NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL INFORMATION
Artificial Intelligence Technology Solutions Inc.
(“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 an 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. 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 six months ended August 31, 2021, the Company
had negative cash flow from operating activities of $(6,096,978). As of August 31, 2021, the Company has an accumulated deficit of $(72,259,045),
and negative working capital of $2,631,999. 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 raise an additional
$ 15 million to $ 50 million before the end of the fiscal year. Management is committed to raise either non-dilutive funds or minimally
dilutive funds. There is no assurance that these funds will be able to be raised nor can we provide assurance that these possible raises
may not have dilutive effects.
The Company currently projects that 2022 fiscal year’s
revenues will be between 5 and 15 times greater than the 2021 fiscal year’s revenues. This projection is based on the following
factors: 1. an anticipated significant increase in the orders; 2. an expected significant improvement in the Company’s ability to
make timely deliveries; and 3. an anticipated significant improvement in the Company’s ability to support many more devices than
this it could support during the 2021’s fiscal year. However, there can be no assurance that the revenues will increase to the extent
projected or that the anticipated improvements will actually occur.
This expansion plan will require the Company to expend
significant resources, including the hiring of additional staffing, which the Company expects to finish the next fiscal year with between
75 – 125 employees.
- 8 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”)
and in conformity with the condensing instructions on Form 10-Q and Rule 8-03 of Regulation S-X and the related rules and regulations
of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements
and notes thereto in the Company’s latest Annual Report filed with the SEC on Form 10-K as filed on June 1, 2021. The unaudited
condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Robotic Assistance
Devices, Inc., Robotic Assistance Devices Group, Inc., and Robotic Assistance Devices Mobile, Inc. All significant intercompany accounts
and transactions have been eliminated in consolidation. The unaudited consolidated financial statements reflect all adjustments, consisting
of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. The results
of operations for the six months ended August 31, 2021 are not necessarily indicative of the results that may be expected for the entire
year.
Use of Estimates
In order to prepare financial statements in conformity
with accounting principles generally accepted in the United States, management must make estimates, judgements and assumptions that affect
the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the
financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from resolution
currently anticipated by management and on which the financial statements are based. The most significant estimates included in these
consolidated financial statements are those associated with the assumptions used to value preferred stock and derivative liabilities.
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 was an allowance of $26,890 and
$24,868 provided as of August 31, 2021 and February 28, 2021, respectively.
Device Parts Inventory
Device parts inventory is stated at the lower of cost
or net realizable value 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. As of both August 31, 2021 and February 28, 2021 there was
no valuation reserve.
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.
- 9 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Computer equipment
|
|
3 years
|
Office equipment
|
|
4 years
|
Demo Devices
|
|
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 August 31, 2021 and February 28, 2021, 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.
Sales of Future Revenues
The Company has entered into transactions, as more
fully described in footnote 8, in which it has received funding from investors in exchange for which it will make payments to those investors
based on the level of sales of certain revenue categories, generally based on a percentage of sales for those certain revenues. The Company
determines whether these agreements constitute sales of future revenues or are in substance debt based on the facts and circumstances
of each agreement, with the following primary criteria determinative of whether the agreement constitutes a sale of future revenues or
debt:
|
●
|
Does the agreement purport, in substance, to be a sale
|
|
●
|
Does the Company have continuing involvement in the generation of cash flows due the investor
|
|
●
|
Is the transaction cancellable by either party through payment of a lump sum or other transfer of assets
|
|
●
|
Is the investors rate of return is implicitly limited by the terms of the agreement
|
|
●
|
Does the Company’s revenue for a reporting period underlying the
agreement have only a minimal impact on the investor’s rate of return
|
|
●
|
Does the investor have recourse relating to payments due
|
In the event a transaction is determined to be a sale
of future revenues, it is recorded as deferred revenue and amortized using the sum-of-the-revenue method. In the event a transaction is
determined to be debt, it is recorded as debt and amortized using the effective interest method. As of the date of these financial statements,
the Company has determined that all such agreements are debt.
- 10 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. Refer to Note 4 – Revenue from Contracts with
Customers for additional information.
Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized when items of income and expense are recognized in the financial
statements in different periods than when recognized in the tax return. Deferred tax assets arise when expenses are recognized in the
financial statements before the tax returns or when income items are recognized in the tax return prior to the financial statements. Deferred
tax assets also arise when operating losses or tax credits are available to offset tax payments due in future years. Deferred tax liabilities
arise when income items are recognized in the financial statements before the tax returns or when expenses are recognized in the tax return
prior to the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Leases
Lease agreements are evaluated to determine if they
are sales/finance leases meeting any of the following criteria at inception: (a) transfer of ownership of the underlying asset; (b) purchase
option that is reasonably certain of being exercised; (c) the lease term is greater than a major part of the remaining estimated economic
life of the underlying asset; or (d) if the present value of the sum of lease payments and any residual value guaranteed by the lessee
that has not already been included in lease payments in accordance with ASC 842-10-30-5(f) equals or exceeds substantially all of the
fair value of the underlying asset.
If at its inception, a lease meets any of the four
lease criteria above, the lease is classified by the Company as a sales/finance; 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.
- 11 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
Our CEO and Chairman holds sufficient shares of the
Company’s voting preferred stock that give sufficient voting rights under the articles of incorporation and bylaws of the Company
such that the CEO and Chairman can at any time unilaterally vote to increase the number of authorized shares of common stock of the Company,
without the need to call a general meeting of common shareholders of the Company.
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:
|
●
|
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.
|
- 12 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Measured on a Recurring Basis
The following table presents information about our
liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements
fell:
|
|
Amount at
|
|
Fair Value Measurement Using
|
|
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
August 31, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – conversion features pursuant to convertible notes payable
|
|
$
|
7,299
|
|
$
|
—
|
|
$
|
—
|
|
$
|
7,299
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28, 2021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – conversion features pursuant to convertible notes payable
|
|
$
|
444,466
|
|
$
|
—
|
|
$
|
—
|
|
$
|
444,466
|
|
See Note 12 for specific inputs used in the multinomial
lattice model 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 Issued Accounting Pronouncements
Accounting for Income Taxes
In December 2019, the FASB issued a new standard
to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intra-period tax
allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for
outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also
simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for
transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021,
with early adoption permitted. The Company does not expect any material impact of this standard in our consolidated financial
statements, including accounting policies, processes, and systems.
- 13 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recently Adopted Accounting Pronouncements
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. The Company adopted this on March 1, 2020.
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 842 (which addresses lease accounting and was adopted on March 1, 2019).
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.
After adopting Topic 842, also referred to above in
Note 3, the Company is accounting 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. The Company recognizes revenue from its device rental activities when persuasive evidence
of a contract exists, the performance obligations have been satisfied, the transaction price is fixed or determinable and collection is
reasonably assured. Performance obligations associated with device rental transactions are satisfied over the rental period. Rental periods
are short-term in nature. Therefore, the Company has elected to apply the practical expedient which eliminates the requirement to disclose
information about remaining performance obligations. Payments are due from customers at the completion of the rental, except for customers
with negotiated payment terms, generally net 30 days or less, which are invoiced and remain as accounts receivable until collected.
The following table presents revenues from contracts
with customers disaggregated by product/service:
|
|
Three Months Ended
August 31, 2021
|
|
Six Months Ended
August 31, 2021
|
|
Device rental activities
|
|
$
|
123,375
|
|
$
|
218,081
|
|
Direct sales of goods and services
|
|
|
18,197
|
|
|
483,825
|
|
|
|
$
|
141,572
|
|
$
|
701,906
|
|
|
|
Three Months Ended
August 31, 2020
|
|
Six Months Ended
August 31, 2020
|
|
Device rental activities
|
|
$
|
73,082
|
|
$
|
130,203
|
|
Direct sales of goods and services
|
|
|
3,000
|
|
|
9,200
|
|
|
|
$
|
76,082
|
|
$
|
139,403
|
|
5. REVENUE EARNING DEVICES
Revenue earning devices consisted of the following:
|
|
August 31, 2021
|
|
February 28, 2021
|
|
Revenue earning devices
|
|
$
|
779,100
|
|
$
|
500,173
|
|
Less: Accumulated depreciation
|
|
|
(303,143
|
)
|
|
(226,459
|
)
|
|
|
$
|
475,957
|
|
$
|
273,714
|
|
- 14 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the six months ended August 31, 2021, the Company
made total additions through inventory transfers to revenue earning devices of $282,337. During the six months ended August 31, 2020,
the Company made total additions to revenue earning devices of $47,094.
During the six months ended August 31, 2021 the Company
sold a revenue earning device having a net book value of $3,255 for revenues of $30,600 and included the $3,255 in cost of goods sold.
Depreciation expense was $43,834 and $76,839 for the
three and six months ended August 31, 2021, respectively, and $24,820 and $47,461 for the three and six months ended August 31, 2020,
respectively.
6. FIXED ASSETS
Fixed assets consisted of the following:
|
|
August 31, 2021
|
|
February 28, 2021
|
|
Vehicles
|
|
$
|
44,243
|
|
$
|
70,896
|
|
Demo devices
|
|
|
3,670
|
|
|
3,670
|
|
Computer equipment
|
|
|
36,742
|
|
|
23,399
|
|
Office equipment
|
|
|
6,162
|
|
|
4,142
|
|
|
|
|
90,817
|
|
|
102,107
|
|
Less: Accumulated depreciation
|
|
|
(33,032
|
)
|
|
(67,113
|
)
|
|
|
$
|
57,785
|
|
$
|
34,994
|
|
During the three months and six months ended August
31, 2021 the Company made additions of $16,800 and $32,162, respectively. During both the three months and six months ended August 31,
2020 the Company made additions of $4,638.
During the six months ended August 31, 2021 the Company sold a vehicle
having a net book value of $875 for fair value proceeds of $30,000 and recorded a gain on disposal of fixed assets of $29,125.
During the six months ended August 31, 2020, the Company
disposed of office equipment having an original cost of $3,550 and a net book value of $1,553 for $1,000 in proceeds and recorded a $553
loss on disposal of fixed assets.
Depreciation expense was $3,857 and $8,495 for the
three and six months ended August 31, 2021, respectively, and $5,540 and $11,015 for the three and six months ended August 31, 2020, respectively.
7. LEASES
We lease certain warehouses and office space. Leases
with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line
basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, we did not combine lease and
non-lease components.
Most leases include one or more options to renew,
with renewal terms that can extend the lease term by 10 years or more. The exercise of lease renewal options is at our sole discretion.
The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title
or purchase option reasonably certain of exercise.
- 15 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Below is a summary of our lease assets and liabilities at August 31, 2021
and February 28, 2021.
Leases
|
|
Classification
|
|
August 31, 2021
|
|
February 28, 2021
|
|
Assets
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Operating Lease Assets
|
|
$
|
1,280,039
|
|
$
|
47,753
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Current Operating Lease Liability
|
|
$
|
94,610
|
|
$
|
43,894
|
|
Noncurrent
|
|
|
|
|
|
|
|
|
|
Operating
|
|
Noncurrent Operating Lease Liabilities
|
|
|
1,185,429
|
|
|
3,859
|
|
Total lease liabilities
|
|
|
|
$
|
1,280,039
|
|
$
|
47,753
|
|
Note: As most of our leases do not provide an implicit
rate, we use our incremental borrowing rate of 10% based on the information available at commencement date in determining the present
value of lease payments.
The weighted average remaining lease term is 9.5 years.
CAM charges were not included in operating lease expense
and were expensed in general and administrative expenses as incurred.
The Company’s leases are accounted for as operating
leases. Rent expense and operating lease cost are recorded over the lease terms on a straight-line basis. Rent expense and operating lease
cost was $75,212 and $104,086 for the three and six months ended August 31, 2021, respectively, and $4,300 and $7,300 for the three and
six months ended August 31, 2020, respectively.
8. 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 payment (Payments) on the Company’s reported quarterly revenue from operations excluding any gains or losses
from financial instruments (Revenues). 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. The investor has agreed to pay the remaining balance
in minimum $60,000 monthly installments, concluding November 30, 2019. At February 29, 2020 the investor has advanced the full $900,000.
On May 9, 2019 the Company entered into two similar
arrangements with two investors:
|
(1)
|
The investor would pay up to $400,000 in exchange for a perpetual 4% rate Payment on the Company’s
reported quarterly Revenues. If the total investor advances turns out to be less than $400,000, this would not constitute a breach of
the agreement, rather the 4% rate would be adjusted on a pro-rata basis. The investor has agreed to pay the remaining balance in four
monthly installments of $64,111 starting July 1, 2019. At February 29, 2020, $400,000 has been paid to the Company.
|
|
|
|
|
(2)
|
The investor would pay up to $50,000 in exchange for a perpetual 1.11% rate Payment on the Company’s
reported quarterly Revenues. If the total investor advances turns out to be less than $50,000, this would not constitute a breach of the
agreement, rather the 1.11% rate would be adjusted on a pro-rata basis. The investor has agreed to pay the remaining balance in four monthly
installments of $8,014 starting July 1, 2019. At February 29, 2020, $50,000 has been paid to the Company.
|
These variable payments (Payments) are to be made
30 days after the end of each 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.
In the event that at least 10% of the assets of the
Company are sold by the Company, the investors 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 investors. The FMV cannot exceed 30% 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 investors must be paid the FMV
of all future Payments in one lump payment. The FMV cannot exceed 30% 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.
- 16 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On November 18, 2019 the Company entered into another
similar arrangement with the (February 1, 2019) investor above whereby the investor would advance up to $225,000 in exchange for a perpetual
2.25% rate Payment on the Company’s quarterly Revenues (commencing on quarter ending May 31, 2020). At February 29, 2020 the investor
has advanced $109,000 and the investor advanced the $116,000 remainder as of May 2020.
On December 30, 2019 the Company entered into another
similar arrangement with a new investor whereby the investor would advance up to $100,000 in exchange for a perpetual 1.00% rate Payment
on the Company’s quarterly Revenues (commencing quarter ended November 30, 2020). At February 29, 2020 the investor has advanced
$50,000 with the remainder to be advanced no later than June 30, 2020. If the total investor advances turns out to be less than $100,000,
this would not constitute a breach of the agreement, rather the 1.00% rate would be adjusted on a pro-rata basis.
On April 22, 2020 the Company entered into another
similar arrangement with the (first May 9, 2019) investor above whereby the investor would advance up to $100,000 in exchange for
a perpetual 1.00% rate Payment on the Company’s quarterly Revenues. At May 31, 2020 the investor has fully funded this commitment.
On July 1, 2020 the Company entered into a similar
agreement with the first investor whereby the investor would pay up to $800,000 in exchange for a perpetual 2.75% rate payment (Payment)
on the Company’s reported quarterly revenue. These Payments are to be made 90 days after the fiscal quarter with the first payment
being due no later than May 31, 2021. If the Payments would deplete RAD’s available cash by more than 20%, the payment may be deferred.
The investor had agreed to pay $100,000 per month over an 8-month period with the first payment due July 2020 and the final payment no
later than February 28, 2021. As at August 31, 2020 the investor had fully funded the $800,000 commitment.
On August 27, 2020 the Company and the first investor
referred to above consolidated the three separate agreements of February 1, 2019 for $900,000, November 18, 2019 for $225,000 and July
1, 2020 for $800,000 into a new agreement for a total of $1,925,000. This new agreement is for similar terms as the above agreements save
for the following: the rate payment is revised to 14.25% payable on revenues commencing the quarter ended August 31, 2020 and the
Payments are secured by the assets of the Company. This interest may be secured by UCC filing but is subordinated to equipment
financing on the products the Company leases to its customers.
In summary of all agreements mentioned above if in
the event that at least 10% of the assets of the Company are sold by the Company, the investors 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 investors. The
FMV cannot exceed 43.77% 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 investors must be paid the FMV of all future Payments in one lump payment. The FMV cannot exceed 43.77%
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.
As of March 1, 2021 as a result of the amendment with the first investor noted below, this aggregate asset disposition % was reduced from
43.77 % to 33.77%.
On March 1, 2021 the first investor referred to above whose aggregate investment
is $1,925,000 revised his agreements as follows:
|
1)
|
The rate payment was reduced from 14.25 % to 9.65 %
|
|
|
|
|
2)
|
The asset disposition % (see below) was reduced from 31 % to 21%
|
In consideration for the above changes, the investor
received 40 Series F Convertible Preferred Stock and a warrant to purchase 367 shares of its Series F Convertible Preferred Stock with
a five-year term and an exercise price of $1.00. During the three months ended May31, 2021 the warrant holder exercised warrants to acquire
38 shares of Series F Convertible Preferred Stock. The company attributed a fair value based on recent transactions for the Series F Preferred
stock and warrants of $33,015,214 and recorded a loss on settlement of debt with a corresponding adjustment to paid in capital.
The Company retains total involvement in the generation
of cash flows from these revenue streams that form the basis of the payments to be made to the investors under this agreement. Because
of this, the Company has determined that the agreements constitute debt agreements. As of August 31, 2021, the Company has not yet completed
its assessment of the likely cash flows under these agreements, and thus, has not yet determined the effective interest rate under these
agreements. The Company expects to have completed its analysis of the expected cash flows prior to the filing of the year end February
28, 2023 filing. As of August 31, 2021, and February 28, 2021, the balances under these agreements were $2,525,000 and $2,525,000, respectively.
- 17 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
For the three months ended August 31, 2021, the Company
has received $0 related to the deferred payment obligation as the balance remains $2,525,000 at August 31, 2021. For the year ended February
28, 2021, $966,000 has been paid to the Company bringing the balance to $2,525,000 at February 28, 2021.
The Payments first become payable on June 30, 2019
(unless otherwise indicated) based on the quarterly Revenues for the quarter ended May 31, 2019 and accrue every quarter thereafter. As
of August 31, 2021, the Company has accrued $246,035 in Payments (February 28, 2021 -$91,857). No amounts have been recorded to date as
interest on Payments, as the amounts are immaterial.
9. CONVERTIBLE NOTES PAYABLE
Convertible notes payable consisted of the following:
|
|
|
|
|
|
|
|
|
Balance
|
|
Balance
|
|
|
|
|
|
|
Interest
|
|
Conversion
|
|
August 31,
|
|
February 28,
|
|
Issued
|
|
Maturity
|
|
|
Rate
|
|
Rate per Share
|
|
2021
|
|
2021
|
|
July 18, 2016
|
|
July
18, 2017*
|
|
|
10%
|
|
$0.003
|
(2)
|
|
3,500
|
|
|
3,500
|
|
December 31, 2016
|
|
December 31, 2020
|
|
|
8%
|
|
35% discount
|
(1)
|
|
—
|
|
|
65,000
|
|
January 19, 2021
|
|
January 19, 2022
|
|
|
12%
|
|
$0.04
|
|
|
—
|
|
|
275,000
|
|
January 27,2021
|
|
January 27, 2022
|
|
|
10%
|
|
$0.10
|
(3)
|
|
—
|
|
|
550,000
|
|
|
|
|
|
|
|
|
|
|
|
3,500
|
|
|
893,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion of convertible notes payable
|
|
|
(3,500
|
)
|
|
(893,500
|
)
|
Less: discount on noncurrent convertible notes payable
|
|
|
—
|
|
|
—
|
|
Noncurrent convertible notes payable, net of discount
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Current portion of convertible notes payable
|
|
$
|
3,500
|
|
$
|
893,500
|
|
Less: discount on current portion of convertible notes payable
|
|
|
—
|
|
|
(697,276
|
)
|
Current portion of convertible notes payable, net of discount
|
|
$
|
3,500
|
|
$
|
196,224
|
|
__________
*
|
The indicated note was in default as of August 31, 2021. Default interest rate 22%
|
|
|
(1)
|
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.
|
|
|
(2)
|
The conversion price is not subject to adjustment from forward or reverse stock splits.
|
|
|
(3)
|
The per share conversion price into which Principal Amount and interest (including any Default Interest) under
this Note shall be convertible into shares of Common Stock hereunder (the “Conversion Price”) shall be equal to $0.10 per
share (the “Fixed Conversion Price”); provided, however, that if, the lowest traded price on the date six (6) months
from the issue date hereof is below the Fixed Conversion Price, and no default exists, the conversion shall be $0.05 (the “Alternative
Fixed Conversion Price”) provided, further, that upon any Event of Default (as defined herein) after the Issue Date, the
Conversion Price shall equal the lower of (i) $0.03 (the “Default Fixed Conversion Price”); or (ii) seventy percent (70%)
multiplied by the lowest closing price of the Common Stock during the fifteen (15) consecutive Trading Day period immediately preceding
the date of the respective event of default (the “Default Conversion Price”);
|
During both the three months ended August 31, 2021
and 2020, the Company incurred original issue discounts of $0, and debt discounts from derivative liabilities of $438,835 and $0, respectively
related to new or re-valued convertible notes payable. During the three months ended August 31, 2021 and 2020, the Company recognized
interest expense related to the amortization of debt discount of $694,855 and $35,551, respectively. The Company recorded penalty interest
of $0 and $445,277 during the three months ended August 31, 2021 and August 31, 2020, respectively.
- 18 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During both the six months ended August 31, 2021 and
2020, the Company incurred original issue discounts of $0 and debt discounts from derivative liabilities of $438,835 and $0, respectively
related to new or re-valued convertible notes payable. During the six months ended August 31, 2021and 2020, the Company recognized interest
expense related to the amortization of debt discount of $775,986 and $94,675, respectively. The Company recorded penalty interest of $0
and $445,277 during the six months ended August 31, 2021 and August 31, 2020, respectively.
All the notes above are unsecured. As of August 31,
2021 and February 28, 2021, the Company had total accrued interest payable of $27,302 and $49,764, respectively, all of which is classified
as current.
During the six months ended August 31, 2021, the Company
also had the following convertible note activity:
●
|
the Company amended the January 27, 2021 agreement with the lender whereby the conversion rate
was changed from $0.10 to $0.03 as a result of a dilutive issuance. This resulted a derivative discount of $438,835 and a loss on extinguishment
of $360,125.
|
|
|
●
|
holders of certain convertible notes payable elected
to convert a total of $825,000 of principal and $71,955 accrued interest, and $1,750 of fees into 31,042,436 shares of common stock. No
gain or loss was recognized on conversions as these conversions occurred within the terms of the agreement that provided for conversion.
|
●
|
the conversion rate of the January 19, 2021 note included above was reduced to $0.027 due to the dilutive
issuance provision in the January 19, 2021 agreement.
|
10. RELATED PARTY TRANSACTIONS
For the six months ended August 31, 2021, the Company
repaid net advances of $118,342 from its loan payable-related party. For the six months ended August 31, 2020 the Company repaid net advances
of $75,328. At August 31, 2021, the loan payable-related party was $910,095 and $904,806 at February 28, 2021. Included in the balance
due to the related party at August 31, 2021 is $925,001 of deferred salary and interest, $762,000 of which bears interest at 12%. At February
28, 2021, included in the balance due to the related party is $883,710 of deferred salary and interest, $642,000 of which bears interest
at 12%. The accrued interest included in loan at August 31, 2021 and August 31, 2020 was $160,536 and $80,410, respectively.
Pursuant to the amended Employment Agreement with its Chief Executive Officer
in Note 14, the Company accrued $1,022,000 of stock-based compensation with a corresponding adjustment to incentive compensation plan
payable due to the vesting cost of the equity awards. These awards are payable through the issuance of Series G Preferred Shares which
are redeemable at the Company’s option at $1,000 per share. The Company will classify these awards granted as Series G Preferred
Shares as a liability accordingly because of those terms.
During the three and six months ended August 31, 2021
the Company was charged $1,041,788 and $562,837, respectively in consulting fees for research and development to a company partially owned
by a principal shareholder During the three and six months ended August 31, 2020, the Company was charged $61,121 and $111,816, respectively
for consulting fees for research and development to a company owned by a principal shareholder.
11. OTHER DEBT – VEHICLE LOAN
In December 2016, RAD entered into a vehicle loan
for $47,704 secured by the vehicle. The loan is repayable over 5 years maturing November 9, 2021, and repayable $1,019 per month including
interest and principal. In November 2017, RAD entered into another vehicle loan secured by the vehicle for $47,661. The loan is repayable
over 5 years, maturing October 24, 2022 and repayable at $923 per month including interest and principal. The principal repayments made
were $0 for both the year ended February 28, 2021 and February 29, 2020. 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 both February 28, 2021 and February
29, 2020. For the first vehicle loan, the vehicle was retired in 2020, the proceeds of the disposal of $18,766 was applied against the
balance of the loan with a $5,515 gain on the remaining asset value of $13,251. A balance of $16,944 remains on this vehicle loan at both
February 28, 2021 and February 29, 2020. The remaining total balances of the amounts owed on the vehicle loans were $38,522 and $38,522
as of August 31, 2021 and February 28, 2021, respectively, of which all were classified as current.
- 19 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. LOANS PAYABLE
Loans payable at August 31, 2021 consisted of the
following:
Schedule of loans payable
|
|
|
|
|
|
|
|
Annual
|
|
Date
|
|
Maturity
|
|
Description
|
|
Principal
|
|
Interest Rate
|
|
June 11, 2018
|
|
June 11, 2019
|
|
Promissory note
|
(3)
|
$
|
48,000
|
|
25%
|
*
|
August 10, 2018
|
|
September 1, 2018
|
|
Promissory note
|
(4)
|
|
—
|
|
25%
|
|
August 16, 2018
|
|
August 16, 2019
|
|
Promissory note
|
(1)
|
|
—
|
|
25%
|
|
August 16, 2018
|
|
October 1, 2018
|
|
Promissory note
|
(4)
|
|
—
|
|
25%
|
|
October 11, 2018
|
|
October 11, 2019
|
|
Promissory note
|
(7)
|
|
17,000
|
|
20%
|
*
|
January 31, 2019
|
|
June 30, 2019
|
|
Promissory note
|
(2)
|
|
78,432
|
|
15%
|
*
|
January 24, 2019
|
|
January 24, 2021
|
|
Loan
|
(8)
|
|
194,803
|
|
11%
|
*
|
May 9, 2019
|
|
June 30, 2019
|
|
Promissory note
|
(5)
|
|
7,850
|
|
15%
|
*
|
May 31, 2019
|
|
June 30, 2019
|
|
Promissory note
|
(6)
|
|
86,567
|
|
15%
|
*
|
June 26, 2019
|
|
June 26, 2020
|
|
Promissory note
|
(9)
|
|
79,104
|
|
15%
|
*
|
September 24, 2019
|
|
June 24, 2020
|
|
Promissory note
|
(13)
|
|
12,000
|
|
15%
|
*
|
January 30, 2020
|
|
January 30, 2021
|
|
Promissory note
|
(15)
|
|
11,000
|
|
15%
|
*
|
February 27, 2020
|
|
February 27, 2021
|
|
Promissory note
|
(16)
|
|
5,000
|
|
15%
|
*
|
April 16, 2020
|
|
April 16, 2021
|
|
Promissory note
|
(17)
|
|
13,000
|
|
15%
|
*
|
May 12, 2020
|
|
May 12, 2021
|
|
Promissory note
|
(18)
|
|
43,500
|
|
15%
|
*
|
May 22, 2020
|
|
May 22, 2021
|
|
Promissory note
|
(19)
|
|
85,000
|
|
15%
|
*
|
June 2, 2020
|
|
June 2, 2021
|
|
Promissory note
|
(23)
|
|
62,000
|
|
15%
|
*
|
June 9, 2020
|
|
June 9, 2021
|
|
Promissory note
|
(24)
|
|
31,000
|
|
15%
|
*
|
June 12, 2020
|
|
June 12, 2021
|
|
Promissory note
|
(25)
|
|
50,000
|
|
15%
|
*
|
June 16, 2020
|
|
June 16, 2021
|
|
Promissory note
|
(26)
|
|
42,000
|
|
15%
|
*
|
April 3, 2020
|
|
April 3, 2021
|
|
Promissory note
|
(20)
|
|
27,697
|
|
20%
|
*
|
August 13, 2020
|
|
August 13, 2021
|
|
Promissory note
|
(22)
|
|
—
|
|
20%
|
|
September 8, 2020
|
|
September 8, 2021
|
|
Promissory note
|
(27)
|
|
—
|
|
20%
|
|
September 15, 2020
|
|
September 15, 2022
|
|
Promissory note
|
(28)
|
|
300,000
|
|
10%
|
|
October 6, 2020
|
|
March 6, 2023
|
|
Promissory note
|
(29)
|
|
150,000
|
|
12%
|
|
November 12, 2020
|
|
November 12, 2023
|
|
Promissory note
|
(30)
|
|
110,000
|
|
12%
|
|
November 23, 2020
|
|
October 23, 2022
|
|
Promissory note
|
(31)
|
|
65,000
|
|
15.5%
|
|
November 23, 2020
|
|
November 23, 2023
|
|
Promissory note
|
(32)
|
|
300,000
|
|
15%
|
|
December 10, 2020
|
|
December 10, 2023
|
|
Promissory note
|
(33)
|
|
82,500
|
|
12%
|
|
December 10, 2020
|
|
December 10, 2023
|
|
Promissory note
|
(34)
|
|
3,921,168
|
|
12%
|
|
December 10, 2020
|
|
December 10, 2023
|
|
Promissory note
|
(35)
|
|
3,054,338
|
|
12%
|
|
December 10, 2020
|
|
December 10, 2023
|
|
Promissory note
|
(36)
|
|
165,605
|
|
12%
|
|
December 14, 2020
|
|
December 14, 2023
|
|
Promissory note
|
(37)
|
|
310,375
|
|
12%
|
|
December 14, 2020
|
|
December 14, 2023
|
|
Promissory note
|
(38)
|
|
—
|
|
12%
|
|
December 30, 2020
|
|
December 30, 2023
|
|
Promissory note
|
(39)
|
|
350,000
|
|
12%
|
|
December 31, 2021
|
|
December 31, 2024
|
|
Promissory note
|
(40)
|
|
25,000
|
|
12%
|
|
December 31, 2021
|
|
December 31, 2024
|
|
Promissory note
|
(41)
|
|
145,000
|
|
12%
|
|
January 14, 2021
|
|
January 14, 2024
|
|
Promissory note
|
(42)
|
|
550,000
|
|
12%
|
|
February 22, 2021
|
|
February 22, 2022
|
|
Promissory note
|
(43)
|
|
1,650,000
|
|
12%
|
|
March 1, 2021
|
|
March 1, 2022
|
|
Promissory note
|
(10)
|
|
6,000,000
|
|
12%
|
|
March 23, 2021
|
|
March 23, 2022
|
|
Promissory note
|
(11)
|
|
—
|
|
0%
|
|
March 23, 2021
|
|
March 23, 2022
|
|
Promissory note
|
(12)
|
|
—
|
|
0%
|
|
June 8, 2021
|
|
June 8, 2022
|
|
Promissory note
|
(44)
|
|
2,750,000
|
|
12%
|
|
July 12, 2021
|
|
July 26, 2026
|
|
Promissory note
|
(45)
|
|
4,000,160
|
|
7%
|
|
|
|
|
|
$
|
24,823,099
|
|
|
|
Less current portion of loans payable
|
|
|
|
|
(11,293,954
|
)
|
|
|
Less discount on loans payable
|
|
|
|
|
(951,226
|
)
|
|
|
Loans payable
|
|
|
|
$
|
12,577,919
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of loans payable
|
|
|
|
$
|
11,293,954
|
|
|
|
Less discount on loans payable
|
|
|
|
|
(8,735,256
|
)
|
|
|
Current portion of loans payable, net of discount
|
|
|
|
$
|
2,558,698
|
|
|
|
- 20 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
*
|
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. The loan has been fully repaid.
|
|
|
(2)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $25,882.
|
|
|
(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.
|
|
|
(4)
|
$20,000 loan repaid during the quarter ended May 31, 2021.
|
|
|
(5)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $2,590.
|
|
|
(6)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $28,567.
|
|
|
(7)
|
$6,000 repaid during the year ended February 29, 2020.
|
|
|
(8)
|
$257,000 Canadian loan. Interest payable every calendar quarter commencing June 30, 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 favor of the lender on a first priority basis subject to the following: the lender’s security
in this respect shall be postponeable to security in favor of institutional financing obtained by RAD. Additional funding of $26,146 during
the quarter ended May 31, 2021.
|
|
|
(9)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $26,104.
|
|
|
(10)
|
The unsecured note may be pre-payable at any time. Cash proceeds of $5,400,000 were received. The note balance
of $6,000,000 includes an original issue discount of $600,0000 and was issued with a warrant to purchase 300,000,000 shares at an exercise
price of $0.135 per share with a 3-year term and having a relative fair value of $4,749,005 using Black-Scholes with assumptions described
in note 14. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to
their respective values, a debt discount of $4,749.005 with a corresponding adjustment to paid in capital for the relative value of the
warrant. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $190,438 and $228,363,
respectively with an unamortized discount of $5,120,643 at August 31, 2021.
|
|
|
(11)
|
In exchange for 28 Series F preferred shares, the Company issued a noninterest bearing unsecured loan for
$2,545,900. A fair value of the loan of $2,267,768 was determined with a debt discount off $278,132. For the three months and six months
ended August 31, 2021, the Company recorded amortization expense of $1,524 and $54,102, respectively with an unamortized discount of $0
at August 31, 2021. On June 2, 2021 the Company exchanged the $2,545,900 debt having a net book value of $2,321,870 for 39,167,693 common
shares having a fair value of $2,177,724. The Company recorded a gain on settlement of debt of $144,146.
|
|
|
(12)
|
In exchange for 55 Series F preferred shares, the Company issued a noninterest bearing unsecured loan for
$5,000,875. A fair value of the loan of $4,465,067 was determined with a debt discount off $535,808. For the three months and six months
ended August 31, 2021, the Company recorded amortization expense of $2,936 and $107,162, respectively with an unamortized discount of
$0 at August 31, 2021. On June 2, 2021 the Company exchanged the $5,000,875 debt having a net book value $4,572,229 for 76,936,539 common
shares having a fair value of 4,277,672. The Company recorded a gain on settlement of debt of $294,557.
|
|
|
(13)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $3,000.
|
- 21 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(15)
|
The note may be pre-payable at any time. The note balance includes an original issue discount
of $2,450.
|
|
|
(16)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $1,200.
|
|
|
(17)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $3,850.
|
|
|
(18)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $8,000.
|
|
|
(19)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $15,000.
|
|
|
(20)
|
$ 40,000 CDN loan, both principal and interest are due at maturity, if unpaid there is a 10% penalty on unpaid
balance. By consent of all parties, lender may convert balance into Class F shares at $6,739 USD per share.
|
|
|
(21)
|
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. $25,000 repaid during the year. Repaid in full.
|
|
|
(22)
|
$ 60,000 CDN loan, principal is due at maturity, interest is payable commencing the third month after the
loan over the remaining 10 months. If principal or interest unpaid there is a 10% penalty on unpaid balance. By consent of all parties,
lender may convert balance into Class F shares at $6,739 USD per share. Total loan of $44,183 (in $USD) and related accrued interest paid
during the quarter ended May 31, 2021.
|
|
|
(23)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $12,000.
|
|
|
(24)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $6,000.
|
|
|
(25)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $10,000.
|
|
|
(26)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $7,000.
|
|
|
(27)
|
$10,000 CDN loan, principal is due at maturity, interest is payable monthly commencing the third month after
the loan over the remaining 10 months. If principal or interest unpaid there is a 10% penalty on unpaid balance. By consent of all parties,
lender may convert balance into Class F shares at $6,739 USD per share. Total loan of $7,381 (in $USD) and related accrued interest paid
during the quarter ended May 31, 2021.
|
|
|
(28)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $50,000.
Interest payable monthly, principal due at maturity. Secured by a general security charging all of RAD’s present and after-acquired
property.
|
|
|
(29)
|
Principal and interest repayable in 28 monthly instalments commencing December 6, 2020, the first 6 months
at $2,000 per month, the remaining 22 payments at $ 8,500 per month. Secured by revenue earning devices.
|
|
|
(30)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $10,000 and
was issued with a warrant to purchase 70,000,000 shares at an exercise price of $0.00165 per share, with a 3-year term and having a relative
fair value of $41,176. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity
according to their respective values, a debt discount of $41,176 with a corresponding adjustment to paid in capital. For the three months
and six months ended August 31, 2021, the Company recorded amortization expense of $2,860 and $$5,470, respectively with an unamortized
discount of $42,859 at August 31, 2021.
|
|
|
(31)
|
Principal and interest repayable in 21 monthly instalments commencing December 6, 2020 of $4,060 commencing
February 21, 2021. Secured by revenue earning devices.
|
- 22 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(32)
|
The note may be pre-payable at any time. The note balance includes an original issue discount
of $25,000 and was issued with a warrant to purchase 230,000,000 shares at an exercise price of $0.00165 per share with a 3-year term
and having a relative fair value of $125,814. The discounts are being amortized over the term of the loan. After allocating these charges
to debt and equity according to their respective values, a debt discount of $125,814 with a corresponding adjustment to paid in capital
for the relative value of the warrant. For the three months and six months ended August 31, 2021, the Company recorded amortization expense
of $7,999 and $15,244, respectively with an unamortized discount of $128,556 at August 31, 2021.
|
|
|
(33)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of 7,500 and
was issued with a warrant to purchase 100,000,000 shares at an exercise price of $0.002 per share with a 3-year term and having a relative
fair value of $54,545. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity
according to their respective values, a debt discount of $54,545 with a corresponding adjustment to paid in capital for the relative value
of the warrant. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $2,207 and $4,051,
respectively with an unamortized discount of $56,519 at August 31, 2021.
|
|
|
(34)
|
This promissory note was issued as part of a debt settlement as disclosed in Note 8 whereby $2,683,357 in
convertible notes and associated accrued interest of $1,237,811 totaling $3,921,168 was exchanged for this promissory note of $3,921,168,
and a warrant to purchase 450,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a relative fair
value of $990,000. This note is secured by a general security charging all of the Company’s present and after-acquired property.
|
|
|
(35)
|
This promissory note was issued as part of a debt settlement as disclosed in Note 9 whereby $1,460,794 in
convertible notes and associated accrued interest of $1,593,544 totaling $3,054,338 was exchanged for this promissory note of $3,054,338,
and a warrant to purchase 250,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a relative fair
value of $550,000. This note is secured by a general security charging all of the Company’s present and after-acquired property.
|
|
|
(36)
|
This promissory note was issued as part of a debt settlement as disclosed in Note 9 whereby $103,180 in convertible
notes and associated accrued interest of $62,425 totaling $165,605 was exchanged for this promissory note of $165,605, and a warrant to
purchase 80,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a fair value of $176,000.
|
|
|
(37)
|
This promissory note was issued as part of a debt settlement as disclosed in Note 8 whereby $235,000 in convertible
notes and associated accrued interest of $75,375 totaling $310,375 was exchanged for this promissory note of $310,375, and a warrant to
purchase 25,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a fair value of $182,500.
|
|
|
(38)
|
This promissory note was issued as part of a debt settlement as disclosed in Note 9 whereby $100,000 in convertible
notes and associated accrued interest of $37,589 totaling $137,589 was exchanged for this promissory note of $192,625. Loan fully repaid
at May 31,2021.
|
|
|
(39)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $35,000 and
was issued with a warrant to purchase 50,000,000 shares at an exercise price of $0.025 per share with a 3-year term and having a relative
fair value of $271,250. The discounts are being amortized over the term of the
loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $271,250 with a corresponding
adjustment to paid in capital for the relative fair value of the warrant. For the three months and six months ended August 31, 2021, the
Company recorded amortization expense of $5,652 and $9,927, respectively with an unamortized discount of $294,203 at August 31, 2021.
|
|
|
(40)
|
This promissory note was issued as part of a debt settlement as disclosed in Note 9 whereby $9,200 in convertible
notes and associated accrued interest of $6,944 totaling $16,144 was exchanged for this promissory note of $25,000. This note is secured
by a general security charging all of the Company’s present and after-acquired property.
|
- 23 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(41)
|
This promissory note was issued as part of a debt settlement as disclosed in Note 9 whereby $79,500
in convertible notes and associated accrued interest of $28,925 totaling $108,425 was exchanged for this promissory note of $145,000.
This note is secured by a general security charging all of the Company’s present and after-acquired property.
|
|
|
(42)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $250,000
and was issued with a warrant to purchase 50,000,000 shares at an exercise price of $0.025 per share with a 3-year term and having a relative
fair value of $380,174. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity
according to their respective values, a debt discount of $380,174 with a corresponding adjustment to paid in capital. For the three months
and six months ended August 31, 2021, the Company recorded amortization expense of $12,879 and $23,458, respectively with an unamortized
discount of $401,998 at August 31, 2021.
|
|
|
(43)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $150,000
and was issued with a warrant to purchase 100,000,000 shares at an exercise price of $0.135 per share with a 3-year term and having a
relative fair value of $1,342,857. The discount and warrant are being amortized over the term of the loan. After allocating these charges
to debt and equity according to their respective values, a debt discount of $1,342,857 with a corresponding adjustment to paid in capital
for the relative fair value of the warrant. For the three months and six months ended August 31, 2021, the Company recorded amortization
expense of $16,039 and $27,595 with an unamortized discount of $1,464,983 at August 31, 2021.
|
|
|
(44)
|
The note may be pre-payable at any time. The note balance includes an original issue discount of $50,000 and
was issued with a warrant to purchase 170,000,000 shares at an exercise price of $0.064 per share with a 3-year term and having a relative
fair value of $2,035,033 using Black-Scholes with assumptions described in note 14. The discounts are being amortized over the term of
the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $2,035,033 with a
corresponding adjustment to paid in capital. For the three months and six months ended August 31, 2021, the Company recorded amortization
expense of $135,404 with an unamortized discount of $2,149,630 at August 31, 2021.
|
|
|
(45)
|
This loan was in exchange for 184 Series F preferred shares from a former director. The interest and principal
are payable at maturity. The loan is unsecured.
|
13. DERIVATIVE LIABILITIES
As of August 31, 2021, 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 $7,299.
The Company estimated the fair value of the derivative
liabilities using the multinomial lattice model using the following key assumptions during the three months ended August 31, 2021:
Schedule of derivative liabilities using
the Monte-Carlo
Strike price
|
$0.04 - $0.026
|
Fair value of Company common stock
|
$0.6320 - $0.4285
|
Dividend yield
|
0.00%
|
Expected volatility
|
125.3% - 107.7%
|
Risk free interest rate
|
0.15% - 0.13%
|
Expected term (years)
|
0.5 - 0.32
|
During the three months ended August 31, 2021, and
2020, the Company released $503,500 and $1,560,733, and respectively, of the Company’s derivative liability to equity due to the
conversions of principal and interest on the associated notes and other debt settlements.
During the six months ended August 31, 2021, and 2020,
the Company released $503,500 and $1,728,231, and respectively, of the Company’s derivative liability to equity due to the conversions
of principal and interest on the associated notes and other debt settlements.
- 24 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The changes in the derivative liabilities (Level 3
financial instruments) measured at fair value on a recurring basis for the three months ended August 31, 2021 were as follows:
Schedule of level 3 financial instruments
Balance as of February 28, 2021
|
$
|
444,466
|
|
Reduction of derivative liability due to debt settlement
|
|
(503,500
|
)
|
Derivative discount on loan amendment
|
|
438,835
|
|
Change in fair value of derivative liabilities
|
|
(372,502
|
)
|
Balance as of August 31, 2021
|
$
|
7,299
|
|
14. STOCKHOLDERS’ EQUITY (DEFICIT)
Summary of Preferred Stock Activity
Series E Preferred Stock
During the six months ended August 31, 2021 Series
F shareholders had the following activity:
|
-
|
A shareholder cancelled 100 Class E shares. The company recorded an adjustment to paid in capital.
|
Series F Preferred Stock
During the six months ended August 31, 2021 Series
F shareholders had the following activity:
|
-
|
40 Series F Preferred Shares and a warrant to purchase 367 Series F Preferred Shares with a five-year
term and an exercise price of $1.00 were issued to an investor in exchange for amending their deferred variable payment obligation agreement
as disclosed in Note 8. The company attributed a fair value based on recent transactions for the Series F Preferred stock and warrants
of $33,015,214 and recorded a loss on settlement of debt with a corresponding adjustment to paid in capital.
|
|
|
|
|
-
|
The warrant holder exercised warrant to acquire 38 Series F Preferred Shares.
|
|
|
|
|
-
|
The shareholder above converted 78 Series F Preferred Shares into 316,345,908 common shares.
|
|
|
|
|
-
|
Two Series F Preferred shareholders exchanged 83 Series F Preferred Shares for two promissory notes as disclosed
in point (11) and (12) in Note 12 on March 23, 2021. The notes are non-interest bearing, have a one-year maturity and total $7,546,775.
These notes were subsequently exchanged on June 2, 2021 for a total of 116,104.232 common shares.
|
|
|
|
|
-
|
On July 12, 2021, the former director agreed to surrender his remaining 184 Series F preferred shares in exchange
for a note payable from the Company of $4,000,160 bearing interest at 7% per annum with a 5 year term, maturing July 12, 2026.
|
|
|
|
|
-
|
On August 24, 2021the Series F preferred warrant holder agreed to not exercise his warrant privileges on his
remaining 329 warrant shares before September 1, 2023.
|
Summary of Preferred Stock Warrant Activity
|
|
Number of Series F Preferred Warrants
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Years
|
|
|
|
|
|
|
|
Outstanding at March 1, 2021
|
|
—
|
|
—
|
|
—
|
Issued
|
|
367
|
|
$1.00
|
|
5.00
|
Exercised
|
|
(38
|
)
|
$1.00
|
|
5.00
|
Forfeited and cancelled
|
|
—
|
|
—
|
|
—
|
Outstanding at August 31, 2021
|
|
329
|
|
$1.00
|
|
4.75
|
- 25 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On August 23, 2021, the Company filed amended
Series F preferred shares such that Series F preferred shares are not convertible into common stock by a holder until (A) August
23, 2023 or (B) the date on which such a conversion may be required for the purpose of (i) uplisting the Company to a new stock
exchange, or (ii) selling more than 50% of the Company’s assets.
Summary of Common Stock Activity
During the six months ended August 31, 2021 common
shareholders had the following activity:
|
-
|
A Series F Preferred shareholder converted 78 Series F Preferred Shares for 316,345,998 common
shares.
|
|
|
|
|
-
|
holders of certain convertible notes payable elected to convert a total of $825,000 of principal
and $71,955 accrued interest, and $1,750 of fees into 31,042,436 shares of common stock.
|
|
|
|
|
-
|
in June 2021, lenders (see note 12) exchanged debt having a face value of $7,546,775 and a net
book value of $6,894,099 for 116,104,232 common shares having a fair value of $6,455,396. A gain on settlement of debt of $438,703 was
recorded.
|
|
|
|
|
-
|
the company entered into an investor relations contract whereby 2,100,000 shares are issuable
as of August 31, 2021. Stock based compensation of $109,200 was recorded in the period ended August 31, 2021.
|
Summary of Common Stock Warrant Activity
|
|
Number of Warrants
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Years
|
|
|
|
|
|
|
|
Outstanding at March 1, 2021
|
|
619,523,492
|
|
$0.0295
|
|
2.81
|
Issued
|
|
470,000,000
|
|
$0.109
|
|
2.77
|
Exercised
|
|
(311,000,000
|
)
|
$0.0003
|
|
2.23
|
Forfeited and cancelled
|
|
—
|
|
—
|
|
—
|
Outstanding at August 31, 2021
|
|
778,523,492
|
|
$0.0875
|
|
2.51
|
For both the three and six months ended August 31,
2021 and August 31, 2020, the Company recorded a total of $1,200,550 and $0, respectively, to stock-based compensation for options and warrants
with a corresponding adjustment to additional paid-in capital.
During the six months ended August 31, 2021 warrant
holders had the following activity:
|
-
|
warrant holders exercised warrants to acquire 311,000,000 shares on a cashless basis for 300,251,671
common shares with a corresponding adjustment to paid in capital.
|
|
|
|
|
-
|
in conjunction with debt disclosed in Note 12 (44), the Company issued warrants to a lender to purchase 170,000,000
shares at an exercise price of $0.064 per share with a 3-year term and having a relative fair value of $2,035,033 and in in conjunction
with debt disclosed in Note 12 (10), the Company issued warrants to a lender to purchase 300,000,000 shares at an exercise price of $0.135
per share with a 3-year term and having a relative fair value of $4,749,005 both using the Black-Scholes model with assumptions described
below:
|
Strike price
|
$0.135 - $0.0064
|
Fair value of Company’s common stock
|
$0.146 - $0.0071
|
Dividend yield
|
0.00%
|
Expected volatility
|
411.0% - 409.5%
|
Risk free interest rate
|
0.32% - 0.27%
|
Expected term (years)
|
3.00
|
- 26 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summary of Common Stock Option Activity
On April 9, 2021 the Company entered into an Employment
Agreement with Chief Executive Officer, Steven Reinharz with three year term under the following terms whereby stock option awards will
be granted if certain conditions are met :
|
-
|
A stock option award (option 1) will be granted to the employee to purchase 10,000,000 shares
at an exercise price of $ $0.15 per share if the trading share price of the Company reaches an average of $0.30 per share for ten days
over a 30 day trading period.
|
|
|
|
|
-
|
A stock option award (option 2) will be granted to the employee to purchase 30,000,000 shares at an exercise
price of $ $0.25 per share if the trading share price of the Company reaches an average of $0.50 per share for ten days over a 30 day
trading period.
|
|
|
|
|
-
|
On July 12, 2021 the Company and CEO amended the April 9, 2021 Employment Agreement effective July 1, 2021
whereby the following objectives and awards were added to the two existing ones:
|
|
Objective #3:
|
Sales in any fiscal quarter exceed the total sales in fiscal year 2021 for the first time.
|
|
|
|
|
Award #3:
|
Five hundred (500) shares of Series G preferred stock.
|
|
|
|
|
Objective #4:
|
One hundred fifty (150) devices are deployed in the marketplace.
|
|
|
|
|
Award #4:
|
Two hundred fifty (250) shares of Series G preferred stock.
|
|
|
|
|
Objective #5:
|
Year-to-date sales at any point in fiscal year 2022 exceed One Million Dollars ($1,000,000).
|
|
|
|
|
Award #5:
|
Two hundred fifty (250) shares of Series G preferred stock.
|
|
|
|
|
Objective #6:
|
The price per share of common stock has increased to and maintains a price of Ten Cents ($0.10) or more for
ten (10) days in a thirty (30) day period.
|
|
|
|
|
Award #6:
|
Two hundred fifty (250) shares of Series G preferred stock.
|
|
|
|
|
Objective #7:
|
The price per share of common stock has increased to and maintains a price of Twenty Cents ($0.20) or more
for ten (10) days in a thirty (30) day period.
|
|
|
|
|
Award #7:
|
Five hundred (500) shares of Series G preferred stock.
|
|
|
|
|
Objective #8:
|
The RAD 3.0 products are launched into the marketplace by November 30, 2022.
|
|
|
|
|
Award #8:
|
Five hundred (500) shares of Series G preferred stock.
|
|
|
|
|
Objective #9:
|
RAD receives an order for fifty (50) units from a single customer.
|
|
|
|
|
Award #9:
|
Five hundred (500) shares of Series G preferred stock.
|
The fair value the first two awards was obtained
through the use of the Monte Carlo method was $69,350
with a charge to stock- based compensation and a corresponding charge to paid in capital. The fair value of the remaining rewards
was determined by calculating the vesting amounts of each reward and totaled $1,022,000 with a charge to stock-based compensation
and a corresponding charge to incentive compensation plan payable.
On April 14, 2021, the Shareholders of Series E Preferred
Stock and the Board of Directors of our Company (“Board”) approved and adopted the 2021 Incentive Stock Plan (the “2021
Plan”).
- 27 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The purpose of the 2021 Plan is to promote the success
of the Company by authorizing incentive awards to retain Directors, executives, selected Employees and Consultants, and reward participants
for making major contributions to the success of the Company. The 2021 Plan authorizes the granting of stock options, restricted stock,
restricted stock units, stock appreciation rights and stock awards. A total of five million (5,000,000) shares of common stock may be
issued under the 2021 Plan. All awards under the 2021 Plan, whether vested or unvested, are subject to the terms of any recoupment, clawback
or similar policy of the Company in effect from time to time, as well as any similar provisions of applicable law, which could in certain
circumstances require repayment or forfeiture of awards or any shares of stock or other cash or property received with respect to the
awards, including any value received from a disposition of the shares acquired upon payment of the awards. The 2021 Plan will be administered
by the Board or any Committee authorized by the Board, if applicable, which will have the sole authority to, among other things: construe
and interpret the 2021 Plan; make rules and regulations relating to the administration of the 2021 Plan; select participants; and establish
the terms and conditions of awards, all in accordance with the terms of the 2021 Plan. The 2021 Plan will remain in effect until April
14, 2031, unless sooner terminated by the Board. Termination will not affect awards then outstanding.
15. 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 March 2021, the Company settled with former landlords
for $30,000. The Company had accrued $62,552 at February 28, 2021. A gain on settlement of debt of $32,552 was recorded.
In April 2019 the principals of WeSecure filed a lawsuit
against the Company in California Superior Court seeking a total of $199,358 plus attorney’s fees and damages. The total included
claims for the non-payment of a balance from the sale of WeSecure assets to the Company, unpaid consulting fees payable to the two principals
of WeSecure, and labor code violations. In June 2019, the parties settled all claims for $180,000, payable in 14 monthly installments,
and a full release. The $122,000 balance owing at February 28, 2021 was paid in full on March 17, 2021.
The related legal costs are expensed as incurred.
Purchase Commitment
On August 15 ,2021 the Company entered into a memorandum
of understanding with Ghost Robotics whereby the Company will modify and resell a Ghost Robotics (“Ghost”) product (“V50”) in development in exchange for the following:
|
-
|
the Company will pay Ghost a non refundable marketing fee of $500,000 with $100,000 payable September
1, 2021 with the remaining $400,000 to be paid in instalments of $40,000 per month over the following 10 months commencing October 1,
2021.
|
|
|
|
|
-
|
the Company will purchase $85,000 of other Ghost products for research and development purposes. This amount
will be credited against future purchases of 6 V50’s that the Company will modify and resell.
|
|
|
|
|
-
|
Ghost agrees not to sell it’s V50 to three specific customers for a three-year period commencing after
the first commercial sales of the V50.
|
|
|
|
|
-
|
the Company will be re-brand their modified version of the V50 and be responsible for its testing and support.
|
- 28 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Operating Lease
On December 18, 2020, the Company entered into a 15-month
lease agreement for office space at 18009 Sky Park Circle Suite E, Irvine CA, 92614, commencing on December 18, 2020 through to March
31, 2022 with a minimum base rent of $3,859 per month. The Company paid a security deposit of $3,859.
On March 10, 2021, the Company entered into a 10-year
lease agreement for a manufacturing facility at 10800 Galaxie Avenue, Ferndale, Michigan, 48220, commencing on May 1, 2021 through to
April 30, 2031 with a minimum base rent of $15,880 per month. The base rent increase by 3% per annum commencing May 1, 2024. The Company
paid a security deposit of $15,880.
Maturity of Lease Liabilities
|
Operating
Leases
|
|
August 31, 2022
|
$
|
234,571
|
|
August 31, 2023
|
|
207,558
|
|
August 31, 2024
|
|
207,558
|
|
August 31, 2025
|
|
207,558
|
|
August 31, 2026
|
|
207,558
|
|
August 31, 2027 and after
|
|
968,604
|
|
Total lease payments
|
|
2,033,407
|
|
Less: Interest
|
|
(753,368
|
)
|
Present value of lease liabilities
|
$
|
1,280,039
|
|
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. Penalties earned through
August 31, 2021 have been recorded in these financial statements.
15. EARNINGS (LOSS) PER SHARE
The net income (loss) per common share amounts were
determined as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
|
August 31,
|
|
August 31,
|
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) available to common shareholders
|
|
$
|
(4,832,373
|
)
|
$
|
(9,018,241
|
)
|
$
|
(40,737,291
|
)
|
$
|
(7,042,965)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of common stock equivalents:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: interest expense on convertible debt
|
|
|
38,345
|
|
|
588,817
|
|
|
63,299
|
|
|
999,966
|
|
Add Penalty interest on convertible debt
|
|
|
—
|
|
|
445,277
|
|
|
—
|
|
|
445,277
|
|
Add (less) loss (gain) on change of derivative liabilities
|
|
|
193,063
|
|
|
7,170,785
|
|
|
372,502
|
|
|
4,327,294
|
|
Net income (loss) adjusted for common stock equivalents
|
|
|
(4,600,965
|
)
|
|
(813,362
|
)
|
|
(40,301,490
|
)
|
|
(1,270,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares – basic
|
|
|
3,890,453,905
|
|
|
200,780,577
|
|
|
3,689,985,691
|
|
|
101,158,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic
|
|
$
|
(0.00
|
)
|
$
|
(0.04
|
)
|
$
|
(0.01
|
)
|
$
|
(0.07
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares – diluted
|
|
|
3,890,453,905
|
|
|
200,780,577
|
|
|
3,689,985,691
|
|
|
101,158,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – diluted
|
|
$
|
(0.00
|
)
|
$
|
(0.04
|
)
|
$
|
(0.01
|
)
|
$
|
(0.07
|
)
|
- 29 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The anti-dilutive shares of common stock equivalents
for the three and six months ended August 31, 2021 and August 31, 2020 were as follows:
|
|
For the Three Months Ended
|
|
For the Six Months Ended
|
|
|
August 31,
|
|
August 31,
|
|
|
2021
|
|
2020
|
|
2021
|
|
2020
|
Convertible notes and accrued interest
|
|
2,782,614
|
|
3,610,181,585
|
|
2,782,614
|
|
3,610,181,585
|
Convertible Class F Preferred shares
|
|
13,783,685,333
|
|
1,828,604,242
|
|
13,783,685,333
|
|
1,828,604,242
|
Stock options and warrants
|
|
818,523,492
|
|
—
|
|
818,523,492
|
|
—
|
Total
|
|
14,604,991,439
|
|
5,438,785,827
|
|
14,604,991,439
|
|
5,438,785,827
|
16. SUBSEQUENT EVENTS
Subsequent to August 31, 2021 through to October
15, 2021:
|
-
|
On September 2, 2021 the Company filed a Form S-3 statement indicating its intention to issue
a public offering of shares of its securities in a prospectus for an aggregate value of $30,000,000. The prospectus describes the general
terms of these securities and the general manner in which these securities will be offered. The Company will provide the specific terms
of these securities in supplements to this prospectus. The prospectus supplements will also describe the specific manner in which these
securities will be offered and may also supplement, update or amend information contained or incorporated by reference in this prospectus.
The Company may offer these securities in amounts, at prices and on terms determined at the time of offering.
|
|
|
|
|
-
|
On September 15, 2021 the Company and GHS Investments, LLC (“the investor”) entered into a share
purchase agreement whereby the investor would purchase up to $10,000,000 of the Company’s common stock over the next year. The investor
would receive 112.5% of the purchased shares at a price of 90% of the lowest volume weighted average price over the five
days prior to purchase date. Pursuant to this agreement the investor has so far acquired 44,193,332 common shares for net proceeds
of $1,257,175.
|
|
|
|
|
-
|
On September 14, 2021 the Company entered into a promissory note for $1,650,000 with cash proceeds of $1,500,000
and an original issue discount of $150,000. The loan bears interest at 12% per annum and matures on September 14, 2024. Along with the
note the lender received a warrant to purchase 250,000,000 shares of common stock at an exercise price of $0.037 per share and a three
year term.
|
|
|
|
|
-
|
On September 15, 2021 the Company and White Lion Capital , LLC (“White Lion”) entered into a share
purchase agreement whereby the investor would purchase up to $10,000,000 of the Company’s common stock over the next year. The purchase
price of the common stock is 92% of the lowest volume weighted average price over the three days prior to purchase date. The
Company will pay $3,000 for each purchase transaction to cover clearing costs. Pursuant to this agreement on October 7, 2021
the investor acquired 49,000,000 common shares for expected net proceeds of $1,182,640.
|
|
|
|
|
-
|
In September 2021 the Company repaid to its Chief Executive Officer approximately $800,000 in
deferred salary and associated interest.
|
- 30 -
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of our financial condition
and results of operations for the three months and six months ended August 31, 2021 and August 31, 2020 should be read in conjunction
with our unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our
discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans,
objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these
forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our
Annual Report on Form 10-K for the year ended February 28, 2021, as filed on June 1, 2021 with the SEC. We use words such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,” and similar
expressions to identify forward-looking statements.
Unless expressly indicated or the context requires
otherwise, the terms “AITX”, the “Company”, “we”, “us”, and “our” refer to
Artificial Intelligence Technology Solutions Inc.
Overview
AITX was incorporated in Florida on March 25, 2010.
AITX reincorporated into Nevada on February 17, 2015. AITX’s fiscal year end is February 28 (February 29 during leap year). AITX
is located at 10800 Galaxie Ave., Ferndale Michigan, 48220, and our telephone number is 877-767-6268.
AITX’s mission is to apply Artificial Intelligence
(AI) technology to solve enterprise problems categorized as expensive, repetitive, difficult to staff, and outside of the core competencies
of the client organization.
A short list of basic examples include:
|
1.
|
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.
|
|
|
|
|
2.
|
Integrated hardware/software with AI-driven responses, simulating and expanding on what legacy or manned solutions
could perform.
|
|
|
|
|
3.
|
Automation of common access control functions through technology utilizing facial recognition and machine
vision, leapfrogging most legacy solutions in use today.
|
RAD solutions are unique because they:
|
1.
|
Start with an AI-driven autonomous response utilizing cellular-optimized communications, while
easily connecting to a human operator for a manned response, as needed.
|
|
|
|
|
2.
|
Use unique hardware purpose-built by RAD for delivery of these solutions. Various form factors have been customized
to deliver this new functionality.
|
|
|
|
|
3.
|
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.
|
- 31 -
Management Discussion and Analysis
Results of Operations for the Three Months Ended
August 31, 2021 and 2020
The following table shows our results of operations
for the three months ended August 31, 2021 and 2020. The historical results presented below are not necessarily indicative of the results
that may be expected for any future period.
Revenue
|
|
Period
|
|
Change
|
|
|
|
Three Months
Ended
August 31, 2021
|
|
Three Months
Ended
August 31, 2020
|
|
Dollars
|
|
Percentage
|
|
Revenues
|
|
$
|
141,572
|
|
$
|
76,082
|
|
$
|
65,490
|
|
86%
|
|
Gross profit
|
|
|
99,618
|
|
|
40,071
|
|
|
59,547
|
|
149%
|
|
Operating expenses
|
|
|
3,383,990
|
|
|
707,969
|
|
|
2,676,021
|
|
378%
|
|
Loss from operations
|
|
|
(3,284,372
|
)
|
|
(667,898
|
)
|
|
(2,616,474
|
)
|
392%
|
|
Other income (expense), net
|
|
|
(1,548,001
|
)
|
|
(8,350,343
|
)
|
|
6,802,342
|
|
(81%
|
)
|
Net loss
|
|
$
|
(4,832,373
|
)
|
$
|
(9,018,241
|
)
|
$
|
4,185,868
|
|
(46%
|
)
|
The following table presents revenues from contracts
with customers disaggregated by product/service:
|
|
Three Months
Ended
|
|
Three Months
Ended
|
|
Change
|
|
|
|
August 31, 2021
|
|
August 31, 2020
|
|
Dollars
|
|
Percentage
|
|
Device rental activities
|
|
$
|
123,375
|
|
$
|
73,082
|
|
$
|
50,293
|
|
69%
|
|
Direct sales of goods and services
|
|
|
18,197
|
|
|
3,000
|
|
|
15,197
|
|
507%
|
|
|
|
$
|
141,572
|
|
$
|
76,082
|
|
$
|
65,490
|
|
86%
|
|
Total revenue for the three-month period ended August
31, 2021 was $141,572 which represented an increase of $65,490 compared to total revenue of $76,082 for the three months ended August
31, 2020. This large increase is a result of increases in rental activities and training revenue as the Company continues to grow its
business.
Gross profit
Total gross profit for the three-month period ended
August 31, 2021 was $99,618 which represented an increase of $59,547, compared to gross profit of $40,071 for the three months ended August
31, 2020. The increase resulted primarily from the increased revenues noted above. The gross profit % of 70% for the three-month period
ended August 31, 2021 was slightly higher than the margin of 53% for the prior year’s corresponding period due to the shift in sales
mix, specifically higher training revenue in 2021.
Operating Expenses
|
|
Period
|
|
Change
|
|
|
|
Three Months
Ended
August 31, 2021
|
|
Three Months
Ended
August 31, 2020
|
|
Dollars
|
|
Percentage
|
|
Research and development
|
|
$
|
699,292
|
|
$
|
108,678
|
|
$
|
590,614
|
|
543%
|
|
General and administrative
|
|
|
2,590,920
|
|
|
564,078
|
|
|
2,026,842
|
|
359%
|
|
Depreciation and amortization
|
|
|
47,691
|
|
|
30,360
|
|
|
17,331
|
|
57%
|
|
Operating lease cost and rent
|
|
|
75,212
|
|
|
4,300
|
|
|
70,912
|
|
1649%
|
|
(Gain) loss on disposal of fixed assets
|
|
|
(29,125
|
)
|
|
553
|
|
|
(29,678
|
)
|
5367%
|
|
Operating expenses
|
|
$
|
3,383,990
|
|
$
|
707,969
|
|
$
|
2,676,021
|
|
378%
|
|
- 32 -
Our operating expenses were comprised of general and administrative expenses,
research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile
expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the three-month period ended
August 31, 2021 and August 31, 2020, were $3,383,990 and $707,969, respectively. The overall increase of $2,676,021 was primarily attributable
to the following changes in operating expenses of:
●
|
General and administrative expenses increased by $2,026,842. In comparing the three
months ended August 31, 2021 and August 31, 2020 this significant increase was primarily due to increases in production supplies by
$182,579, professional fees by $29,967, wages and salaries $590,820, stock-based compensation $1,131,260, and travel $116,203 and
with the remaining increase distributed amongst other G&A accounts. These large increases may be explained due to the large ramp
up in costs this fiscal year to operate the new manufacturing facility and the hiring of 18 additional full-time employees. In
addition, the expenses of the prior year’s corresponding quarter were also much lower due to the Covid 19 pandemic and the
limited cash available at that time.
|
|
|
●
|
Research and development increased by $590,614 due to funding development of new products as well as upgrades
of existing products.
|
|
|
●
|
Depreciation and amortization increased by $17,331
due to increases in fixed assets and revenue earning devices.
|
|
|
●
|
Operating lease cost and rent increased by $70,912 due to the two new leases including three months of the
new manufacturing facility for the three months ended August 31, 2021 as compared to a month-to-month lease of only office space for the
three months ended August 31, 2020.
|
|
|
●
|
(Gain) loss on disposal of fixed assets increase by $29,678 due to a vehicle sold this current quarter.
|
Other Income (Expense)
Other income (expense) during the three months ended
August 31, 2021 and August 31, 2020, was ($1,548,001) and ($8,350,343), respectively. The $6,802,342 decrease in other expense was primarily
attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt.
●
|
In comparing the three months ended August 31, 2021 and the three months ended August 31, 2020,
the change in fair value of derivative liabilities increased by $7,363,848 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 as well as reductions in derivative liability as a result
of settlements on the underlying 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 as well as the significant reduction in convertible debt and accrued interest that occurred at
the end of fiscal 2021.
|
|
|
●
|
Interest expense increased by $634,215 due to a significant increase loans payable, most significantly new
loans totaling over $18 million , including loans from the Series F preferred share exchanges, and other debt exchanges.
|
|
|
●
|
Gain on settlement of debt was $72,709 for the quarter
ended August 31, 2021 and nil in the prior year’s quarter. The
Debt exchange for common shares was partially offset
by a loss on the convertible debt amendment which resulted in an overall gain this quarter.
|
Net loss
We had a net loss of $4,832,373 for the three months ended August 31, 2021,
compared to a net loss of $9,018,241 for the three months ended August 31, 2020. The change is primarily the result of the change in fair
value of derivative liabilities and other items discussed above.
- 33 -
Results of Operations for the Six Months Ended
August 31, 2021 and 2020
The following table shows our results of operations
for the six months ended August 31, 2021 and 2020. The historical results presented below are not necessarily indicative of the results
that may be expected for any future period.
Revenue
|
|
Period
|
|
Change
|
|
|
|
Six Months
Ended
August 31, 2021
|
|
Six Months
Ended
August 31, 2020
|
|
Dollars
|
|
Percentage
|
|
Revenues
|
|
$
|
701,906
|
|
$
|
139,403
|
|
$
|
562,503
|
|
404%
|
|
Gross profit
|
|
|
549,026
|
|
|
94,102
|
|
|
454,924
|
|
483%
|
|
Operating expenses
|
|
|
5,984,944
|
|
|
1,100,731
|
|
|
4,884,213
|
|
444%
|
|
Loss from operations
|
|
|
(5,435,918
|
)
|
|
(1,006,629
|
)
|
|
(4,429,289
|
)
|
440%
|
|
Other income (expense), net
|
|
|
(35,301,373
|
)
|
|
(6,036,336
|
)
|
|
(29,265,037
|
)
|
485%
|
|
Net loss
|
|
$
|
(40,737,291
|
)
|
$
|
(7,042,965
|
)
|
$
|
(33,694,326
|
)
|
478%
|
|
The following table presents revenues from contracts
with customers disaggregated by product/service:
|
|
Six Months
Ended
|
|
Six Months
Ended
|
|
Change
|
|
|
|
August 31, 2021
|
|
August 31, 2020
|
|
Dollars
|
|
Percentage
|
|
Device rental activities
|
|
$
|
218,081
|
|
$
|
130,203
|
|
$
|
87,878
|
|
67%
|
|
Direct sales of goods and services
|
|
|
483,825
|
|
|
9,200
|
|
|
474,625
|
|
5,159%
|
|
|
|
$
|
701,906
|
|
$
|
139,403
|
|
$
|
562,503
|
|
404%
|
|
Total revenue for the six-month period ended August
31, 2021 was $701,996 which represented an increase of $562,503 compared to total revenue of 139,403 for the six months ended August 31,
2020. This large increase is a result of unit sales which includes sales of new units totaling $434,342 with the remaining increases in
training revenue. Rental activities increased by 67% as well as the Company continues to grow its business.
Gross profit
Total gross profit for the six-month period ended
August 31, 2021 was $549,026 which represented an increase of $454,924, compared to gross profit of $94,102 for the six months ended August
31, 2020. The increase resulted primarily from the increased revenues noted above. The gross profit % of 78% for the six-month period
ended August 31, 2021 was higher than the margin of 68% for the prior year’s corresponding period due to the shift in sales mix.
Operating Expenses
|
|
Period
|
|
Change
|
|
|
|
Six Months
Ended
August 31, 2021
|
|
Six Months
Ended
August 31, 2020
|
|
Dollars
|
|
Percentage
|
|
Research and development
|
|
$
|
1,333,937
|
|
$
|
190,401
|
|
$
|
1,143,536
|
|
601%
|
|
General and administrative
|
|
|
4,490,712
|
|
|
844,001
|
|
|
3,646,711
|
|
432%
|
|
Depreciation and amortization
|
|
|
85,334
|
|
|
58,476
|
|
|
26,858
|
|
46%
|
|
Operating lease cost and rent
|
|
|
104,086
|
|
|
7,300
|
|
|
96,786
|
|
1,326%
|
|
(Gain) loss on disposal of fixed assets
|
|
|
(29,125
|
)
|
|
553
|
|
|
(29,678
|
)
|
5,367%
|
|
Operating expenses
|
|
$
|
5,984,944
|
|
$
|
1,100,731
|
|
$
|
4,884,213
|
|
444%
|
|
- 34 -
Our operating expenses were comprised of general and administrative expenses,
research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile
expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the six-month period ended August
31, 2021 and August 31, 2020, were $5,984,944 and $1,100,731, respectively. The overall increase of $4,884,213 was primarily attributable
to the following changes in operating expenses of:
●
|
General and administrative expenses increased by $3,646,711. In comparing the six months
ended August 31, 2021 and August 31, 2020 this significant increase was primarily due to increases in production supplies by
$120,974, professional fees by $534,688, wages and salaries $882,904, subcontractor fees $58,812, stock-based compensation
$1,200,550,investor relations $76,000, payments under deferred variable payment obligation $134,634, duty and freight $118,921,
office expenses $79,523, advertising and promotion $37,660 , and travel $217,476 with the remaining increase distributed amongst
other G&A accounts. These large increases may be explained due to the large ramp up in costs this quarter to operate the new
manufacturing facility, the hiring of 18 additional full-time employees and the termination costs of the former director. In
addition, the expenses of the prior year’s corresponding quarter were also much lower due to the Covid 19 pandemic and the
limited cash available at that time.
|
|
|
●
|
Research and development increased by $1,143,536 due to funding development of new products as well as upgrades
of existing products.
|
|
|
●
|
Depreciation and amortization increased by $26,858 due to increases in fixed assets and revenue earning devices.
|
|
|
●
|
Operating lease cost and rent increased by $96,786 due to the two new leases including four months of the
new manufacturing facility for the six months ended August 31, 2021 as compared to a month-to-month lease of office space for the six
months ended August 31, 2020.
|
|
|
●
|
(Gain) loss on disposal of fixed assets increase by $29,678 due to a vehicle sold this current quarter.
|
Other Income (Expense)
Other income (expense) during the six months ended
August 31, 2021 and August 31, 2020, was ($35,301,373) and ($6,036,336), respectively. The $29,265,037 decrease in other income was primarily
attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt.
●
|
In comparing the six months ended August 31, 2021 and the six months ended August 31, 2020, the
change in fair value of derivative liabilities increased by $4,699,796 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 as well as reductions in derivative liability as a result
of settlements on the underlying 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 as well as the significant reduction in convertible debt and accrued interest that occurred at
the end of fiscal 2021 and first six months of fiscal 2022.
|
|
|
●
|
Interest expense increased by $1,053,181 due to a significant increase loan payable, most significantly new
loans totaling over $18 million , including loans from the Series F preferred share exchanges, and other debt exchanges.
|
|
|
●
|
Loss on settlement of debt was $32,911,652 the quarter ended August 31, 2021 and nil in the prior year’s
quarter. The amendment of the deferred variable payment obligation referred to in Note 8 led to a $33,015,215 loss which was partially
offset by gains from accrued liabilities settlements and the debt exchange for common shares which was partially offset by a loss on the
convertible debt amendment that resulted in an overall gain this quarter. This loss on settlement of debt is non-cash and has no effect
on the cash flows of the Company.
|
Net loss
We had a net loss of $40,737,291 for the six months
ended August 31, 2021, compared to a net loss of $7,042,065 for the six months ended August 31, 2020. The change is primarily the result
of the loss on settlement in the six months ended August 31, 2021 as well as the change in the fair value of the derivative liabilities
and other items discussed above.
- 35 -
Liquidity, Capital Resources and Cash Flows
Management believes that we will continue to incur
losses for the immediate future. Therefore, we will need additional equity or debt financing until we can achieve profitability and positive
cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern.
Our unaudited condensed consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification
of liabilities that may be necessary should we be unable to continue as a going concern. For the six months ended August 31, 2021, we
have generated revenue and are trying to achieve positive cash flows from operations
As of August 31, 2021, we had a cash balance of $2,395,389,
accounts receivable of $186,435, device parts inventory of $278,427 and $6,250,160 in current liabilities. At the current cash consumption
rate, we will need to consider additional funding sources going forward. We are taking proactive measures to reduce operating expenses
and drive growth in revenue.
The successful outcome of future activities cannot
be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business
plan or generate positive operating results.
Capital Resources
The following table summarizes total current assets,
liabilities and working capital (deficit) for the periods indicated:
|
|
August 31, 2021
|
|
February 28, 2021
|
|
Current assets
|
|
$
|
3,618,161
|
|
$
|
1,207,033
|
|
Current liabilities(1)
|
|
|
6,250,160
|
|
|
4,410,710
|
|
Working capital
|
|
$
|
(2,631,999
|
)
|
$
|
(3,203,677
|
)
|
__________
(1)
|
As of August 31, 2021 and February 28, 2021, current liabilities included approximately $7,299
and $444,466, respectively, of derivative liabilities that are expected to be settled in shares of the Company in accordance with the
various conversion terms.
|
As of August 31, 2021 and February 28, 2021, we had
a cash balance of $2,395,389 and $1,044,418, respectively.