, from Mr. Reinharz in exchange for the
issuance by AITX of (i) 3,350,000 shares of its Series E Preferred
Stock and, (ii) 2,450 shares of its Series F Convertible Preferred
Stock. As a result of the RAD acquisition, RAD is a wholly owned
subsidiary of AITX. As a result of the closing of the RAD
acquisition, AITX has succeeded to the business of RAD, in which it
purchased all of the outstanding shares of capital stock of RAD. As
a result, AITX’ 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.
- 18 -
The
RAD acquisition is being treated as a reverse recapitalization
effected by a share exchange for financial accounting and reporting
purposes since substantially all of our prior operations were
disposed of as part of the consummation of the transaction and
therefore no goodwill or other intangible assets were recorded. RAD
is treated as the accounting acquirer as its stockholders control
the Company after the RAD Acquisition, even though the Company 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.
AITX’s
prior business focus was transportation services, and we were
previously exploring the on-demand logistics market by seeking to
develop a network of logistics partnerships. Following the RAD
acquisition described above, the Company took on RAD’s business of
applying advanced artificial intelligence (AI) driven technologies,
paired with multi-use hardware and supported by custom software and
cloud services, to intelligently automate and integrate a variety
of high frequency security, concierge and operational tasks.
RAD’s
solutions are offered as a recurring monthly subscription,
typically with a minimum 12 month subscription contract. RAD’s
solutions earn over 75% gross margin over the life of each deployed
asset. Specifically, RAD provides workflow automation solutions
delivered through a system of hardware, software and cloud
services. All elements of hardware and software design offered by
RAD are 100% designed, developed and owned by RAD.
Results of
Operations
The
following table shows our results of operations for the years ended
February 28, 2019 and 2018,. The historical results presented below
are not necessarily indicative of the results that may be expected
for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Change
|
|
|
|
Year Ended
February 28, 2019
|
|
Year Ended
February 28, 2018
|
|
Dollars
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
114,671
|
|
$
|
106,476
|
|
$
|
8,195
|
|
8%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
110,149
|
|
|
61,476
|
|
|
48,673
|
|
79%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
4,257,843
|
|
|
3,578,301
|
|
|
679,542
|
|
19%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,147,694
|
)
|
|
(3,516,825
|
)
|
|
(630,869
|
)
|
18%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net
|
|
|
19,509,231
|
|
|
(20,732,176
|
)
|
|
40,241,407
|
|
194%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income ( loss )
|
|
$
|
15,361,537
|
|
$
|
(24,249,001
|
)
|
$
|
39,610,538
|
|
163%
|
Revenue
Total
revenue for the year ended February 28, 2019 was $114,671, which
represented an increase of $8,195, compared to total revenue of
$106,476 for the year ended February 28, 2018. The increase in
rental revenues actually was $ 53,195 due to the prior year 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. Note that 2019 was the first year the Company
started renting their current product line.
Gross profit
Total
gross profit for the year ended February 28, 2019 was $110,149,
which represented an increase of $48,673 compared to total gross
profit of $61,476 for the year ended February 28, 2018. The
increase resulted from the cost of goods on the above-mentioned
prior year sale of the WeSecure asset. Removing the $45,000 cost of
the asset, the cost of rental revenue activities were $4,522 and
nil for the years ended February 28, 2019 and 2018, respectively.
The 2019 cost represents inventory adjustments.
- 19 -
Operating
expenses
Operating expenses for the years ended February 28, 2019 and
February 28, 2018 comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
|
Change
|
|
|
|
Year Ended
February 28, 2019
|
|
Year Ended
February 28, 2018
|
|
Dollars
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
540,971
|
|
$
|
493,000
|
|
$
|
47,971
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
|
3,529,088
|
|
|
2,391,664
|
|
|
1,137,424
|
|
48%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
114,612
|
|
|
130,081
|
|
|
(15,469
|
)
|
(12%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on impairment of fixed assets
|
|
|
73,172
|
|
|
563,556
|
|
|
(490,384
|
)
|
(87%)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
$
|
4,257,843
|
|
$
|
3,578,301
|
|
$
|
679,542
|
|
19%
|
Our
operating expenses were comprised of general and administrative
expenses, research and development, depreciation and amortization,
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 years
ended February 28, 2019 and February 28, 2018 were $4,257,843 and
$3,578,301, respectively. The overall $679,542 increase in
operating expenses was primarily attributable to the following
increases in operating expenses of:
●
Research and development expenses increased by $47,971 which
resulted from an increase in R&D Consultation fee from RAD
Canada of $247,398 because of development costs on the new products
and decreases in R&D equipment and other R&D costs of
$199,427 which were caused by the development of the older robots
that were developed and used in fiscal 2018.
●
General and administrative expenses increase by $1,137,424
primarily due to the following increases :
●
Stock based compensation increased by $743,425 as 20,436,309
warrants were issued during the year ended February 28, 2019 vs
4,500 warrants issued in the prior fiscal year.
●
Professional fees increased by $303,010 due to higher reporting
costs and the consulting fee paid to Garett Parsons for the year
ended February 28, 2019.
●
Wages and salaries increased by $161,403.
Note
that since the merger with RAD occurred in August 29, 2018 for
fiscal 2018 the results of operations prior to that date for the
year ended February 29, 2018 included in the consolidated FS were
RAD only, where for the year ended February 28, 2019 the results of
operations were combined for the full year.
These
above increases were partially offset by decreases in loss on
impairment of fixed assets of $490,384 and a reduction of
depreciation and amortization of $15,469 both which could be
attributed to the write off of revenue producing and demo devices
occurring in the year ended February 28, 2018.
Other income (expense)
Other
income (expense) consisted of the change of fair value of
derivative instruments interest expense and gain on settlement of
debt. Other income (expense) during the years ended February 28,
2019 and 2018, was $19,509,231 and ($20,732,176), respectively. The
$40,241,407 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 gain 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.
- 20 -
|
|
|
●
|
Change in fair value of
derivative liabilities increased by $35,534,360 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 $5,664,858 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 $957,811 due to a decrease in the number and
amount of debt settlements this year over last year.
|
Going Concern
The
accompanying 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 year ended February 28, 2019, the Company had negative cash
flow from operating activities of $1,804,261. As of February 28,
2019, the Company has an accumulated deficit of $20,142,492 and
negative working capital of $15,376,920. 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
doubts about the Company’s ability to continue as a going
concern.
Capital Resources
The following table
summarizes total current assets, liabilities and working capital
for the period indicated:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2019
|
|
February 28, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
366,681
|
|
$
|
491,989
|
|
|
Current liabilities(1)
|
|
|
15,743,601
|
|
|
34,784,191
|
|
|
Working capital
|
|
$
|
(15,376,920
|
)
|
$
|
(34,292,202
|
)
|
__________
|
|
|
(1)
|
As February 28,
2019 and February 28, 2018, current liabilities included
approximately $6.2 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
February 28, 2019 and February 28, 2018, we had a cash balance of
$21,192 and $24,773, respectively.
Summary of Cash
Flows
|
|
|
|
|
|
|
|
|
|
|
Year Ended
February 28, 2019
|
|
Year Ended
February 28, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in operating activities
|
|
$
|
(1,804,261
|
)
|
$
|
(3,309,230
|
)
|
|
Net cash used in investing activities
|
|
$
|
(202,717
|
)
|
$
|
(239,490
|
)
|
|
Net cash provided by financing activities
|
|
$
|
2,003,397
|
|
$
|
3,516,586
|
|
- 21 -
Net
cash used in operating activities for the year ended February 28,
2019 was $1,804,261, which included a net income of $15,361,537,
non-cash activity such as the change in fair value of derivative
liabilities of $26,039,039, gain on settlement of debt of $217,217,
change in operating assets of $2,105,485, interest expense related
to derivative liabilities in excess of face value of debt of
$1,017,250, amortization of debt discount of $4,993,674, loss on
impairment of fixed assets $73,172, provision for note receivable
$40,000, stock-based compensation of $746,625, and
depreciation and amortization of $114,612 to derive the uses of
cash in operations.
Net cash used in
investing activities.
Net
cash used in investing activities for the year ended February 28,
2019 was $202,717. This consisted primarily of the purchase of
fixed assets of $232,858 offset by a reduction of the security
deposit.
Net cash provided
by financing activities.
Net
cash provided by financing activities was $2,003,397 for the year
ended February 28, 2019. This consisted of proceeds from
convertible notes payable of $1,227,608, proceeds from loans
payable $539,573, proceeds from deferred variable payment
obligation of $ 192,500,net borrowings from loan payable – related
party of $218,890, and proceeds from the sale of preferred stock of
$174,070, offset by principal payments on convertible notes of
$187,000, repayments of loan payable $156,500 and payments of
vehicle loans of $5,746.
Off-Balance Sheet
Arrangements
We do
not have any outstanding off-balance sheet guarantees, interest
rate swap transactions or foreign currency forward contracts.
Furthermore, we do not have any retained or contingent interest in
assets transferred to an unconsolidated entity that serves as
credit, liquidity or market risk support to such entity. We do not
have any variable interest in an unconsolidated entity that
provides financing, liquidity, market risk or credit support to us
or that engages in leasing, hedging or research and development
services with us.
Significant Accounting
Policies
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.
Significant Accounting
Policies
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.
- 22 -
|
|
|
|
Demo devices
|
|
4 years
|
|
Computer equipment
|
|
3 years
|
|
Office equipment
|
|
4 years
|
|
Vehicles
|
|
3 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.
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 February 28, 2019
and February 28, 2018, the Company had no deferred development
costs.
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 2020 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.
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).
- 23 -
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).
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement
Using
|
|
|
|
|
Amount at
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
February 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – conversion features pursuant to convertible
notes payable
|
|
$
|
6,170,139
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,170,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – conversion features pursuant to convertible
notes payable
|
|
$
|
31,113,844
|
|
$
|
—
|
|
$
|
—
|
|
$
|
31,113,844
|
|
See Note 16 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.
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.
- 24 -
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 does not expect any
material impact of ASU 2016 02 on the financial statements because
the leases commencing March 1 ,2019 are month to month.
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.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do
not have any financial instruments that are exposed to significant
market risk. We maintain our cash and cash equivalents in bank
deposits and short-term, highly liquid money market investments. A
hypothetical 100-basis point increase or decrease in market
interest rates would not have a material impact on the fair value
of our cash equivalents securities, or our earnings on such cash
equivalents.
ITEM 8. FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
See
Index to Financial Statements and Financial Statement Schedules
appearing on pages F-1 through F-29 of this annual report on Form
10-K.
- 25 -
ITEM 9. CHANGES IN
AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On May
13, 2019, the Board of Directors of Artificial Intelligence
Technology Solutions Inc. (the “Registrant”) approved and ratified
the engagement of Fruci & Associates II, PLLC (“Fruci PLLC”) as
the Registrant’s independent registered public accounting firm
effective immediately, and dismissed Marcum LLP (“Marcum LLP”) as
the Registrant’s independent registered public accounting firm.
From
October 18, 2018 through May13, 2019, there were (i) no
disagreements (as described in Item 304(a)(1)(iv) of Regulation S-K
and the related instructions) between the Registrant and Marcum LLP
on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
On
October 18, 2018, Artificial Intelligence Solutions Inc. (formerly
On the Move Systems Corp.) (the “Company”) engaged Marcum LLP
(“Marcum”) as its independent registered public accountants. This
engagement occurred in connection with the Company’s prior
independent public accountants, GBH CPAs, PC (“GBH”) resigning,
effective July 1, 2018, as a result of combining its practice with
Marcum. The engagement of Marcum has been approved by the Audit
Committee of the Company’s Board of Directors.
During
the fiscal year ended February 28, 2018 and through October 18,
2018, there were no disagreements with GBH on any matter of
accounting principles or practices, financial statement disclosure,
or auditing scope or procedure, which if not resolved to GBH’s
satisfaction would have caused it to make reference thereto in
connection with its reports on the financial statements for such
years. During the fiscal year ended February 28, 2018 and through
October 18, 2018, there were no events of the type described in
Item 304(a)(1)(v) of Regulation S-K, except certain material
weaknesses in the Company’s internal controls over financial
reporting, as discussed in the Form 10-K for the fiscal year ended
February 28, 2018.
On
February 19, 2018, our Board of Directors approved and ratified the
engagement of GBH CPAs, PC (“GBH”) as the Company’s independent
registered public accounting firm for the Company’s fiscal year
ended February 28, 2018, effective immediately, and dismissed
Friedman, LLP (“Friedman”) as the Company’s independent registered
public accounting firm.
From
September 25, 2017 to February 19, 2018, there were (i) no
disagreements (as described in Item 304(a)(1)(iv) of Regulation S-K
and the related instructions) between the Company and Friedman on
any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure.
Prior
to the appointment of GBH, on September 25, 2017, our Board of
Directors approved and ratified the engagement of Friedman LLP
(“Friedman”) as our independent registered public accounting firm
for the Company’s fiscal year ending February 28, 2018, effective
immediately, and dismissed MaloneBailey, LLP (“MaloneBailey”) as
our independent registered public accounting firm.
MaloneBailey’s audit report on AITX’ consolidated financial
statements as of and for the fiscal year ended February 28, 2017,
did not contain an adverse opinion or a disclaimer of opinion and
was not qualified or modified as to uncertainty, audit scope or
accounting principles, other than an explanatory paragraph
regarding the substantial doubt about our ability to continue as a
going concern.
During
the two months ended February 28, 2017, and the subsequent interim
periods through September 25, 2017, there were (i) no disagreements
(as described in Item 304(a)(1)(iv) of Regulation S-K and the
related instructions) between the Company and MaloneBailey on any
matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved
to MaloneBailey’s satisfaction, would have caused MaloneBailey to
make reference thereto in their report on the financial statements
for such year, and (ii) no “reportable events” within the meaning
of Item 304(a)(1)(v) of Regulation S- K.
During
the two months ended February 28, 2017, and the subsequent interim
periods through September 25, 2017, neither the Company nor anyone
acting on its behalf has consulted with Friedman regarding (i) the
application of accounting principles to a specific transaction,
either completed or proposed, or the type of audit opinion that
might be rendered on the Company’s financial statements or the
effectiveness of internal control over financial reporting, and
neither a written report or oral advice was provided to the Company
that Friedman concluded was an important factor considered by the
Company in reaching a decision as to any accounting, auditing, or
financial reporting issue, (ii) any matter that was the subject of
a disagreement within the meaning of Item 304(a)(1)(iv) of
Regulation S-K, or (iii) any reportable event within the meaning of
Item 304(a)(1)(v) of Regulation S-K.
- 26 -
ITEM 9A. CONTROLS AND
PROCEDURES
Evaluation of Disclosure Controls and
Procedures
As of
February 28, 2019, 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)). Based upon
that evaluation, our principal executive officer and principal
financial officer concluded that, as of February 28, 2019, our
disclosure controls and procedures were not effective to ensure
that information required to be disclosed in reports filed 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.
Limitations on Systems of
Controls
Our
management, including our principal executive officer and principal
financial officer, 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. To address the material weaknesses identified
in our evaluation, we performed additional analysis and other
post-closing procedures in an effort to ensure our consolidated
financial statements included in this annual report have been
prepared in accordance with generally accepted accounting
principles. Accordingly, management believes that the financial
statements included in this report fairly present in all material
respects our financial condition, results of operations and cash
flows for the periods presented.
Management’s Report on Internal Control
over Financial Reporting
Our
management is responsible for establishing and maintaining adequate
internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Securities Exchange Act of 1934 as a process
designed by, or under the supervision of, the Company’s principal
executive and principal financial officers and effected by the
Company’s board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with accounting principles generally
accepted in the United States of America and includes those
policies and procedures that:
|
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•
|
Pertain to the
maintenance of records that in reasonable detail accurately and
fairly reflect the transactions and dispositions of the assets of
the Company;
|
|
|
|
|
•
|
Provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America and
that receipts and expenditures of the company are being made only
in accordance with authorizations of management and directors of
the company; and
|
|
|
|
|
•
|
Provide reasonable
assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could
have a material effect on the financial statements.
|
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future periods
are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate. All internal control
systems, no matter how well designed, have inherent limitations.
Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial
statement preparation and presentation. Because of the inherent
limitations of internal control, there is a risk that material
misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent
limitations are known features of the financial reporting process.
Therefore, it is possible to design into the process safeguards to
reduce, though not eliminate, this risk.
As of
February 28, 2019, management assessed the effectiveness of our
internal control over financial reporting based on the criteria for
effective internal control over financial reporting established in
Internal Control-Integrated Framework (2013 framework) issued by
the Committee of Sponsoring Organizations of the Treadway
Commission and SEC guidance on conducting such assessments. Based
on that evaluation, they concluded that, during the period covered
by this report, such internal controls and procedures were not
effective to detect the inappropriate application of U.S. GAAP
rules as more fully described below. This was due to deficiencies
that existed in the design or operation of our internal controls
over financial reporting that adversely affected our internal
controls and that may be considered to be material weaknesses.
- 27 -
The
matters involving internal controls and procedures that our
management considered to be material weaknesses under the standards
of the Public Company Accounting Oversight Board were: lack of a
functioning audit committee; lack of a majority of independent
members and a lack of a majority of outside directors on our board
of directors; inadequate segregation of duties consistent with
control objectives; and, management is dominated by a single
individual. The aforementioned material weaknesses were identified
by our Chief Executive Officer in connection with the review of our
financial statements as of February 28, 2019.
Management believes that the material weaknesses set forth above
did not have an effect on our financial results. However,
management believes that the lack of a functioning audit committee
and the lack of a majority of outside directors on our board of
directors results in ineffective oversight in the establishment and
monitoring of required internal controls and procedures, which
could result in a material misstatement in our financial statements
in future periods.
This report does not include
an attestation report of our registered public accounting firm
regarding internal control over financial reporting. Management’s
report was not subject to attestation by our registered public
accounting firm pursuant to the rules of the Securities and
Exchange Commission that permit us to provide only management’s
report in this annual report.
Changes in Internal Control over
Financial Reporting
No changes were made to our
internal control over financial reporting during the quarter ended
February 28, 2019 that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
ITEM 9B. OTHER
INFORMATION
None.
PART III
ITEM 10. DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
following table sets forth the names, positions and ages of our
directors and executive officers as of the date of this report. Our
directors serve for one year and until their successors are elected
and qualified. Our officers are elected by the board of directors
to a term of one year and serve until their successor is duly
elected and qualified, or until they are removed from office. The
board of directors has no nominating, auditing or compensation
committees.
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Name
|
|
Age
|
|
Position(s)
|
|
Garett Parsons
|
|
35
|
|
President, Chief
Executive Officer, Chief Financial Officer and Director
|
Biographical information concerning our director and executive
officer listed above is set forth below.
Garett Parsons. Mr. Parsons has served as our
President, Chief Executive Officer, Chief Financial Officer and
member of our board of directors since February 2017. Mr. Parsons
has over 10 years of financial consulting for both private and
public equity markets. Mr. Parsons has extensive experience in the
field of asset valuation, funding structures and public release
document generation. His education includes a Bachelor of Arts in
Political Science/Economics from California State University
Sacramento and an Associate of Arts in Liberal Studies/ Business
San Joaquin Delta College and West Hills College.
There
are no family relationships between any of the executive officers
and directors. During the past 10 years, Mr. Parsons was involved
in any of the legal proceedings listed in Item 401(f) of Regulation
S-K. There are no arrangements or understandings between Mr.
Parsons and any other person pursuant to which he was or is to be
selected as an executive officer or director.
Board Committees and
Director Independence
As Mr.
Parsons serves as our sole director, we do not have a separately
designated audit committee, compensation committee or nominating
and corporate governance committee. The functions of those
committees are being undertaken by our sole director. Because we do
not have any independent directors and have only one director, our
sole director believes that the establishment of committees of the
Board would not provide any benefits to our company and could be
considered more form than substance.
We
currently do not have any non-employee or independent directors, as
such term is defined in the listing standards of The NASDAQ Stock
Market, and we do not anticipate appointing additional directors in
the near future.
- 28 -
Our
sole director is not an “audit committee financial expert” within
the meaning of Item 401(e) of Regulation S-K. As with most small,
early stage companies until such time our company further develops
its business, achieves a stronger revenue base and has sufficient
working capital to purchase directors and officer’s insurance, the
Company does not have any immediate prospects to attract
independent directors. When the Company is able to expand our Board
of Directors to include one or more independent directors, the
Company intends to establish an Audit Committee of our Board of
Directors. It is our intention that one or more of these
independent directors will also qualify as an audit committee
financial expert. Our securities are not quoted on an exchange that
has requirements that a majority of our Board members be
independent, and the Company is not currently otherwise subject to
any law, rule or regulation requiring that all or any portion of
our Board of Directors include “independent” directors, nor are we
required to establish or maintain an Audit Committee or other
committee of our Board of Directors.
Procedures for Nominating
Directors
There
have been no material changes to the procedures by which security
holders may recommend nominees to the Board since the most recently
completed fiscal quarter. We do not have a policy regarding the
consideration of any director candidates that may be recommended by
our stockholders, including the minimum qualifications for director
candidates, nor has our sole director established a process for
identifying and evaluating director nominees. We have not adopted a
policy regarding the handling of any potential recommendation of
director candidates by our stockholders, including the procedures
to be followed. Our sole director has not considered or adopted any
of these policies, as we have never received a recommendation from
any stockholder for any candidate to serve on our Board of
Directors. Given our relative size and lack of directors and
officers insurance coverage, we do not anticipate that any of our
stockholders will make such a recommendation in the near
future.
While
there have been no nominations of additional directors proposed, in
the event such a proposal is made, all current members of our Board
will participate in the consideration of director nominees.
Director
Qualifications
Mr.
Parsons was appointed to our board in February 2017. Mr. Parsons
has significant operational experience in our industry and brings
both a practical understanding of the industry and as well as
hands-on experience in our business sector to our board and a
greater understanding of certain of the challenges we face in
executing our growth strategy.
Code of Ethics and
Business Conduct
We
have adopted a code of ethics meeting the requirements of Section
406 of the Sarbanes-Oxley Act of 2002. We believe our code of
ethics is reasonably designed to deter wrongdoing and promote
honest and ethical conduct; provide full, fair, accurate, timely,
and understandable disclosure in public reports; comply with
applicable laws; ensure prompt internal reporting of violations;
and provide accountability for adherence to the provisions of the
code of ethics.
Director
Compensation
Mr.
Parsons, our sole director, does not receive any additional
compensation for his services as a director. We reimburse our
directors for all reasonable ordinary and necessary
business-related expenses, but we did not pay director’s fees or
other cash compensation for services rendered as a director during
the years ended February 28, 2019 and February 29, 2018 to any of
the individuals serving on our Board during that period. We have no
standard arrangement pursuant to which our directors are
compensated for their services in their capacity as directors. We
may pay fees for services rendered as a director when and if
additional directors are appointed to the Board of Directors.
Compliance with
Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our executive officers
and directors, and persons who beneficially own more than 10% of a
registered class of our equity securities to file with the SEC
initial statements of beneficial ownership, reports of changes in
ownership and annual reports concerning their ownership of our
common shares and other equity securities, on Forms 3, 4 and 5
respectively. Executive officers, directors and greater than 10%
stockholders are required by the SEC regulations to furnish us with
copies of all Section 16(a) reports they file. Based on our review
of the copies of such forms received by us, or written
representations that no other reports were required, and to the
best of our knowledge, we believe that all of our officers,
directors, and owners of 10% or more of our common stock filed all
required Forms 3, 4, and 5.
- 29 -
ITEM 11. EXECUTIVE
COMPENSATION
The
following table summarizes all compensation recorded by us in the
past two fiscal years for Mr. Parsons, our President, Chief
Executive Officer and Chief Financial Officer.
2019 SUMMARY COMPENSATION
TABLE
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|
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Name and Principal
Position
|
|
Year
|
|
Salary
or
Fees
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plan
Compensation
($)
|
|
Non-Qualified
Deferred
Compensation
Earnings
($)
|
|
All
Other
Compensation
($)
|
|
Total
($)
|
|
Garett Parsons,
|
|
2019
|
|
101,410
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
101,410
|
|
President, Chief Executive
Officer and Chief Financial Officer (1)
|
|
2018
|
|
68,768
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
69,768
|
__________
|
|
|
(1)
|
Mr. Parsons was
appointed President, Chief Executive Officer and Chief Financial
Officer on February 16, 2017.
|
Employment
Agreements
We are
not currently a party to an employment agreement with Mr. Parsons,
our sole executive officer. We may enter into an employment
agreement with Mr. Parsons in the future, however. We have no plans
providing for the payment of any retirement benefits.
Outstanding Equity
Awards at 2019 Fiscal Year-End
The
following table provides information concerning unexercised
options, stock that has not vested and equity incentive plan awards
for Mr. Parsons, our sole executive officer outstanding as of
February 28, 2019:
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|
|
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|
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|
|
|
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OPTION
AWARDS
|
|
STOCK
AWARDS
|
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Name
|
|
Number of
Securities Underlying Unexercised Options (#) Exercisable
|
|
Number of
Securities Underlying Unexercised Options (#) Unexercisable
|
|
Equity
Incentive Plan Awards: Number of Securities Underlying Unexercised
Unearned Options
(#)
|
|
Option
Exercise Price
($)
|
|
Option
Expiration Date
|
|
Number of
Shares or Units of Stock That Have Not Vested (#)
|
|
Market
Value of Shares or Units of Stock That Have Not Vested ($)
|
|
Equity
Incentive Plan Awards: Number of Unearned Shares, Units or Other
Rights That Have Not Vested (#)
|
|
Equity
Incentive Plan Awards: Market or Payout Value of Unearned Shares,
Units or Other Rights That Have Not Vested (#)
|
|
|
Garett Parsons
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
0
|
|
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
At
February 28, 2019, AITX had 200,261,790 shares of its common stock
issued and outstanding. The following table sets forth information
regarding the beneficial ownership of our common stock as of
February 28, 2019, and reflects:
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●
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each of our executive
officers;
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●
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each of our
directors;
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●
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all of our directors and
executive officers as a group; and
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|
|
●
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each stockholder known
by us to be the beneficial owner of more than 5% of our outstanding
shares of common stock.
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- 30 -
Information on beneficial ownership of securities is based upon a
record list of our stockholders and we have determined beneficial
ownership in accordance with the rules of the SEC. We believe,
based on the information furnished to us, that the persons and
entities named in the table below have sole voting and investment
power with respect to all shares of common stock that they
beneficially own, subject to applicable community property laws,
except as otherwise provided below.
|
|
|
|
|
|
Name
|
|
Amount and Nature of
Beneficial Ownership (1)
|
|
Percent of
Class (2)
|
|
Named Executive Officers and
Directors:
|
|
|
|
|
|
Garett Parsons (3)
|
|
200,261,790
|
|
22.47%
|
|
All executive officers and directors as a
group (1 persons)
|
|
200,261,790
|
|
22.47%
|
|
|
|
|
|
|
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5% Stockholders:
|
|
|
|
|
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Steve Reinharz (4)
|
|
490,641,386
|
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55.06%
|
|
c/o Robotic Assistance Devices
|
|
|
|
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31103 Rancho Viejo Road, Suite D211
San Juan Capistrano, CA 92675
|
|
|
|
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__________
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(1)
|
Beneficial ownership is
determined in accordance with the rules of the Securities and
Exchange Commission and generally includes voting or investment
power with respect to securities. Beneficial ownership also
includes shares of stock subject to options and warrants currently
exercisable or exercisable within 60 days of the date of this
table. In determining the percent of common stock owned by a person
or entity as of the date of this Report, (a) the numerator is the
number of shares of the class beneficially owned by such person or
entity, including shares which may be acquired within 60 days on
exercise of warrants or options and conversion of convertible
securities, and (b) the denominator is the sum of (i) the total
shares of common stock outstanding on as of the date of this Report
200,261,790 shares, and (ii) the total number of shares that the
beneficial owner may acquire upon exercise of the derivative
securities. Unless otherwise stated, each beneficial owner has sole
power to vote and dispose of its shares.
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(2)
|
Based on 200,261,790
shares of the Company’s common stock issued and outstanding as of
the date of this report.
|
|
|
|
|
(3)
|
Mr. Parsons is the
Company’s President, Chief Executive Officer and Chief Financial
Officer and owns 1,000,000 shares of our Series E Preferred Stock
and 1,000 shares of our Series F Preferred Stock. If Mr. Parsons
converted the 1,000 shares of the Company’s Series F Preferred
stock, he would receive 200,261,790 shares of the Company’s common
stock, which is included in the chart above as if such conversion
has occurred. Further, the outstanding shares of Series E preferred
stock have the right to take action by written consent or vote
based on the number of votes equal to twice the number of votes of
all outstanding shares of common stock. As a result, the holder of
Series E preferred stock has 2/3rds of the voting power of all
shareholders at any time corporate action requires a vote of
shareholders.
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|
|
|
|
(4)
|
Steve Reinharz is the
CEO of RAD and is the holder of (i) 3,350,000 shares of our Series
E Preferred Stock and, (ii) 2,450 shares of our Series F
Convertible Preferred Stock. If Mr. Reinharz converted the 2,450
shares of the Company’s Series F Convertible Preferred Stock, he
would receive 306,261,157 shares of the Company’s common stock,
which is included in the chart above as if such conversion has
occurred. Further, the outstanding shares of Series E preferred
stock have the right to take action by written consent or vote
based on the number of votes equal to twice the number of votes of
all outstanding shares of common stock. As a result, the holder of
Series E preferred stock has 2/3rds of the voting power of all
shareholders at any time corporate action requires a vote of
shareholders.
|
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE
We do
not have a written policy for the review, approval or ratification
of transactions with related parties or conflicted transactions.
When such transactions arise, they are referred to our board of
directors for its consideration.
The
director of RAD loaned RAD certain funds to pay for RAD’s expenses.
The loans are non-interest bearing (save for deferred salary
portion of loan which bears interest at 12% see Note 13) and
unsecured, with no specific terms of repayment or collateral. For
the year ended February 28, 2019 and 2018 , the Company received
net advances of $218,890 and $219,613, respectively, from its loan
payable to a related party. At February 28, 2019, the balance due
to the related party was $782,844, and $316,142 at February 28,
2018.
During
the year ended February 28, 2019 and 2018 , the Company paid
$484,251 and $236,853, respectively in consulting fees for research
and development to a company owned by a principal shareholder.
- 31 -
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
On May
13, 2019, the Board of Directors of Artificial Intelligence
Technology Solutions Inc. (the “Registrant”) approved and ratified
the engagement of Fruci & Associates II, PLLC (“Fruci PLLC”) as
the Registrant’s independent registered public accounting firm
effective immediately, and dismissed Marcum LLP (“Marcum LLP”) as
the Registrant’s independent registered public accounting firm.
On
October 18, 2018, Artificial Intelligence Solutions Inc. (formerly
On the Move Systems Corp.) (the “Company”) engaged Marcum LLP
(“Marcum”) as its independent registered public accountants. This
engagement occurred in connection with the Company’s prior
independent public accountants, GBH CPAs, PC (“GBH”) resigning,
effective July 1, 2018, as a result of combining its practice with
Marcum. The engagement of Marcum has been approved by the Audit
Committee of the Company’s Board of Directors.
On
September 25, 2017, our Board of Directors approved and ratified
the engagement of GBH CPAs, PC (“GBH CPAs”) as our independent
registered public accounting firm for the Company’s fiscal year
ending February 28, 2018, effective immediately, and dismissed
Malone Bailey as the Company’s independent registered public
accounting firm.
The
following table shows the fees that were billed for the audit and
other services provided by Fruci PLLC for the fiscal years ended
February 28, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
Audit Fees
|
|
$
|
30,000
|
|
|
—
|
|
Audit-Related Fees
|
|
|
—
|
|
|
—
|
|
Tax Fees
|
|
|
—
|
|
|
—
|
|
All Other Fees
|
|
|
—
|
|
|
—
|
|
Total
|
|
$
|
$30,000
|
|
$
|
—
|
Audit Fees - This category includes the audit of our annual
financial statements, review of financial statements included in
our Quarterly Reports on Form 10-Q and services that are normally
provided by the independent registered public accounting firm in
connection with engagements for those fiscal years. This category
also includes advice on audit and accounting matters that arose
during, or as a result of, the audit or the review of interim
financial statements.
Audit-Related Fees - This category consists of assurance and
related services by the independent registered public accounting
firm that are reasonably related to the performance of the audit or
review of our financial statements and are not reported above under
“Audit Fees.” The services for the fees disclosed under this
category would include consultation regarding correspondence with
the SEC, other accounting consulting and other audit services.
Tax
Fees - This category consists of professional services rendered
by our independent registered public accounting firm for tax
compliance and tax advice. The services for the fees disclosed
under this category include tax return preparation and technical
tax advice.
All
Other Fees - This category consists of fees for other
miscellaneous items.
As
part of its responsibility for oversight of the independent
registered public accountants, the Board has established a
pre-approval policy for engaging audit and permitted non-audit
services provided by our independent registered public accountants.
In accordance with this policy, each type of audit, audit-related,
tax and other permitted service to be provided by the independent
auditors is specifically described and each such service, together
with a fee level or budgeted amount for such service, is
pre-approved by the Board. All of the services provided by Fruci,
MaloneBailey and GBH CPAs described above were approved by our
Board.
The
Company’s principal accountant did not engage any other persons or
firms other than the principal accountant’s full-time, permanent
employees.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
(a)(1) Financial Statements
The consolidated financial statements and Report of Independent
Registered Public Accounting Firm are listed in the Index to
Financial Statements and Financial Statement Schedules on page F-1
and included on pages F-2 through F-29.
- 32 -
(2) Financial Statement Schedules
All schedules for which provision is made in the applicable
accounting regulations of the SEC are either not required under the
related instructions, are not applicable (and therefore have been
omitted), or the required disclosures are contained in the
financial statements included herein.
(3) Exhibits.
|
|
|
|
Exhibit No.
|
|
Description of Document
|
|
2.1
|
|
Stock Purchase Agreement, dated August 28, 2017, by and among the
registrant, Steve Reinharz and Robotic Assistance Devices Inc.
(incorporated by reference to Exhibit 10.1 to the registrant’s
current report on Form 8-K filed with the Commission on August 31,
2017).
|
|
|
|
|
|
3.1
|
|
Articles of Incorporation of the registrant filed with the Nevada
Secretary of State on September 8, 2014. (incorporated by
reference to Exhibit 3.1 to the registrant’s transition report on
Form 10-KT filed with the Commission on March 12, 2018).
|
|
|
|
|
|
3.2
|
|
Plan and Agreement of Merger of Artificial Intelligence Technology
Solutions Inc. (a Florida corporation) and Artificial Intelligence
Technology Solutions Inc. (a Nevada corporation). (incorporated
by reference to Exhibit 3.2 to the registrant’s transition report
on Form 10-KT filed with the Commission on March 12, 2018).
|
|
|
|
|
|
3.3
|
|
Bylaws of the registrant (incorporated by reference to Exhibit
3.2 to the registrant’s registration statement on Form S-1 (File
No. 333-168530), filed with the Commission on August 4, 2010).
|
|
|
|
|
|
3.4
|
|
Certificate of Designations filed with the Nevada Secretary of
State on February 8, 2017. (incorporated by reference to
Exhibit 3.4 to the registrant’s transition report on Form 10-KT
filed with the Commission on March 12, 2018).
|
|
|
|
|
|
3.5
|
|
Certificate of Designations filed with the Nevada Secretary of
State on May 3, 2017. (incorporated by reference to Exhibit 3.5
to the registrant’s transition report on Form 10-KT filed with the
Commission on March 12, 2018).
|
|
|
|
|
|
3.6
|
|
Amendment to Certificate of Designations filed with the Nevada
Secretary of State on May 3, 2017 (incorporated by reference to
Exhibit 3.1 to the registrant’s current report on Form 8-K filed
with the Commission on May 12, 2017).
|
|
|
|
|
|
10.1
|
|
Preferred Stock Purchase Agreement dated January 31, 2017 and
entered into between the Company and Capital Venture Holdings
LLC. (incorporated by reference to Exhibit 10.1 to the
registrant’s transition report on Form 10-KT filed with the
Commission on March 12, 2018).
|
|
|
|
|
|
14.1
|
|
Code of Ethics (incorporated by reference to Exhibit 14.1 to
the registrant’s registrant statement on Form S-1 (File No.
333-168530), filed with the Commission on August 4, 2010).
|
|
|
|
|
|
21.1
|
|
List of Subsidiaries. *
|
|
|
|
|
|
31.1
|
|
Certification of the Chief Executive Officer and
Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
|
|
|
|
|
|
32.1
|
|
Certification of the Chief Executive Officer and
Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
|
|
|
|
|
|
101.INS
|
|
XBRL Instance **
|
|
101.SCH
|
|
XBRL Taxonomy Extension
Schema **
|
|
101.CAL
|
|
XBRL Taxonomy Extension
Calculation **
|
|
101.DEF
|
|
XBRL Taxonomy Extension
Definition **
|
|
101.LAB
|
|
XBRL Taxonomy Extension
Labels **
|
|
101.PRE
|
|
XBRL Taxonomy Extension
Presentation **
|
__________
|
|
|
*
|
Filed or furnished herewith.
|
|
**
|
In accordance with Regulation S-T, the
Interactive Data Files in Exhibit 101 to the Annual Report on Form
10-K shall be deemed “furnished” and not “filed.”
|
- 33 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: August 29, 2019
|
By:
|
/s/ Garett Parsons
|
|
|
|
Garett Parsons
|
|
|
|
President, Chief Executive Officer and Chief
Financial Officer
|
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ Garett Parsons
|
|
President, Chief Executive Officer, Chief
Financial Officer, and Director (principal executive officer,
principal financial officer and principal accounting officer)
|
|
August 29, 2019
|
|
Garett Parsons
|
|
|
|
|
- 34 -
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
INDEX TO CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
Report of Independent Registered Public
Accounting Firm
|
F-2
|
|
|
|
|
Consolidated Balance Sheets
|
F-3
|
|
|
|
|
Consolidated Statements of Operations
|
F-4
|
|
|
|
|
Consolidated Statement of Stockholders’
Deficit
|
F-5
|
|
|
|
|
Consolidated Statements of Cash Flows
|
F-6
|
|
|
|
|
Notes to the Consolidated Financial
Statements
|
F-7
|
F-1
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Artificial Intelligence Technology Solutions Inc.
Opinion on the
Financial Statements
We have audited the
accompanying consolidated balance sheets of Artificial Intelligence
Technology Solutions Inc. (“the Company”) as of February 28, 2019
and 2018, and the related consolidated statements of operations,
stockholders’ deficit, and cash flows for each of the years in the
two-year period ended February 28, 2019, and the related notes
(collectively referred to as the financial statements). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of February 28,
2019 and 2018, and the results of its operations and its cash flows
for each of the years in the two-year period ended February 28,
2019, in conformity with accounting principles generally accepted
in the United States of America.
Going Concern
The accompanying
financial statements have been prepared assuming that the Company
will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has an accumulated deficit,
negative working capital, and management does not anticipate
positive cash flows in the near future. These factors raise
substantial doubt about the Company’s ability to continue as a
going concern. Management’s plans in regard to these matters are
also described in Note 2 to the financial statements. The financial
statements do not include any adjustments that might result from
the outcome of this uncertainty.
Basis for
Opinion
These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on the Company’s financial
statements based on our audit. We are a public accounting firm
registered with the Public Company Accounting Oversight Board
(United States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit
in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement, whether due to error or fraud. The Company
is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting. As part of our
audit, we are required to obtain an understanding of internal
control over financial reporting, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express
no such opinion.
Our audit included
performing procedures to assess the risks of material misstatement
of the financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding the amounts
and disclosures in the financial statements. Our audit also
included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that our audit
provides a reasonable basis for our opinion.
We have served as the Company’s auditor since
2019.
Spokane, Washington
August 26, 2019
F-2
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
CONSOLIDATED BALANCE
SHEETS
|
|
|
|
|
|
|
|
|
|
|
February
28, 2019
|
|
February
28, 2018
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
21,192
|
|
$
|
24,773
|
|
|
Accounts receivable
|
|
|
39,964
|
|
|
28,000
|
|
|
Device parts inventory
|
|
|
273,496
|
|
|
316,113
|
|
|
Prepaid expenses and deposits
|
|
|
18,778
|
|
|
83,103
|
|
|
Vehicle for disposal
|
|
|
13,251
|
|
|
—
|
|
|
Note receivable
|
|
|
—
|
|
|
40,000
|
|
|
Total
current assets
|
|
|
366,681
|
|
|
491,989
|
|
|
Revenue earning devices, net of accumulated depreciation of $42,784
and $0, respectively
|
|
|
187,174
|
|
|
—
|
|
|
Fixed assets, net of accumulated depreciation of $29,701 and
$36,632, respectively
|
|
|
37,194
|
|
|
158,205
|
|
|
Intangible asset, net
|
|
|
—
|
|
|
56,248
|
|
|
Security deposit
|
|
|
—
|
|
|
30,141
|
|
|
Total
assets
|
|
$
|
591,049
|
|
$
|
736,583
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
1,486,488
|
|
$
|
487,243
|
|
|
Advances payable
|
|
|
12,637
|
|
|
1,594
|
|
|
Balance due on acquisition of WeSecure
|
|
|
25,000
|
|
|
25,000
|
|
|
Customer deposits
|
|
|
10,000
|
|
|
10,000
|
|
|
Current portion of deferred variable payment obligation
|
|
|
2,108
|
|
|
—
|
|
|
Current portion of convertible notes payable, net of discount of
$718,015 and $3,418,637, respectively
|
|
|
5,484,446
|
|
|
2,117,946
|
|
|
Loan payable - related party
|
|
|
782,844
|
|
|
316,142
|
|
|
Current portion of loans payable
|
|
|
321,946
|
|
|
—
|
|
|
Vehicle loan - current portion
|
|
|
57,287
|
|
|
17,830
|
|
|
Current portion of accrued interest payable
|
|
|
1,390,706
|
|
|
694,592
|
|
|
Derivative liability
|
|
|
6,170,139
|
|
|
31,113,844
|
|
|
Total
current liabilities
|
|
|
15,743,601
|
|
|
34,784,191
|
|
|
Convertible
notes payable, net of discount of $302,105 and $505,039,
respectively
|
|
|
262,895
|
|
|
95,060
|
|
|
Loans
payable
|
|
|
140,535
|
|
|
—
|
|
|
Deferred
variable payment obligation
|
|
|
190,392
|
|
|
—
|
|
|
Accrued
interest payable
|
|
|
85,344
|
|
|
55,917
|
|
|
Vehicle
loan
|
|
|
—
|
|
|
64,332
|
|
|
Total
liabilities
|
|
|
16,422,767
|
|
|
34,999,500
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and
contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
deficit:
|
|
|
|
|
|
|
|
|
Preferred Stock, undesignated; 15,645,650 shares authorized; no
shares issued and outstanding at February 28, 2019 and February 28,
2018, respectively
|
|
|
—
|
|
|
—
|
|
|
Series E Preferred Stock, $0.001 par value; 4,350,000 shares
authorized; 4,350,000 and 4,350,000 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 3,450 shares issued and outstanding,
respectively
|
|
|
3,450
|
|
|
3,450
|
|
|
Common Stock, $0.00001 par value; 5,000,000,000 shares authorized
200,261,790 and 1,250,046 shares issued and outstanding,
respectively
|
|
|
2,003
|
|
|
12
|
|
|
Additional paid-in capital
|
|
|
4,126,901
|
|
|
1,233,300
|
|
|
Preferred stock to be issued
|
|
|
174,070
|
|
|
—
|
|
|
Accumulated deficit
|
|
|
(20,142,492
|
)
|
|
(35,504,029
|
)
|
|
Total
stockholders’ deficit
|
|
|
(15,831,718
|
)
|
|
(34,262,917
|
)
|
|
Total
liabilities and stockholders’ deficit
|
|
$
|
591,049
|
|
$
|
736,583
|
|
The accompanying notes
are an integral part of these consolidated financial
statements.
F-3
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
CONSOLIDATED STATEMENTS OF
OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
Year Ended
February 28, 2019
|
|
Year Ended
February 28, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
114,671
|
|
$
|
106,476
|
|
|
|
|
|
|
|
|
|
|
|
Cost of Goods Sold
|
|
|
4,522
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
110,149
|
|
|
61,476
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
Research and
development
|
|
|
540,971
|
|
|
493,000
|
|
|
General and
administrative
|
|
|
3,529,088
|
|
|
2,391,664
|
|
|
Depreciation and
amortization
|
|
|
114,612
|
|
|
130,081
|
|
|
Loss on impairment of
fixed assets
|
|
|
73,172
|
|
|
563,556
|
|
|
Total operating
expenses
|
|
|
4,257,843
|
|
|
3,578,301
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(4,147,694
|
)
|
|
(3,516,825
|
)
|
|
|
|
|
|
|
|
|
|
|
Other income (expense), net:
|
|
|
|
|
|
|
|
|
Change in fair value of
derivative liabilities
|
|
|
26,039,039
|
|
|
(9,495,321
|
)
|
|
Interest expense
|
|
|
(6,747,025
|
)
|
|
(12,411,883
|
)
|
|
Loss (gain) on
settlement of debt
|
|
|
217,217
|
|
|
1,175,028
|
|
|
Total other income
(expense), net
|
|
|
19,509,231
|
|
|
(20,732,176
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,361,537
|
|
$
|
(24,249,001
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income ( loss) per share - basic
|
|
$
|
0.55
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - diluted
|
|
$
|
(0.01
|
)
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
Weighted average common share outstanding -
basic
|
|
|
27,727,881
|
|
|
61,578,290
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common share outstanding -
diluted
|
|
|
1,956,175,903
|
|
|
61,578,290
|
|
The accompanying notes
are an integral part of these consolidated financial
statements.
F-4
ARTIFICIAL
INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY
ON THE MOVE SYSTEMS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
February 28, 2019
|
|
Year
Ended
February 28, 2018
|
|
|
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
15,361,537
|
|
$
|
(24,249,001
|
)
|
|
Adjustments to reconcile net
loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
114,612
|
|
|
130,081
|
|
|
Provision for note receivable
|
|
|
40,000
|
|
|
—
|
|
|
Loss on
impairment of fixed assets
|
|
|
73,172
|
|
|
563,556
|
|
|
Stock
based compensation
|
|
|
746,265
|
|
|
2,840
|
|
|
Change
in fair value of derivative liabilities
|
|
|
(26,039,039
|
)
|
|
9,495,321
|
|
|
Interest expense related to derivative liability in excess of face
value of debt
|
|
|
1,017,250
|
|
|
10,797,663
|
|
|
Amortization of debt discounts
|
|
|
4,993,674
|
|
|
1,214,348
|
|
|
Gain on
settlement of debt
|
|
|
(217,217
|
)
|
|
(1,175,028
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(11,964
|
)
|
|
(20,222
|
)
|
|
Deposits on robots and other current assets
|
|
|
—
|
|
|
(424,363
|
)
|
|
Prepaid
expenses
|
|
|
64,325
|
|
|
—
|
|
|
Device
parts inventory
|
|
|
42,617
|
|
|
(270,014
|
)
|
|
Accounts payable and accrued expenses
|
|
|
1,219,703
|
|
|
344,297
|
|
|
Accrued
interest payable
|
|
|
790,804
|
|
|
291,292
|
|
|
Customer deposits
|
|
|
—
|
|
|
(10,000
|
)
|
|
Net cash
used in operating activities
|
|
|
(1,804,261
|
)
|
|
(3,309,230
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(232,858
|
)
|
|
(228,371
|
)
|
|
Cash
proceeds from WESecure transaction
|
|
|
—
|
|
|
17,000
|
|
|
Cash
paid for security deposit
|
|
|
30,141
|
|
|
(30,141
|
)
|
|
Cash
acquired in reverse capitalization
|
|
|
—
|
|
|
2,022
|
|
|
Net cash
used in investing activities
|
|
|
(202,717
|
)
|
|
(239,490
|
)
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from convertible notes payable, net
|
|
|
1,227,608
|
|
|
2,558,345
|
|
|
Principal payments on convertible notes payable
|
|
|
(187,000
|
)
|
|
(50,000
|
)
|
|
Proceeds from loans payable
|
|
|
539,575
|
|
|
—
|
|
|
Repayment of loans payable
|
|
|
(156,500
|
)
|
|
—
|
|
|
Proceeds from deferred variable payment obligation
|
|
|
192,500
|
|
|
—
|
|
|
Net
borrowings on loan payable - related party
|
|
|
218,890
|
|
|
219,613
|
|
|
Loan
from OMVS to RAD prior to the reverse recapitalization
|
|
|
—
|
|
|
752,500
|
|
|
Proceeds from vehicle loan
|
|
|
—
|
|
|
47,661
|
|
|
Repayment of vehicle loan
|
|
|
(5,746
|
)
|
|
(11,533
|
)
|
|
Proceeds from sale of preferred shares
|
|
|
174,070
|
|
|
—
|
|
|
Net cash
provided by financing activities
|
|
|
2,003,397
|
|
|
3,516,586
|
|
|
|
|
|
|
|
|
|
|
|
Net change in cash
|
|
|
(3,581
|
)
|
|
(32,134
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash, beginning of period
|
|
|
24,773
|
|
|
56,907
|
|
|
|
|
|
|
|
|
|
|
|
Cash, end of period
|
|
$
|
21,192
|
|
$
|
24,773
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of
cash and non-cash transactions:
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
3,213
|
|
$
|
24,193
|
|
|
Cash
paid for taxes
|
|
$
|
—
|
|
$
|
—
|
|
|
Noncash
investing and financing activities:
|
|
|
|
|
|
|
|
|
Transfer of devices from deposits to fixed assets and revenue
earning devices
|
|
$
|
—
|
|
$
|
491,260
|
|
|
Transfer from accounts payable to loan payable related party
|
|
$
|
247,812
|
|
$
|
—
|
|
|
Debt
discount from derivative liabilities
|
|
$
|
914,010
|
|
$
|
3,106,385
|
|
|
Conversion of convertible notes and interest to shares of common
stock
|
|
$
|
851.687
|
|
$
|
808,040
|
|
|
Settlement and exchange of convertible notes payable
|
|
$
|
670,286
|
|
$
|
837,070
|
|
|
Reclassification of fixed assets to vehicle for disposal
|
|
$
|
13,251
|
|
$
|
—
|
|
|
Capitalization of accrued interest to convertible notes payable
|
|
$
|
67,272
|
|
$
|
—
|
|
|
Proceeds of disposal of vehicle offset against vehicle loan
|
|
$
|
21,907
|
|
$
|
—
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
F-6
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
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 year ended
February 28, 2019, the Company had negative cash flow from
operating activities of $1,804,261. As of February 28, 2019, the
Company has an accumulated deficit of $20,142,492, and negative
working capital of $15,376,920. 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.
F-7
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
3. ACCOUNTING
POLICIES
Basis of
Presentation and Consolidation
The accompanying
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-K and
Rule 8-03 of Regulation S-X and the related rules and regulations
of the Securities and Exchange Commission (“SEC”). The audited
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 audited 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.
Use of
Estimates
The preparation of
financial statements in conformity with generally accepted
accounting principles requires management to make certain estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of
revenue and expenses during the reported period. Actual results
could differ from those estimates.
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. There were no allowances provided for the
years ended February 28, 2019 and 2018.
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.
F-8
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
Demo devices
|
|
4 years
|
|
Computer equipment
|
|
3 years
|
|
Office equipment
|
|
4 years
|
|
Vehicles
|
|
3 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 February 28, 2019 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.
F-9
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
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).
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:
F-10
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
●
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement
Using
|
|
|
|
|
Amount at
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
|
February 28, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – conversion features pursuant to convertible
notes payable
|
|
$
|
6,170,139
|
|
$
|
—
|
|
$
|
—
|
|
$
|
6,170,139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – conversion features pursuant to convertible
notes payable
|
|
$
|
31,113,844
|
|
$
|
—
|
|
$
|
—
|
|
$
|
31,113,844
|
|
See Note 16 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.
Recently Adopted
Accounting Pronouncements
See discussion of the
adoption of ASU 2014-09, “Revenue from Contracts with Customers
(Topic 606)”, above.
F-11
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
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.
Subsequent
Events
The Company has
evaluated all transactions through the date the financial
statements were issued for subsequent event disclosure
consideration.
F-12
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
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:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
February 28, 2019
|
|
Year Ended
February 28, 2018
|
|
|
Device rental activities
|
|
$
|
114,261
|
|
$
|
59,867
|
|
|
Direct sales of goods and services
|
|
|
410
|
|
|
46,609
|
|
|
|
|
$
|
114,671
|
|
$
|
106,476
|
|
5. PREPAID EXPENSES
AND DEPOSITS
Prepaid expenses and
deposits on robots expected to be received within one year were
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2019
|
|
February 28, 2018
|
|
|
Prepaid insurance
|
|
$
|
18,778
|
|
$
|
22,076
|
|
|
Prepaid travel
|
|
|
—
|
|
|
10,488
|
|
|
Prepaid trade show expenses
|
|
|
—
|
|
|
50,539
|
|
|
|
|
$
|
18,778
|
|
$
|
83,103
|
|
6. REVENUE EARNING
ROBOTS
Revenue earning robots
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2019
|
|
February 28, 2018
|
|
|
Revenue earning devices
|
|
$
|
229,958
|
|
$
|
—
|
|
|
Less: Accumulated depreciation
|
|
|
(42,784
|
)
|
|
—
|
|
|
|
|
$
|
187,174
|
|
$
|
—
|
|
During the year ended
February 28, 2019, the Company made total additions to revenue
earning devices of $229,958.
F-13
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
During the year ended
February 28, 2018, the Company made total additions to revenue
earning robots of $384,588. Due to all the revenue earning robots
becoming non-operational through February 28, 2018, the Company
wrote down revenue earning robots with a net book value of $414,746
to $0 as loss on impairment of fixed assets.
Depreciation expense was
$42,784 and $51,348 for the years ended February 28, 2019 and 2018,
respectively.
7. FIXED
ASSETS
Fixed assets consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2019
|
|
February 28, 2018
|
|
|
Automobile
|
|
$
|
40,953
|
|
$
|
136,318
|
|
|
Computer equipment
|
|
|
20,262
|
|
|
17,361
|
|
|
Office equipment
|
|
|
5,680
|
|
|
11,829
|
|
|
Leasehold improvements
|
|
|
—
|
|
|
29,329
|
|
|
|
|
|
66,895
|
|
|
194,837
|
|
|
Less: Accumulated depreciation
|
|
|
(29,701
|
)
|
|
(36,632
|
)
|
|
|
|
$
|
37,194
|
|
$
|
158,205
|
|
During the year ended
February 28, 2019, the Company made additions to fixed assets of
$2,900 and wrote-off fixed assets having a net book value of
$25,938 and recorded a corresponding loss on impairment of fixed
assets. The company transferred automobiles having a net book value
of $38,405 to vehicles for disposal since they will be given back
to the lender in the next fiscal quarter. (see Note - 14)
During the year ended
February 28, 2018, the Company acquired total fixed assets of
$335,043. Due to all the demo robots becoming non-operational
through February 28, 2018, the Company wrote down fixed assets with
a net book value of $148,810 to $0 as loss on impairment of fixed
assets.
Depreciation expense was
$58,177 and $73,080 for the years ended February 28, 2019, and
2018, respectively.
8. INTANGIBLE
ASSETS
Intangible assets
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
February 28, 2019
|
|
February 28, 2018
|
|
|
Customer lists and relationships
|
|
$
|
—
|
|
$
|
61,901
|
|
|
Less accumulated amortization
|
|
|
—
|
|
|
(5,653
|
)
|
|
|
|
$
|
—
|
|
$
|
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 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 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% net revenues on sales to identified customers for
non-SMP robots for 2 years. In addition, the Company agreed to
issue 450,000 options to the two principals to purchase shares its
common stock at an exercise price of $0.05 per share that vest on
October 2, 2021 (see further discussion in Note 18).
F-14
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
The Company acquired the
following net assets and liabilities 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
|
|
|
|
|
|
|
|
|
Liabilities Assumed:
|
|
|
|
|
|
Acquisition cost
|
|
$
|
125,000
|
|
|
Total liabilities
assumed
|
|
$
|
125,000
|
|
Amortization expense was
$12,272 and $5,653 for the years ended February 28, 2019, and 2018
, respectively.
The Company evaluated
the fair value of the customer lists and relationships at February
28, 2019 and found that there was an impairment. Accordingly the
Company wrote off the $61,901 and related accumulated depreciation
of $17,925 which yielded a loss on impairment of fixed assets of
$43,976.
At February 28, 2018,
the Company had made four payments totaling $100,000, with a
remaining balance due of $25,000 that has been included on the
balance sheet as balance due on acquisition to WeSecure. The
acquisition was to be fully paid at February 28, 2018 per the
agreement, and the vendor has filed a lawsuit for $ 180,000 ,
included the balance due on acquisition , unpaid salaries detailed
above and costs. The Company has provided for lawsuit amount with
the balance owing in accounts payable and accrued expenses. See
Note 18.
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.
10. CUSTOMER
DEPOSITS
As of February 28, 2017,
the Company received a $10,000 deposit from a customer towards the
rental of equipment with no expected delivery, and accordingly the
deposit is expected to be returned to the customer sometime in
fiscal 2020.
11. DEFERRED VARIABLE
PAYMENT OBLIGATION
On February 1, 2019 the
Company entered into an agreement with an investor whereby the
investor would pay up to $900,000 (including $192,500 paid in
January and February 2019) in exchange for a perpetual 9% rate on
the Company’s reported quarterly revenue from operations excluding
any gains or losses from financial instruments (Revenues). These
variable payments (Payments) are to be made 30 days after the
fiscal quarter. If the Payments would deplete RAD’s available cash
by more than 30%, the Payments may be deferred for up to 12 months
after the quarterly report at an interest rate of 6% per annum on
the unpaid amount. The investor has agreed to pay the remaining
$707,500 over the remaining nine-month period in minimum $60,000
monthly installments, commencing March 1, 2019 and Concluding
November 30, 2019. The investor has advanced an additional $147,000
pursuant to this agreement between March 1 through to May 31, 2019.
If the total investor advances turns out to be less than $900,000,
this would not constitute a breach of the agreement, rather the 9%
rate would be adjusted on a pro-rata basis.
F-15
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
In the event that at
least 10% of the assets of the Company are sold by the Company, the
investor would be entitled to the fair market value (FMV) of all
future Payments associated with the assets sold as determined by an
independent valuator to be chosen by the investor. The FMV cannot
exceed 20% of the total asset disposition price defined as the
total price paid for the assets plus all future Payments associated
with the assets sold. In the event that the common or preferred
shares are sold by the Company to a third party as to effect a
change in control, then the investor must be paid the FMV of all
future Payments in one lump payment. The FMV cannot exceed 20% of
the share disposition price defined as the total price the third
party paid for the shares plus the total value of all future
Payments.
The Payments will first
become payable on June 30, 2019 based on the quarterly Revenues for
the quarter ended May 31, 2019.
In the event that the
variable payment obligation has been repaid the Company will
expense any further payments as a financing expense.
As the Company’s
long-term future revenues were difficult to accurately forecast,
the value of the deferred variable payment obligation was
determined to be equivalent to the value of the consideration the
Company has received.
At February 28, 2019 the
value of the deferred payment obligation was $192,500
(2018-$0),including a current portion of $2,108.
12. CONVERTIBLE NOTES
PAYABLE
Convertible notes
payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Balance
|
|
|
|
|
|
|
Interest
|
|
Conversion
|
February
28,
|
|
February
28,
|
|
|
Issued
|
|
Maturity
|
|
Rate
|
|
Rate per
Share
|
2019
|
|
2018
|
|
|
February 28, 2011
|
|
February 26, 2013 *
|
|
7%
|
|
$0.015(3)
|
|
$
|
32,600
|
|
$
|
32,600
|
|
|
January 31, 2013
|
|
February 28, 2017 *
|
|
10%
|
|
$0.010(3)
|
|
|
119,091
|
|
|
119,091
|
|
|
May 31, 2013
|
|
November 30, 2016 *
|
|
10%
|
|
$0.010(3)
|
|
|
261,595
|
|
|
261,595
|
|
|
August 31, 2014
|
|
November 30, 2016 *
|
|
10%
|
|
$0.002(3)
|
|
|
355,652
|
|
|
355,652
|
|
|
November 30, 2014
|
|
November 30, 2016 *
|
|
10%
|
|
$0.002(3)
|
|
|
103,950
|
|
|
103,950
|
|
|
February 28, 2015
|
|
February 28, 2017 *
|
|
10%
|
|
$0.001(3)
|
|
|
63,357
|
|
|
63,357
|
|
|
May 31, 2015
|
|
August 31, 2017*
|
|
10%
|
|
$1.000(3)
|
|
|
65,383
|
|
|
65,383
|
|
|
August 31, 2015
|
|
August 31, 2017*
|
|
10%
|
|
$0.300(3)
|
|
|
91,629
|
|
|
91,629
|
|
|
November 30, 2015
|
|
November 30, 2018*
|
|
10%
|
|
$0.300(3)
|
|
|
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(3)
|
|
|
35,100
|
|
|
35,100
|
|
|
July 18, 2016
|
|
July 18, 2017*
|
|
10%
|
|
$0.003(3)
|
|
|
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)
|
|
|
180,964
|
|
|
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
|
|
F-16
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
|
|
Balance
|
|
|
|
|
|
|
Interest
|
|
Conversion
|
February
28,
|
|
February
28,
|
|
|
Issued
|
|
Maturity
|
|
Rate
|
|
Rate per
Share
|
2019
|
|
2018
|
|
|
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)
|
|
|
—
|
|
|
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)
|
|
|
204,067
|
|
|
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)(1)
|
|
|
79,508
|
|
|
82,500
|
|
|
January 30,2018
|
|
January 30, 2019*
|
|
15%
|
|
50%
discount(2)(1)
|
|
|
300,000
|
|
|
300,000
|
|
|
February 21,2018
|
|
February 21,2019*
|
|
15%
|
|
50%
discount(2)(1)
|
|
|
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)
|
|
|
—
|
|
|
—
|
|
|
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)
|
|
|
65,106
|
|
|
—
|
|
|
May 2, 2018
|
|
December 2, 2018*
|
|
10%
|
|
40%
discount(2)
|
|
|
70,682
|
|
|
—
|
|
|
May 4, 2018
|
|
May 4, 2019
|
|
12%
|
|
50%
discount(2)
|
|
|
123,750
|
|
|
—
|
|
|
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)
|
|
|
282,949
|
|
|
—
|
|
|
June 19, 2018
|
|
March 19, 2019
|
|
15%
|
|
50%
discount(2)
|
|
|
87,274
|
|
|
—
|
|
|
July 6, 2017
|
|
June 9 ,2019
|
|
8%
|
|
40%
discount(2)
|
|
|
200,000
|
|
|
—
|
|
|
August 1,2018
|
|
August 1,2019
|
|
15%
|
|
50%
discount(2)
|
|
|
32,500
|
|
|
—
|
|
|
August 23,2018
|
|
August 23,2019
|
|
8%
|
|
45%
discount(2)
|
|
|
77,435
|
|
|
—
|
|
|
September 13 ,2018
|
|
June 30, 2019
|
|
12%
|
|
45%
discount(2)
|
|
|
79,500
|
|
|
—
|
|
|
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 8 ,2018
|
|
August 15, 2019
|
|
12%
|
|
45%
discount(2)
|
|
|
79,500
|
|
|
—
|
|
|
November 26 ,2018
|
|
May 26 ,2019
|
|
10%
|
|
50%
discount(2)
|
|
|
44,798
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
$
|
6,767,461
|
|
$
|
6,136,681
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion of
convertible notes payable
|
|
|
(6,202,461
|
)
|
|
(5,536,582
|
)
|
|
Less: discount on noncurrent
convertible notes payable
|
|
|
(302,105
|
)
|
|
(505,039
|
)
|
|
Noncurrent convertible notes
payable, net of discount
|
|
$
|
262,895
|
|
$
|
95,060
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of
convertible notes payable
|
|
$
|
6,202,461
|
|
$
|
5,536,582
|
|
|
Less: discount on current
portion of convertible notes payable
|
|
|
(718,015
|
)
|
|
(3,418,637
|
)
|
|
Current portion of
convertible notes payable, net of discount
|
|
$
|
5,484,446
|
|
$
|
2,117,946
|
|
__________
|
|
|
*
|
The indicated notes were
in default as of February 28, 2019.
|
|
(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.
|
F-17
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
During the years ended
February 28, 2019 and 2018, the Company incurred original issue
discounts of $85,143 and $251,500, respectively, and debt discounts
from derivative liabilities of $1,668,025 and $3,106,385,
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 years ended February 28, 2019
and 2018, the Company recognized interest expense related to the
amortization of debt discount of $4,641,181 and $1,102,430,
respectively. The Company recorded penalty interest of $343,970
during the year February 28, 2019 (February 2018-$0) that is
payable upon maturity if not already converted or settled prior to
maturity.
All the notes above are
unsecured. As of February 28, 2019, the Company had total accrued
interest payable of $1,476,050, of which $1,390,706 is classified
as current and $85,344 is classified as noncurrent. As of February
28, 2018, the Company had total accrued interest payable of
$750,509, of which $694,592 is classified as current and $55,917 is
classified as noncurrent
See description below
for description of the convertible notes issued during the years
ended February 28, 2019 and 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.
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.
F-18
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
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,and December 2018 the Company received $180,000 of proceeds
from an investor for a back-end note date July 6, 2017 principal
amount of $200,000, including original issue discounts of $20,000
and a June 30, 2019 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.
F-19
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
During the year ended
February 28, 2019, 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 year ended
February 28, 2019, holders of certain convertible note payables
elected to convert principal and accrued interest in the amounts
shown below into shares of common stock. No gain or loss was
recognized on conversions as they occurred within the terms of the
agreement that provided for conversion. Accordingly , for the year
ended February 28, 2019, holders of certain convertible notes
payable elected to convert a total of $889,811 of principal and
$35,782 accrued interest, and $12,000 of fees into 199,0101,627
shares of common stock and warrants to purchase 20.430,476 shares
of common stock (see Note 16 for detail of warrants issued).
|
F-20
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the year ended
February 28, 2018 the Company also had the following convertible
note activity:
In September 2017, the
Company settled the March 8, 2017 note and paid $72,762, including
the remaining $50,000 of principal balance and $1,929 in accrued
interest, and a prepayment penalty of $20,833. The Company incurred
this penalty to avoid additional costs related to the conversion of
this note. The Company recorded a gain on settlement of debt of
$84,507 related to the write-off of the associated derivative
liability.
During the year ended
February 28, 2018, the Company repaid principal on convertible
notes payable of $50,000.
During the year ended
February 28, 2018, a debt holder transferred debt of $337,958 and
accrued interest of $147,713 to a third party who exchanged it for
new convertible note for $300,000, maturing September 1, 2018 and
bearing no interest. A gain on settlement of debt of $1,090,521 was
recorded that includes the amount of associated derivative
liability that was written off.
During the year ended
February 28, 2018, holders of certain convertible note payables
elected to convert principal and accrued interest in the amounts
shown below into shares of common stock. No gain or loss was
recognized on conversions as they occurred within the terms of the
agreement that provided for conversion. Accordingly, for the year
ended February 28, 2018, holders of certain convertible notes
payable elected to convert a total of $123,000 of principal into
230,167 shares of common stock.
During the year ended
February 28, 2018 and prior to the reverse merger, the Company
canceled 600,000 shares of common stock. The shares had been issued
during the year ended February 28, 2017 for the conversion of
principal of a convertible note payable of $600. As a result of the
shares being canceled, $600 was added back to the principal of the
note.
13. RELATED PARTY
TRANSACTIONS
For the year ended
February 28, 2019 and 2018 , the Company received net advances of
$235,240 and $237,948, respectively, from its loan payable-related
party. At February 28, 2019, the loan payable-related party was
$782,844 and $316,142 at February 28, 2018. Included in the balance
due to the related party is $352,392 of deferred salary and
interest, $210,000 of which bears interest at 12%. At February
28,2018 there was $180,852, with $24,000 bearing interest at 12%.
The accrued interest included at February 28, 2019 was $13,650
(2018- $0).
During the year ended
February 28, 2019 and 2018, the Company paid $484,251 and $236,853,
respectively in consulting fees for research and development to a
company owned by a principal shareholder.
14. OTHER DEBT –
VEHICLE LOANS
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 $5,746 and $6,591 for
the years ended February 28, 2019 and 2018, respectively. Regarding
the second vehicle loan , the vehicle was returned at the end of
fiscal 2019 and the car was subsequently sold by the lender for
proceeds of $21,907 which went to reduce the outstanding balance of
the loan. . A loss of $3,257 was recorded as well. A balance of
$21,578 remains on this vehicle loan at February 28,2019. The
remaining total balances of the amounts owed on the vehicle loans
were $57,287 and $82,162 as of February 28, 2019 and February 28,
2018, respectively, of which $57,287 and $17,830 were classified as
current and $0 and $64,332 as long-term, respectively. The Company
ceased making payments of principal and interest during the year
and the company will return the remaining vehicle to the financing
company for disposal. The company has re-allocated the remaining
vehicle from fixed assets to vehicles for disposal at the remaining
net book value of $ 13,251.
F-21
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
15. LOANS
PAYABLE
Loans payable consisted
of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
Date
|
|
Maturity
|
|
Description
|
|
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%
|
*
|
|
August 10, 2018
|
|
September 1, 2018
|
|
Promissory note
|
|
|
10,000
|
|
25%
|
*
|
|
August 16, 2018
|
|
August 16, 2019
|
|
Promissory note
|
(1)
|
|
22,624
|
|
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
|
(8)
|
|
30,000
|
|
20%
|
*
|
|
October 10, 2018
|
|
December 10, 2018
|
|
Promissory note
|
(6)
|
|
7,500
|
|
20%
|
*
|
|
October 11, 2018
|
|
October 11, 2019
|
|
Promissory note
|
(7)
|
|
23,000
|
|
20%
|
|
|
November 8, 2018
|
|
March 15, 2019
|
|
Factoring Agreement
|
(4)
|
|
8,942
|
|
(4)
|
|
|
December 5, 2018
|
|
Demand
|
|
Demand, unsecured
|
|
|
3,000
|
|
0%
|
|
|
January 31, 2019
|
|
June 30, 2019
|
|
Promissory note
|
(2)
|
|
78,432
|
|
15%
|
|
|
January 24, 2019
|
|
January 24, 2021
|
|
Loan
|
(9)
|
|
140,535
|
|
11%
|
|
|
May 31, 2019
|
|
June 30, 2019
|
|
Promissory note
|
(5)
|
|
10,448
|
|
15%
|
|
|
|
|
|
|
|
|
$
|
462,481
|
|
|
|
|
Less current portion of loans payable
|
|
$
|
321,946
|
|
|
|
|
Non current portion of loans payable
|
|
$
|
140,535
|
|
|
|
__________
|
|
|
*
|
Note is in default. No
notice has been given by the note holder.
|
|
|
|
|
(1)
|
Repayable in 12 monthly
instalments of $2,376 commencing September 16, 2018 and secured by
revenue earning devices having a net book value of at least
$25,000.Only one $2,376 repayment has been made by the Company and
no notices have been received.
|
|
|
|
|
(2)
|
The note may be
pre-payable at any time. The note balance includes 33% original
issue discount of $25,882. Accrued interest of $936 has been
recorded.
|
|
|
|
|
(3)
|
Repayable in 12 monthly
instalments of $4,562 commencing August 11, 2018 and secured by
revenue earning devices having a net book value of at least
$48,000. No repayments have been made by the Company and no notices
have been received. Accrued interest of $9,300 has been record at
February 28, 2019.
|
|
|
|
|
(4)
|
Repayable $166 per day
including fees and interest of $5,850. Original proceeds of $20,850
less repayment of $11,908.
|
|
|
|
|
(5)
|
The note may be
pre-payable at any time. The note balance includes 33% original
issue discount of $3,448.
|
|
|
|
|
(6)
|
Repayable in 10 monthly
instalments of $848 commencing January 10, 2019 and secured by
revenue earning devices having a net book value of at least
$186,000.
|
|
|
|
|
(7)
|
Principal repayable in
one year. Interest repayable in 10 monthly instalments of $460
commencing January 11, 2019 and secured by revenue earning devices
having a net book value of at least $186,000.
|
|
|
|
|
(8)
|
$20,000 repaid in
quarter ended February 28, 2019.
|
|
|
|
|
(9)
|
$185,000 Canadian loan.
Interest payable every calendar quarter commencing June30, 2019, if
unpaid accrued interest to be paid at maturity. An additional
interest amount calculated as 4% of RAD revenues from SCOT rentals
for the fiscal years 2020 and 2021 shall be payable March 31, 2020
and March 31, 2021, respectively. Secured by a general security
charging all of RAD’s present and after-acquired property in favour
of the lender on a first priority basis subject to the following:
the lender’s security in this respect shall be postpone-able to
security in favour of institutional financing obtained by RAD.
|
F-22
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
16. DERIVATIVE
LIABILITES
As of February 28, 2019,
and 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 $6,170,139 and $31,113,844,
respectively.
The Company estimated
the fair value of the derivative liabilities using the Monte-Carlo
model using the following key assumptions during the nine months
February 28, 2019:
|
|
|
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
|
The Company estimated
the fair value of the derivative liabilities using the Monte-Carlo
model using the following key assumptions during the year ended
February 28, 2018:
|
|
|
Strike price
|
$1.00 - $0.001
|
|
Fair value of Company common stock
|
$0.17
|
|
Dividend yield
|
0.00%
|
|
Expected volatility
|
85% - 65%
|
|
Risk free interest
rate
|
1.01% - 1.57%
|
|
Expected term
(years)
|
0.26 - 4.00
|
During the years ended
February 28, 2019, and February 28, 2018 the Company released
$1,215,588 and $685,040, 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 February
28, 2019 were as follows:
|
|
|
|
|
Balance as of February 28, 2018
|
$
|
31,113,844
|
|
|
|
|
|
|
|
Release of derivative liability on conversion
of convertible notes payable
|
|
(1,215,588
|
)
|
|
Debt discount due to derivative
liabilities
|
|
914,010
|
|
|
Derivative liability in excess of face value
of debt recorded to interest expense
|
|
784,160
|
|
|
Increase in derivative liability due to debt
settlement
|
|
612,752
|
|
|
Change in fair value of derivative
liabilities
|
|
(26,039,039
|
)
|
|
Balance as of February 28, 2019
|
$
|
6,170,139
|
|
The changes in the
derivative liabilities (Level 3 financial instruments) measured at
fair value on a recurring basis for the year ended February 28,
2018 were as follows:
|
|
|
|
|
Addition of derivative liability pursuant to
reverse recapitalization
|
$
|
9,035,437
|
|
|
Release of derivative liability on conversion
of convertible notes payable recorded to equity
|
|
(685,040
|
)
|
|
Debt discount due to derivative
liabilities
|
|
3,106,385
|
|
|
Derivative liability in excess of face value
of debt recorded to interest expense
|
|
10,797,663
|
|
|
Reduction in derivative liability due to debt
settlement
|
|
(635,922
|
)
|
|
Change in fair value of derivative
liabilities
|
|
9,495,321
|
|
|
Balance as of February 28, 2018
|
$
|
31,113,844
|
|
F-23
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. STOCKHOLDERS ’
EQUITY (DEFICIT)
Summary of
Preferred Stock Activity
During the year ended
February 28 2019, 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.
During the year ended
February 28, 2018, AITX issued 1,000,000 and 1,000 shares of its
Series E and Series F preferred stock, respectively, totaling
$1,000 and $1,000, respectively, in connection with the
recapitalization of AITX by RAD.
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 12).
On April 23, 2019 the
Board of Directors approved an increase in authorized share capital
to 5,000,000,000 shares of common stock and to change the par value
of the common stock to $0.00001 per share. This became effective on
June 20, 2019. The share capital has been retrospectively adjusted
accordingly to reflect this change in par value.
During the year ended
February 28, 2019, the Company issued 199,0101,627 shares of its
common stock for the conversion of debt and related interest and
fees totaling $937,493 including $889,811 for of principal, $35,782
interest, $12,000 in fees in connection with debt converted during
the period, as well as the release of the related derivative
liability (see Note 15).
During the year ended
February 28, 2018 and prior to the Acquisition, AITX issued the
following shares of common stock:
|
|
|
●
|
Issued 760,088 shares of
its common stock totaling $8 in connection with debt converted
during the period;
|
|
|
|
|
●
|
Cancelled 6,000 shares
of its common stock totaling $0; and
|
|
|
|
|
●
|
Issued 89,223 shares of
its common stock totaling $1 in connections with warrants exercised
during the period.
|
Following the
Acquisition through February 28, 2018, the Company issued 230,167
shares of its common stock for the conversion of $123,000 of
outstanding convertible debt.
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 years ended February 28,
2019, and February 29, 2018, the Company amortized $6,596 and
$2,840, respectively, to stock-based compensation with a
corresponding adjustment to additional paid-in capital. At February
28, 2019, and February 29, 2018, the unamortized expense was
$18,047 and $25,003, respectively and the intrinsic value was
$0.
F-24
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
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 February 28, 2019
|
|
4,500
|
|
$ 5.00
|
|
2.60
|
During the year ended
February 28, 2019, 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
|
|
|
|
|
●
|
During the period
December 1, 2018 to February 28, 2019 , the Company issued warrants
to purchase 19,141,171 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. The warrants have an exercise price
ranging from $0.014-$0.031 per share and a three-year term
|
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 14).
|
|
|
|
|
|
|
|
|
|
Number of Warrants
|
|
Weighted Average Exercise
Price
|
|
Weighted Average Remaining
Years
|
|
Outstanding at March 1, 2018
|
|
—
|
|
$ —
|
|
—
|
|
Issued
|
|
20,436,309
|
|
0.14
|
|
2.81
|
|
Exercised
|
|
—
|
|
—
|
|
—
|
|
Forfeited and cancelled
|
|
—
|
|
—
|
|
—
|
|
Outstanding at February 28, 2019
|
|
20,436,309
|
|
$ 0.14
|
|
2.81
|
The above warrants have
an aggregate grant date fair value of $741,149 based on the
Black-Scholes Option Pricing model with the following
assumptions:
|
|
|
Strike price
|
$0.001 - $3.00
|
|
Fair value of Company’s common stock
|
$0.004- $7.00
|
|
Dividend yield
|
0.00%
|
|
Expected volatility
|
305.71% - 341.5%
|
|
Risk free interest
rate
|
2.46% - 2.94%
|
|
Expected term
(years)
|
3.00 - 5.00
|
For the year ended
February 28, 2019, the Company recorded a total of $746,265 to
stock-based compensation for options and warrants with a
corresponding adjustment to additional paid-in capital.
F-25
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
18. 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 condensed 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, AITX
received notice that it had been sued in the Clark County District
Court of Nevada. The plaintiff alleges that AITX obtained certain
trade secrets through a third party also named in the suit. AITX
believes 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
AITX should prevail.
In April 2019 the
principals of WeSecure (see Note 8) filed lawsuit in California
Superior Court seeking damages for non-payment balance of sale of
WeSecure assets totaling $25,000, unpaid consulting fees payable to
the two principals through to September 2019 totaling $
$125,924.48, and labor code violations of $ $48,434.40 all totaling
$199,358.88 plus attorney’s fees and damages. The parties finally
settled all claims with a full release for $180,000 in June 2019
payable in 14 monthly instalments as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2020
|
|
Total
|
|
|
6/30/19
|
$
|
5,000
|
|
1/26/2020
|
$
|
15,000
|
|
|
|
|
|
7/30/19
|
$
|
5,000
|
|
2/25/2020
|
$
|
15,000
|
|
|
|
|
|
8/29/19
|
$
|
7,500
|
|
3/26/2020
|
$
|
15,000
|
|
|
|
|
|
9/28/19
|
$
|
7,500
|
|
4/25/2020
|
$
|
15,000
|
|
|
|
|
|
10/28/19
|
$
|
10,000
|
|
5/25/2020
|
$
|
20,000
|
|
|
|
|
|
11/27/19
|
$
|
10,000
|
|
6/25/2020
|
$
|
20,000
|
|
|
|
|
|
12/27/19
|
$
|
15,000
|
|
7/24/2020
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
60,000
|
|
|
$
|
120,000
|
|
$
|
180,000
|
|
The company has fully
accrued the above $180,000.
The related legal costs
are expensed as incurred.
Operating
Lease
The Company currently
maintains an office at 1218-1222 Magnolia Ave, Suite 106 Bldg. H
,Corona, California 92881 pursuant to a month to month lease
commencing March 1,2019. The Company’s annual rent is $12,000 per
year.
RAD maintains a mailing
address for 31103 Ranch Viejo Road, Suite d2114 for a nominal fee
of $ 264/yr. RAD previously had its offices at 23121 La Cadena
Suite B/C Laguna Hills, California 92675, pursuant to a five-year
term ending March 31, 2022. Its annual rental cost for this
facility was approximately $65,000, plus a proportionate share of
operating expenses of approximately $35,000 annually. The Company
also leased premises in northern California. The lease was for
three years, beginning in August 2017, and would expire in August
2020. The Company shared these premises with a former supplier who
was the co-lessee. Through agreement with the supplier, the Company
was to pay 75% of the lease costs and the supplier was to pay 25%.
The Company’s share of rent costs was approximately $43,000
annually. On February 1,
2018 the Company entered into an additional lease for premises for
a robotic control center. The lease ran from February 1, 2018 to
January 31, 2021 for $6,600 annually. At the end of fiscal 2019 the
Company terminated all three preceding leases through verbal
arrangement with the landlord. Regarding the lease at La Cadena,
the Company agreed to a settlement amount to cover unpaid rent ,
commissions and leasehold improvements paid by the landlord
totaling $62,039 to be paid by the Company in 4 monthly instalments
of $5,000 commencing August 1, 2019 with the remaining balance to
be paid in $10,000 monthly instalments thereafter. The Company
recorded the $62,039 as a loss on settlement. No further liability
was recorded for both the northern California and robotic control
center leases.
F-26
ARTIFICIAL INTELLIGENCE
TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE
SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
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 $134,940
for the year ended February 28, 2019 and $$90,582 for the year
ended February 28, 2018.
At February 28, 2019,
the Company had deferred rent of $0 (February 28, 2018-$6,742).
At February 28, 2019
there were no Company’s future minimum payments.
Convertible Notes
Payable
Certain convertible
notes payable carry conditions whereby in the event of ant default
of any condition the Company would be subject to certain financial
penalties.
19. EARNINGS (LOSS)
PER SHARE
The net income (loss)
per common share amounts were determined as follows:
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
|
February 28,
|
|