ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
__________
|
|
*
|
The indicated notes were in default as of May 31, 2019. Default interest rate 24%
|
|
|
(1)
|
The note is convertible beginning six months after the date of issuance.
|
|
|
(2)
|
The notes are convertible at a discount (as indicated) to the average market price and are accounted for and evaluated under ASC 480 as discussed in Note 3.
|
|
|
(3)
|
The conversion price is not subject to adjustment from forward or reverse stock splits.
|
During the three months ended May 31, 2019 and 2018, the Company incurred original issue discounts of $0 and $48,893, respectively, and debt discounts from derivative liabilities of $0 and $800,608, respectively, related to new convertible notes payable. These amounts are included in discounts on convertible notes payable and are being amortized to interest expense over the life of the convertible notes payable. During the three months ended May 31, 2019 and 2018, the Company recognized interest expense related to the amortization of debt discount of $483,350 and $1,133,763, respectively.
All the notes above are unsecured. As of May 31, 2019, the Company had total accrued interest payable of $1,603,086, of which $1,494,207 is classified as current and $108,879 is classified as noncurrent.
The Company determined that the embedded conversion features in the convertibles notes described below should be accounted for as derivative liabilities as a result of their variable conversion rates.
During the three months ended May 31, 2019, the Company also had the following convertible note activity:
|
|
●
|
The Company wrote of a note payable for $32,600 and related interest of $97,139. The note has matured in February 2013, the company cannot contact the lender and the note is legally prescribed. A gain on settlement of debt of $129,739 was recorded..
|
|
|
●
|
The company recorded a $32,553 penalty as increase on the 4/20/2018 note, with a corresponding charge to interest.
|
|
|
●
|
During the three months ended May 31, 2019, holders of certain convertible notes payable elected to convert a total of $135,186 of principal and $7,312 accrued interest, and $500 of fees into 171,044,703 shares of common stock. No gain or loss was recognized on conversions as they occurred within the terms of the agreement that provided for conversion.
|
12. RELATED PARTY TRANSACTIONS
For the three months ended May 31, 2019 and 2018, the Company received net advances of $67,427 and $37,309, respectively, from its loan payable-related party. At May 31, 2019, the loan payable-related party was $1,066,246 and $782,844 at February 28, 2019. At May 31, 2019, included in the balance due to the related party is $457,652 of deferred salary and interest, $274,758 of which bears interest at 12%. At February 28, 2019, included in the balance due to the related party is $352,392 of deferred salary and interest, $210,000 of which bears interest at 12%. At May 31, 2018 loan payable-related party was $353,451, including $237,696 in deferred salary with $75,000 bearing interest at 12%. The accrued interest included in loan at May 31, 2019 and May 318, 2018 was $8,950 and $2,250, respectively.
During the three months ended May 31, 2019 and 2018, the Company paid ($97,074) and $135,340, respectively in consulting fees for research and development to a company owned by a principal shareholder. The credit received in the quarter ended May 31, 2019 were a result of billing corrections of ($106,444) from the prior period and the charges in the quarter ended May 31, 2019 were $9,370.
- 18 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. OTHER DEBT – VEHICLE LOAN
In December 2016, RAD entered into a vehicle loan for $47,704 secured by the
vehicle. The loan is repayable over 5 years maturing November 9, 2021, and repayable $1,019 per month including interest and
principal. In November 2017, RAD entered into another vehicle loan secured by the vehicle for $47,661. The loan is repayable
over 5 years, maturing October 24, 2022 and repayable at $923 per month including interest and principal. The principal
repayments were $0 and $4,435 for the three months ended May 31, 2019 and 2018, respectively. Regarding the second vehicle
loan, the vehicle was returned at the end of fiscal 2019 and the car was subsequently sold by the lender for proceeds of
$21,907 which went to reduce the outstanding balance of the loan. A loss of $3,257 was recorded as well. A balance of $21,578
remains on this vehicle loan at May 31, 2019. The remaining total balances of the amounts owed on the vehicle loans were
$57,287 and $57,287 as of May 31, 2019 and February 28, 2019, respectively, of which all is current. The Company ceased
making payments of principal and interest during the year and the company will return the remaining vehicle to the financing
company for disposal in the upcoming months. The company has re-allocated the remaining vehicle from fixed assets to vehicles
for disposal at the remaining net book value of $13,251 at May 31, 2019 and February 28, 2019.
14. LOANS PAYABLE
Loans payable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Annual
|
|
|
|
|
|
|
Interest
|
|
Date
|
Maturity
|
Description
|
|
Principal
|
Rate
|
|
June 11, 2018
|
June 11, 2019
|
Promissory note
|
(3)
|
48,000
|
25%
|
*
|
June 20, 2018
|
August 20, 2018
|
Promissory note
|
|
50,000
|
20%
|
*
|
August 10, 2018
|
September 1, 2018
|
Promissory note
|
|
10,000
|
25%
|
*
|
August 16, 2018
|
August 16, 2019
|
Promissory note
|
(1)
|
22,624
|
25%
|
*
|
August 16, 2018
|
October 1, 2018
|
Promissory note
|
|
10,000
|
25%
|
*
|
August 23, 2018
|
October 20, 2018
|
Promissory note
|
|
20,000
|
20%
|
*
|
September 14, 2018
|
November 14, 2018
|
Promissory note
|
(9)
|
30,000
|
20%
|
*
|
October 10, 2018
|
December 10, 2018
|
Promissory note
|
(8)
|
7,500
|
20%
|
*
|
October 11, 2018
|
October 11, 2019
|
Promissory note
|
(10)
|
23,000
|
20%
|
|
March 19, 2019
|
December 19, 2019
|
Factoring Agreement
|
(4)
|
35,297
|
(4)
|
|
April 20, 2019
|
August 20, 2019
|
Factoring Agreement
|
(5)
|
17,491
|
(5)
|
|
December 5, 2018
|
Demand
|
Demand, unsecured
|
|
3,000
|
0%
|
|
January 31, 2019
|
June 30, 2019
|
Promissory note
|
(2)
|
78,432
|
15%
|
|
January 24, 2019
|
January 24, 2021
|
Loan
|
(11)
|
140,535
|
11%
|
|
May 9, 2019
|
June 30, 2019
|
Promissory note
|
(6)
|
7,850
|
15%
|
|
May 31, 2019
|
June 30, 2019
|
Promissory note
|
(7)
|
86,567
|
15%
|
|
|
|
|
|
590,296
|
|
|
Less current portion of loans payable
|
|
|
449,761
|
|
|
Non-current portion of loans payable
|
|
|
140,535
|
|
|
__________
|
|
*
|
Note is in default. No notice has been given by the note holder.
|
|
|
(1)
|
Repayable in 12 monthly instalments of $2,376 commencing September 16, 2018 and secured by revenue earning devices having a net book value of at least $25,000. Only one $2,376 repayment has been made by the Company and no notices have been received.
|
|
|
(2)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $25,882. Accrued interest of $2,965 has been recorded this quarter.
|
|
|
(3)
|
Repayable in 12 monthly instalments of $4,562 commencing August 11, 2018 and secured by revenue earning devices having a net book value of at least $48,000. No repayments have been made by the Company and no notices have been received. Accrued interest of $3,267 has been recorded for the quarter ended May 31, 2019
|
- 19 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
(4)
|
Total loan $50,750, repayable $303 per business day including fees and interest of $15,750. Original cash proceeds of $27,596 and $7,404 carried from previous loan less repayment of $15,453. Previous loan ending March 19, 2019 of $2,778 including additional interest and fees of $620 was repaid this quarter. The Company has pledged a security interest on all accounts receivable and banks accounts of the Company. Obligation under personal guaranty by controlling shareholder of the Company.
|
|
|
(5)
|
Total loan of $20,000, repayable $373 per business day including fees and interest of $9,800. Original proceeds of $35,000 less repayment of $12,309. The Company has pledged a security interest on all accounts receivable and banks accounts as well as all other assets of the Company. Obligation under personal guaranty by controlling shareholder of the Company.
|
|
|
(6)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $2,590.
|
|
|
(7)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $28,567.
|
|
|
(8)
|
Repayable in 10 monthly instalments of $848 commencing January 10, 2019 and secured by revenue earning devices having a net book value of at least $186,000.
|
|
|
(9)
|
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.
|
|
|
(10)
|
$20,000 repaid in quarter ended February 28, 2019.
|
|
|
(11)
|
$185,000 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 favour of the lender on a first priority basis subject to the following: the lender’s security in this respect shall be post-poneable to security in favour of institutional financing obtained by RAD. Accrued interest of $3,896 has been recorded this quarter
|
15. DERIVATIVE LIABILITIES
As of May 31, 2019, 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 $4,251,354.
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 May 31, 2019:
|
|
Strike price
|
$1.00 - $0.001
|
Fair value of Company common stock
|
$0.0055 - $0.0015
|
Dividend yield
|
0.00%
|
Expected volatility
|
341.8% - 208.2%
|
Risk free interest rate
|
1.20% - 2.58%
|
Expected term (years)
|
0.02 - 3.66
|
During the three months ended May 31, 2019, and 2018, the Company released $154,684 and $484,162, respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes.
The changes in the derivative liabilities (Level 3 financial instruments) measured at fair value on a recurring basis for the three months ended May 31, 2019 were as follows:
|
|
|
|
Balance as of February 28, 2019
|
$
|
6,170,139
|
|
Release of derivative liability on conversion of convertible notes payable
|
|
(154,684
|
)
|
Change in fair value of derivative liabilities
|
|
(1,764,101
|
)
|
Balance as of May 31, 2019
|
$
|
4,251,354
|
|
- 20 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
16. STOCKHOLDERS’ EQUITY (DEFICIT)
Summary of Common Stock Activity
On April 23, 2019 the Board of Directors approved an increase in authorized share capital to 5,000,000,000 shares of common stock and to change the par value of the common stock to $0.00001 per share. This became effective on June 20, 2019. The share capital has been retrospectively adjusted accordingly to reflect this change in par value.
On April 23, 2019 the Board of Directors were granted approval to effectuate at its sole discretion a Reverse Stock Split of the Company’s Common Stock, by a ratio of no less than 2:1 and not more than 2000:1, with such ratio to be determined at the sole discretion of the Board and with the process to effect such Reverse Split to be commenced at any time, if at all, within a period of 6 months after May 31, 2019. As of this filing no Reverse splits have been authorized by the Board of Directors.
During the three months ended May 31, 2019, the Company issued 171,044,703 shares of its common stock for the conversion of debt and related interest and fees totaling $142,998 including $135,186 for of principal, $7,312 interest, $500 in fees in connection with debt converted during the period, as well as the release of the related derivative liability (see Note 15).
Summary of Stock Option Activity
|
|
|
|
|
|
|
|
|
Number of Warrants
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Years
|
|
|
|
|
|
|
|
Outstanding at March 1, 2019
|
|
20,436,309
|
|
$ 0.01
|
|
2.56
|
Issued
|
|
—
|
|
—
|
|
—
|
Exercised
|
|
—
|
|
—
|
|
—
|
Forfeited and cancelled
|
|
—
|
|
—
|
|
—
|
Outstanding at May 31, 2019
|
|
20,436,309
|
|
$ 0.01
|
|
2.56
|
For the three months ended May 31, 2019 and May 31, 2018, the Company recorded a total of $0 and $1,752, respectively, to stock-based compensation for options and warrants with a corresponding adjustment to additional paid-in capital.
- 21 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
17. 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 April 2019 the principals of WeSecure (see Note 8) filed lawsuit in California
Superior Court seeking damages for non-payment balance of sale of WeSecure assets totaling $25,000, unpaid consulting fees
payable to the two principals through to September 2019 totaling $125,924, and labor code violations of $48,434 all
totaling $199,358 plus attorney’s fees and damages. The parties finally settled all claims with a full release
for $180,000 in June 2019 payable in 14 monthly instalments as follows:
|
|
|
|
|
|
|
2019
|
|
2020
|
|
Total
|
6/30/19
|
$5,000
|
|
1/26/2020
|
$15,000
|
|
|
7/30/19
|
$5,000
|
|
2/25/2020
|
$15,000
|
|
|
8/29/19
|
$7,500
|
|
3/26/2020
|
$15,000
|
|
|
9/28/19
|
$7,500
|
|
4/25/2020
|
$15,000
|
|
|
10/28/19
|
$10,000
|
|
5/25/2020
|
$20,000
|
|
|
11/27/19
|
$10,000
|
|
6/25/2020
|
$20,000
|
|
|
12/27/19
|
$15,000
|
|
7/24/2020
|
$20,000
|
|
|
|
|
|
|
|
|
|
Total
|
$60,000
|
|
|
$120,000
|
|
$180,000
|
The company has fully accrued the above $180,000. This liability has not been discounted as it was determined to be immaterial.
As of October 8, 2019 the Company has paid $17,500. The Company has been granted
an extension on the September 28, 2019 payment until November 8, 2019. As of filing this remains unpaid.
The related legal costs are expensed as incurred.
The Company currently maintains an office at 1218-1222 Magnolia Ave, Suite 106 Bldg. H, Corona, California 92881 pursuant to a month to month lease commencing March 1, 2019. The Company’s annual rent is $12,000 per year.
RAD maintains a mailing address for 31103 Ranch Viejo Road, Suite d2114 for a nominal fee of $ 264/yr. RAD previously had its offices at 23121 La Cadena Suite B/C Laguna Hills, California 92675, pursuant to a five-year term ending March 31, 2022. Its annual rental cost for this facility was approximately $65,000, plus a proportionate share of operating expenses of approximately $35,000 annually. The Company also leased premises in northern California. The lease was for three years, beginning in August 2017, and would expire in August 2020. The Company shared these premises with a former supplier who was the co-lessee. Through agreement with the supplier, the Company was to pay 75% of the lease costs and the supplier was to pay 25%. The Company’s share of rent costs was approximately $43,000 annually. On February 1, 2018 the Company entered into an additional lease for premises for a robotic control center. The lease ran from February 1, 2018 to January 31, 2021 for $6,600 annually. At the end of fiscal 2019 the Company terminated all three preceding leases through verbal arrangement with the landlord. Regarding the lease at La Cadena, the Company agreed to a settlement amount to cover unpaid rent, commissions and leasehold improvements paid by the landlord totaling $62,039 to be paid by the Company in 4 monthly instalments of $5,000 commencing August 1, 2019 with the remaining balance to be paid in $10,000 monthly instalments thereafter. The Company recorded the $62,039 as a loss on settlement. No further liability was recorded for both the northern California and robotic control center leases.
The Company’s leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $3,000 for the three months ended May 31, 2019 and $11,229 for the three months ended May 31, 2018.
At May 31, 2019 there were no Company’s future minimum payments.
- 22 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
18. EARNINGS (LOSS) PER SHARE
The net income (loss) per common share amounts were determined as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
May 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net income available to common shareholders
|
|
$
|
690,606
|
|
$
|
14,877,911
|
|
|
|
|
|
|
|
|
|
Effect of common stock equivalents
|
|
|
|
|
|
|
|
Add: interest expense on convertible debt
|
|
|
—
|
|
|
176,816
|
|
Add (less) loss (gain) on change of derivative liabilities
|
|
|
—
|
|
|
—
|
|
Net income (loss) adjusted for common stock equivalents
|
|
|
690,606
|
|
|
15,054,727
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares - basic
|
|
|
239,667,851
|
|
|
133,105,889
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – basic
|
|
$
|
—
|
|
$
|
0.11
|
|
|
|
|
|
|
|
|
|
Dilutive effect of common stock equivalents:
|
|
|
|
|
|
|
|
Warrants
|
|
|
—
|
|
|
1,357,411
|
|
Convertible Debt
|
|
|
9,344,919,178
|
|
|
1,781,310,333
|
|
Preferred shares
|
|
|
1,281,007,401
|
|
|
542,550,095
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares – diluted
|
|
|
10,865,594,430
|
|
|
2,458,323,728
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share – diluted
|
|
$
|
—
|
|
$
|
0.01
|
|
The anti-dilutive shares of common stock equivalents for the three months ended May 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
May 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Stock options and warrants
|
|
|
20,436,309
|
|
|
—
|
|
Convertible debt
|
|
|
—
|
|
|
—
|
|
Preferred stock
|
|
|
—
|
|
|
—
|
|
Total
|
|
|
20,436,309
|
|
|
—
|
|
- 23 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
19. SUBSEQUENT EVENTS
Subsequent to May 31, 2019:
|
|
|
|
-
|
convertible note holders converted $234,904 of principal, and $110,965 interest into 2,300,380,444 shares of the Company’s common stock.
|
|
|
|
|
-
|
the Company entered into a factoring loan on July 5, 2019 with a 4 month maturity totaling $41,700 including cash proceeds of $30,000 and $11,700 in interest and fees. Repayable $348 per business day with $10,711 repaid to date.
|
|
|
|
|
-
|
the Company entered into a factoring loan on July 22, 2019 with a 3 month maturity totaling $52,150 including cash proceeds of $35,000 and $17,150 in interest and fees Repayable $869 per business day with $19,810 repaid to date.
|
|
|
|
|
-
|
the Company entered into a factoring loan on August 2, 2019 with a 9 month maturity totaling $79,750 including cash proceeds of $31,773 and $23,727 carried forward from a previous loan and $24,750 in interest and fees. Repayable $475 per business day with $19,810 repaid to date.
|
|
|
|
|
-
|
the Company repaid $127,544 in various loans.
|
- 24 -