ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
*
|
The indicated notes were in default as of August 31, 2020. Default interest rate 24%
|
|
|
(1)
|
The note is convertible beginning six months after the date of issuance.
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|
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(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.
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|
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(3)
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The conversion price is not subject to adjustment from forward or reverse stock splits.
|
During both the three months ended August 31, 2020 and 2019, the Company incurred original issue discounts of $0, and debt discounts from derivative liabilities of $0 related to new convertible notes payable. During the three months ended August 31, 2020 and 2019, the Company recognized interest expense related to the amortization of debt discount of $35,551 and $161,870, respectively. The Company recorded penalty interest of $445,277 and $0 during the three months ended August 31, 2020 and August 31, 2019, respectively.
During both the six months ended August 31, 2020 and 2019, the Company incurred original issue discounts of $0 and derivative discounts of $0, respectively, related to new convertible notes payable. During the six months ended August 31, 2020 and 2019, the Company recognized interest expense related to the amortization of debt discount of $94,675 and $660,100, respectively. The Company recorded penalty interest of $445,277 and $32,553 during the six months ended August 31, 2020 and August 31, 2019, respectively.
All the notes above are unsecured. As of August 31, 2020, the Company had total accrued interest payable of $3,254,967 all of which is classified as current.
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 six months ended August 31, 2020, the Company also had the following convertible note activity:
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|
●
|
The company recorded $445,277 in penalties as increases on various notes, with a corresponding charge to interest.
|
|
|
●
|
holders of certain convertible notes payable elected to convert a total of $1,337,838 of principal and $726,774 accrued interest, and $17,000 of fees into 529,611,800 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.
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9. RELATED PARTY TRANSACTIONS
For the six months ended August 31, 2019, the Company borrowed net advances of $35,738 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, 2020, the loan payable-related party was $1,386,617 and $1,310,358 at February 29, 2020. Included in the balance due to the related party at August 31, 2020 is $799,702 of deferred salary and interest, $540,000 of which bears interest at 12%. At February 29, 2020, included in the balance due to the related party is $656,334 of deferred salary and interest, $426,000 of which bears interest at 12%. The accrued interest included in loan at August 31, 2020 and August 31, 2019 was $67,090 and $34,917, respectively.
During the three and six months ended August 31, 2020 and 2019, the Company was charged $61,121 and credited $111,816, respectively for consulting fees for research and development to a company owned by a principal shareholder. During the three and six months ended August 31, 2019 the Company paid $54,222 and $(42,852), 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) and after adjusting for this, would bring total charges in the six months ended August 31, 2019 to $63,592.
- 18 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. 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 and $5,746 for the years ended February 29, 2020 and February 28, 2019, 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 both August 31, 2020 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 August 31, 2020 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, 2020 and February 28, 2020, respectively, of which all were classified as current. The Company ceased making payments of principal and interest in fiscal 2019 and the company has returned the remaining vehicles to the financing company for disposal.
11. LOANS PAYABLE
Loans payable consisted of the following:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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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
|
|
|
10,000
|
|
25%
|
*
|
August 16, 2018
|
|
August 16, 2019
|
|
Promissory note
|
(1)
|
|
12,624
|
|
25%
|
*
|
August 16, 2018
|
|
October 1, 2018
|
|
Promissory note
|
|
|
10,000
|
|
25%
|
*
|
August 23, 2018
|
|
October 20, 2018
|
|
Promissory note
|
(21)
|
|
25,000
|
|
20%
|
*
|
October 11, 2018
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|
October 11, 2019
|
|
Promissory note
|
(7)
|
|
17,000
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|
20%
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*
|
August 5, 2019
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|
March 11, 2020
|
|
Factoring Agreement
|
(4)
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|
21,250
|
(4)
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*
|
November 12, 2019
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|
August 11, 2020
|
|
Factoring Agreement
|
(10)
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|
3,292
|
(10)
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|
*
|
December 20, 2019
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|
March 5, 2020
|
|
Factoring Agreement
|
(14)
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|
7,480
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|
|
*
|
October 17, 2019
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April 29, 2020
|
|
Factoring Agreement
|
(11)
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|
—
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(11)
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|
|
September 27, 2019
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|
April 4, 2020
|
|
Factoring Agreement
|
(12)
|
|
8,857
|
(12)
|
|
*
|
January 31, 2019
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|
June 30, 2019
|
|
Promissory note
|
(2)
|
|
78,432
|
|
15%
|
*
|
January 24, 2019
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|
January 24, 2021
|
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Loan
|
(8)
|
|
151,431
|
|
11%
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|
May 9, 2019
|
|
June 30, 2019
|
|
Promissory note
|
(5)
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|
7,850
|
|
15%
|
*
|
May 31, 2019
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|
June 30, 2019
|
|
Promissory note
|
(6)
|
|
86,567
|
|
15%
|
*
|
June 26, 2019
|
|
June 26, 2020
|
|
Promissory note
|
(9)
|
|
79,104
|
|
15%
|
*
|
September 24, 2019
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|
June 24 2020
|
|
Promissory note
|
(13)
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|
12,000
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|
15%
|
*
|
January 30, 2020
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|
January 30, 2021
|
|
Promissory note
|
(15)
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|
11,000
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|
15%
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|
February 27, 2020
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|
February 27, 2021
|
|
Promissory note
|
(16)
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|
5,000
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|
15%
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|
April 16, 2020
|
|
April 16, 2021
|
|
Promissory note
|
(17)
|
|
13,000
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|
15%
|
|
May 12, 2020
|
|
May 12, 2021
|
|
Promissory note
|
(18)
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|
43,500
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|
15%
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|
May 22, 2020
|
|
May 22, 2021
|
|
Promissory note
|
(19)
|
|
85,000
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|
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)
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|
50,000
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|
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 31, 2020
|
|
August 31, 2021
|
|
Promissory note
|
(22)
|
|
44,183
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|
20%
|
|
|
|
|
|
|
|
$
|
993,267
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|
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Less current portion of loans payable
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|
|
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993,267
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|
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Non-current portion of loans payable
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|
|
|
$
|
—
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- 19 -
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.
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|
|
(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 $12,376 has been repaid by the Company and no notices have been received. Accrued interest of $1,511 has been recorded.
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|
|
(2)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $25,882.
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|
|
(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.
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|
|
(4)
|
Total loan $79,750, repayable $475 per business day including fees and interest of $25,170. Original cash proceeds of $31,353 and $23,227 carried from previous loan less repayment of $58,500, including payments of $5,775 made during the six months ended August 31, 2020. The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guaranty by the controlling shareholder of the Company.
|
|
|
(5)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $2,590.
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|
|
(6)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $28,567.
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|
|
(7)
|
$6,000 repaid during the year ended February 29, 2020.
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|
|
(8)
|
$200,000 Canadian loan. Interest payable every calendar quarter commencing June30, 2019, if unpaid accrued interest to be paid at maturity. An additional interest amount calculated as 4% of RAD revenues from SCOT rentals for the fiscal years 2020 and 2021 shall be payable March 31, 2020 and March 31, 2021, respectively. Secured by a general security charging all of RAD’s present and after-acquired property in 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. Bonus interest of 10,304 has been accrued payable March 31, 2020.
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|
|
(9)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $26,104.
|
|
|
(10)
|
Total loan of $243,639, repayable $1,509 per week including fees and interest of $60,042. Original cash proceeds of $7,877, repayment of loans (5) and (13) totaling $15,732, partial repayment of fees of $5,566 all totaling $29,175, additional advances of $88,772 with remaining $65,551 to be advanced to the company over the remaining 18 weeks. The Company has repaid a total of $148,789, including payments of $71,100 made during the six months ended August 31, 2020. The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guaranty by the controlling shareholder of the Company.
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|
|
(11)
|
Total loan of $71,000, repayable $710 per business day including fees and interest of $21,000. Original proceeds of $50,000. Loan fully repaid at August 31, 2020.
|
|
|
(12)
|
Total loan of $59,960, repayable $590 per business day including fees and interest of $19,960. Original proceeds of $40,000 less repayment of $51,103, including payments of $6,036 made during the quarter ended August 31, 2020. The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guaranty by the controlling shareholder of the Company.
|
|
|
(13)
|
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $3,000.
|
|
|
(14)
|
Total loan of $12,400, repayable $1,240 per week including fees and interest of $2,400. Original cash proceeds of $10,000, repayments of $4,920. The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guaranty by the controlling shareholder of the Company.
|
|
|
(15)
|
The note may be pre-payable at any time. The note balance includes 22% original issue discount of $2,450.
|
- 20 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
|
|
(16)
|
The note may be pre-payable at any time. The note balance includes 24% 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.
|
|
|
(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.
|
|
|
(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.
|
12. DERIVATIVE LIABILITIES
As of August 31, 2020, 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 $9,489,751.
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, 2020:
|
|
Strike price
|
$0.035 - $0.005
|
Fair value of Company common stock
|
$0.059 - $0.0065
|
Dividend yield
|
0.00%
|
Expected volatility
|
556.4% - 359.2%
|
Risk free interest rate
|
0.16% - 0.08%
|
Expected term (years)
|
0.67 - 0.25
|
During the three months ended August 31, 2020, and 2019, the Company released $1,560,733 and $228,634, respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes. During the six months ended August 31, 2020, and 2019, the Company released $1,728,231 and $383,318, 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 six months ended August 31, 2020 were as follows:
|
|
|
|
Balance as of February 28, 2020
|
$
|
6,890,688
|
|
Release of derivative liability on conversion of convertible notes payable
|
|
(1,728,231
|
)
|
Change in fair value of derivative liabilities
|
|
4,327,294
|
|
Balance as of August 31, 2020
|
$
|
9,489,751
|
|
- 21 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. STOCKHOLDERS’ EQUITY (DEFICIT)
Summary of Common Stock Activity
On March 27, 2020, the Company undertook a 10,000:1 reverse stock split and on August 24, 2018, the Company undertook a 100:1 reverse stock split. The share capital has been retrospectively adjusted accordingly to reflect this reverse stock split, except for the conversion price of certain convertible notes as the conversion price is not subject to adjustment from forward and reverse stock splits (see Note 8).
During the six months ended August 31, 2020, the Company issued 529,611,800 shares of its common stock for the conversion of debt and related interest and fees totaling $2,081,613 including $1,337,838 of principal, $726,7745 interest, $17,000 in fees in connection with debt converted during the period, as well as the release of the related derivative liability (see Note 12).
Summary of Preferred Stock Activity
On July 22, 2020 the board of directors passed a resolution whereby the sole director agreed to return for cancellation, 816 of his 1000 Series F preferred shares to the Company.
Summary of Stock Option Activity
|
|
|
|
|
|
|
|
|
Number of Warrants
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Years
|
|
|
|
|
|
|
|
Outstanding at March 1, 2020
|
|
2,043
|
|
$ 156
|
|
1.81
|
Issued
|
|
—
|
|
—
|
|
—
|
Exercised
|
|
—
|
|
—
|
|
—
|
Forfeited and cancelled
|
|
—
|
|
—
|
|
—
|
Outstanding at August 31, 2020
|
|
2,043
|
|
$ 156
|
|
1.79
|
For the six months ended August 31, 2020 and August 31, 2019, the Company recorded a total of $0 and $0, respectively, to stock-based compensation for options and warrants with a corresponding adjustment to additional paid-in capital.
- 22 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
14. 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 9) filed lawsuit in California Superior Court seeking damages for this non-payment of this balance of WeSecure assets sold totaling $25,000, unpaid consulting fees payable to the two principals through 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 at February 28, 2019.
As of August 31, 2020 the Company paid $30,500. As of this filing the October 2019 through July 2020 instalments are in arrears. The Company repaid $13,000 towards these arrears in the three months ended August 31, 2020 included in the total payments above.
The related legal costs are expensed as incurred.
Operating Lease
The Company currently maintains an office at 1218-1222 Magnolia Ave, Suite 106 Bldg. H, Corona, California 92881 pursuant to a month to month lease which commenced 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, San Juan Capistrano, California, for a nominal fee of $264/yr.
The Company’s leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. The Company has not paid but has accrued rent this quarter due to Covid-19. Rent expense was $4,300 and $7,300 for the three and six months ended August 31, 2020, respectively and $1,000 and $4,000 for the three and six months ended August 31, 2019, respectively.
At August 31, 2020 the Company had no future minimum payments.
Convertible Notes Payable
Certain convertible notes payable carry conditions whereby in the event of ant default of any condition the Company would be subject to certain financial penalties.
- 23 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
15. EARNINGS (LOSS) PER SHARE
The net income (loss) per common share amounts were determined as follows: