UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


FORM 10-Q /A

Amendment No. 1


[X]

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


FOR THE QUARTERLY PERIOD ENDED MAY 31, 2019


OR


[_]

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


FOR THE TRANSITION PERIOD FROM _______________ TO _______________


COMMISSION FILE NUMBER: 0-55079


ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(Exact name of registrant as specified in its charter)


Nevada

 

27-2343603

(State or other jurisdiction of Incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

701 North Green Valley Parkway, Suite 200
Henderson, Nevada

 

89074

(Address of principal executive offices)

 

(Zip code)


(702) 990-3271

(Registrant’s telephone number, including area code)


not applicable

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


Securities registered pursuant to Section 12(b) of the Act:  None

 

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

 

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

 

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


 

Large accelerated filer

[_]

Accelerated filer

[_]

 

Non-accelerated filer

[X]

Smaller reporting company

[X]

 

 

Emerging growth company

[_]


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

 

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


Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 3,664,686,859 shares of common stock were issued and outstanding as of November 5, 2019.




EXPLANATORY NOTE


The purpose of this Amendment No. 1 to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended May 31, 2019 (“Form 10-Q”) is to submit Exhibit 101 to the Form 10-Q in accordance with Rule 405 of Regulation S-T. Exhibit 101 consists of the Interactive Data Files from the Registrant’s Form 10-Q for the quarterly period ended May 31, 2019, filed with the Securities and Exchange Commission on November 22, 2019.


Additionally, we corrected a typographical error on page 7, NOTE 2. GOING CONCERN, which incorrectly stated accumulated deficit of $19,451,886. It is herein corrected to $18,718,588.


 

PAGE

PART I

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements

3

 

 

 

 

Condensed Consolidated Balance Sheets as of May 31, 2019 and February 28, 2019 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended May 31, 2019 and 2018 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Deficit for the Three Months Ended May 31, 2019 and 2018 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2019 and 2018 (Unaudited)

6

 

 

 

 

Notes to the Consolidated Financial Statements (Unaudited)

7

 

 

 

ITEM 2.

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

25

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

ITEM 4.

Controls and Procedures

29

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

30

 

 

 

ITEM 1A.

Risk Factors

30

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

ITEM 3.

Defaults Upon Senior Securities

30

 

 

 

ITEM 4.

Mine Safety Disclosures

30

 

 

 

ITEM 5.

Other Information

30

 

 

 

ITEM 6.

Exhibits

31

 

 

 

SIGNATURES

32


- 2 -



PART 1 – FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

May 31, 2019
(Unaudited)

 

February 28, 2019
(*)

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

21,333

 

$

21,192

 

Accounts receivable

 

 

48,987

 

 

39,964

 

Device parts inventory

 

 

246,368

 

 

273,496

 

Prepaid expenses and deposits

 

 

12,604

 

 

18,778

 

Vehicles held for disposal

 

 

13,251

 

 

13,251

 

Total current assets

 

 

342,543

 

 

366,681

 

Revenue earning devices, net of accumulated depreciation of $58,551 and $42,784 respectively

 

 

204,250

 

 

187,174

 

Fixed assets, net of accumulated depreciation of $35,154 and $29,701, respectively

 

 

31,741

 

 

37,194

 

Total assets

 

 

$578,534

 

 

$591,049

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,009,509

 

$

1,486,488

 

Advances payable

 

 

1,594

 

 

12,637

 

Balance owed WeSecure

 

 

180,000

 

 

25,000

 

Customer deposits

 

 

10,000

 

 

10,000

 

Current portion of deferred variable payment obligation

 

 

2,108

 

 

2,108

 

Current portion of convertible notes payable, net of discount of $222,828 and $718,015, respectively

 

 

5,844,400

 

 

5,484,446

 

Loan payable - related party

 

 

1,066,246

 

 

782,844

 

Current portion of loans payable

 

 

449,761

 

 

321,946

 

Vehicle loan - current portion

 

 

57,286

 

 

57,287

 

Current portion of accrued interest payable

 

 

1,494,207

 

 

1,390,706

 

Derivative liability

 

 

4,251,354

 

 

6,170,139

 

Total current liabilities

 

 

14,366,465

 

 

15,743,601

 

Convertible notes payable, net of discount of $257,808 and $302,105 respectively

 

 

307,193

 

 

262,895

 

Loans payable

 

 

140,535

 

 

140,535

 

Deferred variable payment obligation

 

 

498,892

 

 

190,392

 

Accrued interest payable

 

 

108,879

 

 

85,344

 

Vehicle loan

 

 

 

 

 

Total liabilities

 

 

15,421,964

 

 

16,422,767

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred Stock, undesignated; 15,645,650 shares authorized; no shares issued and outstanding at May 31, 2019 and February 28, 2019, respectively

 

 

 

 

 

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

 

 

4,350

 

 

4,350

 

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

 

 

3,450

 

 

3,450

 

Common Stock, $0.00001 par value; 480,000,000 shares authorized 371,306,493 and 200,261,790 shares issued and outstanding, respectively see Note-16

 

 

3,713

 

 

2,003

 

Additional paid-in capital

 

 

3,689,575

 

 

3,393,603

 

Preferred stock to be issued

 

 

174,070

 

 

174,070

 

Accumulated deficit

 

 

(18,718,588

)

 

(19,409,194

)

Total stockholders’ deficit

 

 

(14,843,430

)

 

(15,831,718

)

Total liabilities and stockholders’ deficit

 

$

578,534

 

$

591,049

 

__________

*Derived from audited information


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


- 3 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)


 

 

Three Months Ended
May 31, 2019

 

Three Months Ended
May 31, 2018

 

 

 

 

 

 

 

 

 

Revenues

 

$

40,305

 

$

16,666

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

203

 

 

4,259

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

40,102

 

 

12,407

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

Research and development

 

 

(52,153

)

 

168,630

 

General and administrative

 

 

400,091

 

 

910,967

 

Depreciation and amortization

 

 

21,218

 

 

21,853

 

Total operating expenses

 

 

369,156

 

 

1,101,450

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(329,054

)

 

(1,089,043

)

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

Change in fair value of derivative liabilities

 

 

1,764,101

 

 

17,851,893

 

Interest expense

 

 

(856,950

)

 

(2,153,084

)

Gain (loss) on settlement of debt

 

 

112,509

 

 

268,145

 

Total other income (expense), net

 

 

1,019,660

 

 

15,966,954

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

690,606

 

$

14,877,911

 

 

 

 

 

 

 

 

 

Net income ( loss) per share - basic

 

$

 

$

0.11

 

Net income (loss) per share - diluted

 

$

 

$

0.01

 

 

 

 

 

 

 

 

 

Weighted average common share outstanding - basic

 

 

239,697,851

 

 

133,105,889

 

 

 

 

 

 

 

 

 

Weighted average common share outstanding - diluted

 

 

10,865,594,430

 

 

2,458,323,728

 


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


- 4 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S DEFICIT

(Unaudited)


 

 

Series E

 

Series F

 

 

 

Additional

 

 

 

Total

 

 

 

Preferred Stock

 

Preferred Stock

 

Common Stock

 

Paid-In

 

Accumulated

 

Stockholders’

 

 

 

Shares

 

Amount

 

Shares

 

Amount

 

Shares

 

Amount

 

Capital

 

Deficit

 

Deficit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 28, 2018

 

4,350,000

 

$

4,350

 

3,450

 

$

3,450

 

1,250,600

 

$

12

 

$

1,233,300

 

$

(35,504,029

)

$

(34,262,917

)

Preferred stock payable

 

 

 

 

 

 

174,070

 

 

 

 

 

 

 

 

 

174,070

 

Adjustment to derivative liability

 

 

 

 

 

 

 

 

 

 

 

484,162

 

 

 

 

484,162

 

Common stock issued for debt conversion

 

 

 

 

 

 

 

322,563

 

 

3

 

 

335,129

 

 

 

 

335,132

 

Common Stock adjustment for reverse split

 

 

 

 

 

 

 

(554

)

 

 

 

 

 

 

 

 

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

474,712

 

 

 

 

474,712

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

14,877,911

 

 

14,877,911

 

Balance at May 31, 2018

 

4,350,000

 

$

4,350

 

3,450

 

$

177,520

 

1,572,609

 

$

15

 

$

2,527,303

 

$

(20,626,118

)

$

(17,916,930

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at February 28, 2019

 

4,350,000

 

$

4,350

 

3,450

 

$

177,520

 

200,261,790

 

$

2,003

 

$

3,393,603

 

$

(19,409,194

)

$

(15,831,718

)

Adjustment to derivative liability

 

 

 

 

 

 

 

 

 

 

 

154,684

 

 

 

 

154,684

 

Common stock issued for debt conversion

 

 

 

 

 

 

 

171,044,703

 

 

1,710

 

 

141,288

 

 

 

 

142,998

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

690,606

 

 

690,606

 

Balance at May 31, 2019

 

4,350,000

 

$

4,350

 

3,450

 

$

177,520

 

371,306,493

 

$

3,713

 

$

3,689,575

 

$

(18,718,588

)

$

(14,843,430

)


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


- 5 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


 

 

Three Months Ended
May 31, 2019

 

Three Months Ended
May 31, 2018

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income (loss)

 

$

690,606

 

$

14,877,911

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,218

 

 

21,853

 

Stock based compensation

 

 

 

 

1,752

 

Change in fair value of derivative liabilities

 

 

(1,764,101

)

 

(17,851,893

)

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

 

 

 

 

599,842

 

Amortization of debt discounts

 

 

483,350

 

 

1,319,553

 

Gain on settlement of debt

 

 

(112,509

)

 

(268,145

)

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(9,023

)

 

11,241

 

Prepaid expenses

 

 

6,174

 

 

22,609

 

Device parts inventory

 

 

 

 

6,178

 

Accounts payable and accrued expenses

 

 

(35,825

)

 

358,336

 

Accrued interest payable

 

 

287,766

 

 

223,439

 

Advances payable

 

 

(11,043

)

 

 

Net cash used in operating activities

 

 

(443,387

)

 

(677,324

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of fixed assets

 

 

(5,715

)

 

(119,576

)

Cash paid for security deposit

 

 

 

 

(75

)

Net cash used in investing activities

 

 

(5,715

)

 

(119,651

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from convertible notes payable, net

 

 

 

 

700,608

 

Proceeds from deferred variable payment obligation

 

 

308,500

 

 

 

Proceeds from loans payable

 

 

103,856

 

 

 

Repayment of loans payable

 

 

(30,540

)

 

 

Net borrowings on loan payable - related party

 

 

67,427

 

 

37,309

 

Repayment of vehicle loan

 

 

 

 

(4,435

)

Proceeds from sale of preferred shares

 

 

 

 

174,070

 

Net cash provided by financing activities

 

 

449,243

 

 

907,552

 

 

 

 

 

 

 

 

 

Net change in cash

 

 

141

 

 

110,577

 

 

 

 

 

 

 

 

 

Cash, beginning of period

 

 

21,192

 

 

24,773

 

 

 

 

 

 

 

 

 

Cash, end of period

 

$

21,333

 

$

135,350

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash and non-cash transactions:

 

 

 

 

 

 

 

Cash paid for interest

 

$

3,213

 

$

1,650

 

Cash paid for taxes

 

$

 

$

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Debt discount from derivative liabilities

 

$

 

$

800,608

 

Conversion of convertible notes and interest to shares of common stock

 

$

325,217

 

$

819,294

 

Settlement and exchange of convertible notes payable

 

$

 

$

267,245

 

Capitalization of accrued interest to convertible notes payable and loans payable

 

$

56,280

 

$

10,040

 


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


- 6 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

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 a LLC. On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc. through the issuance of 10,000 common shares to its sole shareholder.


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


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


2. GOING CONCERN


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


For the three months ended May 31, 2019, the Company had negative cash flow from operating activities of $443,387. As of May 31, 2019, the Company has an accumulated deficit of $18,718,588 , and negative working capital of $14,023,922. Management does not anticipate having positive cash flow from operations in the near future. These factors raise a substantial doubt about the Company’s ability to continue as a going concern for the twelve months following the issuance of these financial statements.


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


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


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


- 7 -



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 amended and filed on November 4, 2019. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Robotic Assistance Devices, Inc., On the Move Experience, LLC and OMV Transports, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations for the three months ended May 31, 2019 are not necessarily indicative of the results that may be expected for the entire year.


Use of Estimates


The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Estimates are used in the fair value calculation of the derivative liability, in determination of cash flows and fair value determinations in impairment testing.


Cash


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


Accounts Receivable


Accounts receivable are comprised of balances due from customers, net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances. There were no allowances provided for the three months ended May 31, 2019 and the year ended February 28, 2019.


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.


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.


- 8 -



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.


Demo Devices

 

4 years

Vehicles

 

3 years

Computer equipment

 

3 years

Office equipment

 

4 years


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 May 31, 2019 and February 28, 2019, 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 10, 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.


- 9 -



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 5 – Revenue from Contracts with Customers for additional information.


Income Taxes


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


Leases


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


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


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


Distinguishing Liabilities from Equity


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


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


Initial Measurement


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


- 10 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


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.


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

 

May 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability – conversion features pursuant to convertible notes payable

 

$

4,251,354

 

$

 

$

 

$

4,251,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability – conversion features pursuant to convertible notes payable

 

$

6,170,139

 

$

 

$

 

$

6,170,139

 


See Note 15 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.


- 11 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


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.


See additional disclosure in Note-18.


Recently Adopted Accounting Pronouncements


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


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


On March 1, 2019 the Company adopted ASU No. 2016-02, Leases (Topic 842), which is effective for public entities for annual reporting periods beginning after December 15, 2018. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company adopted ASU 2016-02 on March 1, 2019 but does not expect any material impact on the financial statements because the leases commencing March 1, 2019 are month to month.


Recently Issued 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 will adopt this March 1,  2020.


4. CORRECTION OF AN ERROR IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS


At February 28, 2019 the company corrected an error on how it was recording the issuance of warrants that were issued along with share conversions throughout the fiscal year. The Company had been recording it as a separate transaction recording the fair value of the warrants at conversion when the Company should have been including the warrants as part of the fair value of the share conversion. Accordingly $472,960 in stock based compensation was reduced for the three months ending May 31, 2018 from the results originally reported ,with a corresponding decease in paid in capital.  The comparative figures have been adjusted throughout this document to reflect this change.


The impact on the financial statements for the three months ended May 31, 2018 are as follows:


- 12 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS


 

 

Originally stated

 

 

 

Restated

 

 

 

Three Months Ended
May 31, 2018

 

Adjustment

 

Three Months Ended
May 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

16,666

 

$

 

$

16,666

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

4,259

 

 

 

 

4,259

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

12,407

 

 

 

 

12,407

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

168,630

 

 

 

 

168,630

 

General and administrative

 

 

1,383,927

 

 

(472,960

)

 

910,967

 

Depreciation and amortization

 

 

21,853

 

 

 

 

21,853

 

Total operating expenses

 

 

1,574,410

 

 

(472,960

)

 

1,101,450

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(1,562,003

)

 

472,960

 

 

(1,089,043

)

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense), net

 

 

15,966,954

 

 

 

 

15,966,954

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

14,404,951

 

$

472,960

 

$

14,877,911

 

 

 

 

 

 

 

 

 

 

 

 

Net income ( loss) per share - basic

 

$

0.11

 

 

 

$

0.11

 

Net income (loss) per share - diluted

 

$

0.01

 

 

 

$

0.01

 

 

 

 

 

 

 

 

 

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

14,404,951

 

$

472,960

 

$

14,877,911

 

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

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

21,853

 

 

 

 

21,853

 

Provision for note receivable

 

 

 

 

 

 

 

Loss on impairment of fixed assets

 

 

 

 

 

 

 

Stock based compensation

 

 

474,712

 

 

(472,960

)

 

1,752

 

Change in fair value of derivative liabilities

 

 

(17,851,893

)

 

 

 

(17,851,893

)

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

 

 

599,842

 

 

 

 

599,842

 

Amortization of debt discounts

 

 

1,319,553

 

 

 

 

1,319,553

 

Gain on settlement of debt

 

 

(268,145

)

 

 

 

(268,145

)

 

 

 

 

 

 

 

 

 

 

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

11,241

 

 

 

 

11,241

 

Deposits on robots

 

 

 

 

 

 

 

Prepaid expenses

 

 

22,609

 

 

 

 

22,609

 

Device parts inventory

 

 

6,178

 

 

 

 

6,178

 

Accounts payable and accrued expenses

 

 

358,336

 

 

 

 

358,336

 

Accrued interest payable

 

 

223,439

 

 

 

 

223,439

 

Advances payable

 

 

 

 

 

 

 

Net cash used in operating activities

 

 

(677,324

)

 

 

 

(677,324

)

 

 

 

 

 

 

 

 

 

 

 

Net cash used in investing activities

 

 

(119,651

)

 

 

 

(119,651

)

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by financing activities

 

 

907,552

 

 

 

 

907,552

 

 

 

 

 

 

 

 

 

 

 

 

Net change in cash

 

 

110,577

 

 

 

 

110,577

 

 

 

 

 

 

 

 

 

 

 

 

Cash, beginning of period

 

 

24,773

 

 

 

 

24,773

 

 

 

 

 

 

 

 

 

 

 

 

Cash, end of period

 

$

135,350

 

$

 

$

135,350

 


- 13 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


5. REVENUE FROM CONTRACTS WITH CUSTOMERS


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


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


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
May 31, 2019

 

Three Months Ended
May 31, 2018

 

Device rental activities

 

$

40,305

 

$

16,256

 

Direct sales of goods and services

 

 

 

 

410

 

 

 

$

40,305

 

$

16,666

 


6. PREPAID EXPENSES AND DEPOSITS


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


 

 

May 31, 2019

 

February 28, 2019

 

Prepaid insurance

 

$

12,604

 

$

18,778

 

 

 

$

12,604

 

$

18,778

 


7. REVENUE EARNING DEVICES


Revenue earning devices consisted of the following:


 

 

May 31, 2019

 

February 28, 2019

 

Revenue earning devices

 

$

262,801

 

$

229,958

 

Less: Accumulated depreciation

 

 

(58,551

)

 

(42,784

)

 

 

$

204,250

 

$

187,174

 


During the three months ended May 31, 2019, the Company made total additions to revenue earning devices of $32,843 including $27,128 in inventory transfers.


During the three months ended May 31, 2018, the Company made total additions to revenue earning devices of $119,576.


Depreciation expense was $15,767 and $3,209 for the three months ended May 31, 2019, and 2018 respectively.


- 14 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


8. FIXED ASSETS


Fixed assets consisted of the following:


 

 

May 31, 2019

 

February 28, 2019

 

Automobile

 

$

40,953

 

$

40,953

 

Computer equipment

 

 

20,262

 

 

20,262

 

Office equipment

 

 

5,680

 

 

5,680

 

 

 

 

66,895

 

 

66,895

 

Less: Accumulated depreciation

 

 

(35,154

)

 

(29,701

)

 

 

$

31,741

 

$

37,194

 


During the three months ended May 31, 2019 and May 31, 2018, the Company made no additions to fixed assets.


Depreciation expense was $5,453 and $15,012 for the three months ended May 31, 2019, and 2018 respectively.


9. CUSTOMER DEPOSITS


As of February 28, 2017, the Company received a $10,000 deposit from a customer towards the rental of equipment with no expected delivery, and accordingly the deposit is expected to be returned to the customer sometime in fiscal 2020.


10. 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.


On May 9, 2019 the Company entered into two similar arrangements with two investors:


 

(1)

The investor would pay up to $400,000 (including $143,556 paid in May 2019) 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.

 

 

 

 

(2)

The investor would pay up to $50,000 (including $17,444 paid in May 2019) 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.


These variable payments (Payments) are to be made 30 days after the fiscal quarter. If the Payments would deplete RAD’s available cash by more than 30%, the Payments may be deferred for up to 12 months after the quarterly report at an interest rate of 6% per annum on the unpaid amount.


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.


- 15 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


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 May 31, 2019, 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 fiscal third quarter November 30, 2019 filing. As of May 31, 2019, the Company owes the investors approximately $2,000. No amounts have been recorded to date as interest, as the amounts are immaterial. As of May 31, 2019, and February 28, 2019, the balances under these agreements were $501,000 and $192,500, respectively.


As of the date of these financial statements the investors had fully funded their commitments under the agreements.


- 16 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


11. CONVERTIBLE NOTES PAYABLE


Convertible notes payable consisted of the following:

 

 

 

 

 

 

 

 

Balance

 

Balance

 

 

 

 

Interest

 

Conversion

May 31,

 

February 28,

Issued

 

Maturity

 

Rate

 

Rate per Share

2019

 

2019

February 28, 2011

 

February 26, 2013 *

 

7%

 

$0.015

 

$—

 

$32,600

January 31, 2013

 

February 28, 2017 *

 

10%

 

$0.010

(3)

119,091

 

119,091

May 31, 2013

 

November 30, 2016 *

 

10%

 

$0.010

(3)

261,595

 

261,595

August 31, 2014

 

November 30, 2016 *

 

10%

 

$0.002

(3)

355,652

 

355,652

November 30, 2014

 

November 30, 2016 *

 

10%

 

$0.002

(3)

103,950

 

103,950

February 28, 2015

 

February 28, 2017 *

 

10%

 

$0.001

(3)

63,357

 

63,357

May 31, 2015

 

August 31, 2017*

 

10%

 

$1.000

(3)

65,383

 

65,383

August 31, 2015

 

August 31, 2017*

 

10%

 

$0.300

(3)

91,629

 

91,629

November 30, 2015

 

November 30, 2018*

 

10%

 

$0.300

(3)

269,791

 

269,791

February 29, 2016

 

February 28, 2019*

 

10%

 

60% discount

(2)

95,245

 

95,245

May 31, 2016

 

May 31, 2019*

 

10%

 

$0.003

(3)

35,100

 

35,100

July 18, 2016

 

July 18, 2017*

 

10%

 

$0.003

(3)

3,500

 

3,500

December 31, 2016

 

December 31, 2020

 

8%

 

35% discount

(2)

65,000

 

65,000

January 15, 2017

 

January 15, 2021

 

8%

 

35% discount

(2)

50,000

 

50,000

January 15, 2017

 

January 15, 2021

 

8%

 

35% discount

(2)

100,000

 

100,000

January 16, 2017

 

January 16, 2021

 

8%

 

35% discount

(2)

150,000

 

150,000

March 8, 2017

 

March 8, 2020

 

10%

 

40% discount

(2)

100,000

 

100,000

March 9, 2017

 

March 9, 2021

 

8%

 

35% discount

(2)

50,000

 

50,000

April 19, 2017

 

April 19, 2018*

 

15%

 

50% discount

(2)

96,250

 

96,250

April 26, 2017

 

April 26, 2018*

 

0%

 

$0.001

 

68

 

68

May 1, 2017

 

May 1, 2021

 

8%

 

35% discount

(2)

50,000

 

50,000

May 4, 2017

 

May 4, 2018*

 

8%

 

40% discount

(2)

131,450

 

131,450

May 15, 2017

 

May 15, 2018*

 

0%

 

$0.001

 

1,280

 

1,280

May 17, 2017

 

May 17, 2020

 

10%

 

40% discount

(1)

85,000

 

85,000

June 7, 2017

 

June 7, 2018*

 

8%

 

40% discount

(2)

156,764

 

180,964

June 16, 2017

 

June 16, 2018*

 

0%

 

$0.001

 

750

 

750

July 6, 2017

 

July 6, 2018*

 

8%

 

40% discount

(2)

200,000

 

200,000

August 8, 2017

 

August 8, 2018*

 

8%

 

40% discount

(2)

125,000

 

125,000

August 29, 2017

 

August 29, 2018*

 

15%

 

50% discount

(2)

147,500

 

147,500

October 4, 2017

 

May 4, 2018*

 

8%

 

40% discount

(2)

150,000

 

150,000

October 16, 2017

 

October 16, 2018*

 

15%

 

50% discount

(2)

175,093

 

204,067

November 22, 2017

 

November 22, 2018*

 

15%

 

50% discount

(2)

500,250

 

500,250

December 28, 2017

 

December 28, 2017*

 

10%

 

40% discount

(2)

28,150

 

28,150

December 29, 2017

 

December 29, 2018*

 

15%

 

50% discount

(2)

330,000

 

330,000

January 9, 2018

 

January 9, 2019*

 

8%

 

40% discount

(2)(1)

79,508

 

79,508

January 30, 2018

 

January 30, 2019*

 

15%

 

50% discount

(2)(1)

300,000

 

300,000

February 21, 2018

 

February 21, 2019*

 

15%

 

50% discount

(2)(1)

300,000

 

300,000

March 14, 2018

 

March 14, 2019*

 

10%

 

40% discount

(2)

50,000

 

50,000

June 7, 2017

 

June 9, 2019

 

8%

 

40% discount

(2)

200,000

 

200,000

April 9, 2018

 

April 9, 2019*

 

15%

 

50% discount

(2)

55,000

 

55,000

March 21, 2017

 

March 21, 2018*

 

8%

 

40% discount

(2)

40,000

 

40,000

April 20, 2018

 

April 20, 2019*

 

8%

 

40% discount

(2)

97,659

 

65,106

May 2, 2018

 

December 2, 2018*

 

10%

 

40% discount

(2)

70,682

 

70,682

May 4, 2018

 

May 4, 2019*

 

12%

 

50% discount

(2)

123,750

 

123,750

May 14, 2018

 

December 14, 2018*

 

10%

 

50% discount

(2)

33,542

 

33,542

May 23, 2018

 

May 23, 2019*

 

10%

 

50% discount

(2)

110,000

 

110,000

June 6, 2018

 

June 6, 2019

 

15%

 

50% discount

(2)

282,949

 

282,949

June 19, 2018

 

March 19, 2019*

 

15%

 

50% discount

(2)

87,274

 

87,274

July 6, 2017

 

June 9, 2019

 

8%

 

40% discount

(2)

200,000

 

200,000

August 1, 2018

 

August 1, 2019

 

15%

 

50% discount

(2)

32,500

 

32,500

August 23, 2018

 

August 23, 2019

 

8%

 

45% discount

(2)

70,123

 

77,435

September 13, 2018

 

June 30, 2019

 

12%

 

45% discount

(2)

9,200

 

79,500

September 17, 2018

 

March 17, 2019*

 

10%

 

50% discount

(2)

4,945

 

4,945

September 20, 2018

 

September 20, 2019

 

15%

 

50% discount

(2)

34,950

 

39,350

September 24, 2018

 

June 24, 2019

 

8%

 

40% discount

(2)

44,000

 

44,000

August 8, 2017

 

June 9, 2019

 

8%

 

40% discount

(2)

125,000

 

125,000

November 8, 2018

 

August 15, 2019

 

12%

 

45% discount

(2)

79,500

 

79,500

November 26, 2018

 

May 26, 2019*

 

10%

 

50% discount

(2)

44,799

 

44,798

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,632,229

 

6,767,461

 

 

 

 

 

 

 

 

 

 

 

Less: current portion of convertible notes payable

 

(6,067,228)

 

(6,202,461)

Less: discount on noncurrent convertible notes payable

 

(257,808)

 

(302,105)

Noncurrent convertible notes payable, net of discount

 

$307,193

 

$262,895

 

 

 

 

 

Current portion of convertible notes payable

 

$6,067,228

 

$6,202,461

Less: discount on current portion of convertible notes payable

 

(222,828)

 

(718,015)

Current portion of convertible notes payable, net of discount

 

$5,844,400

 

$5,484,446


- 17 -



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 -



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 ended May 31, 2019 and May 31, 2018 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, 2019, as filed on August 26, 2019 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


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


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


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


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


- 25 -



Results of Operations for the Three Months Ended May 31, 2019 and 2018


The following table shows our results of operations for the three months ended May 31, 2019 and 2018. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.


 

 

Period

 

Change

 

 

 

Three Months
Ended
May 31, 2019

 

Three Months
Ended
May 31, 2018

 

Dollars

 

Percentage

 

Revenues

 

$

40,305

 

$

16,666

 

$

23,639

 

142%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

40,102

 

 

12,407

 

 

27,695

 

223%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

369,156

 

 

1,101,450

 

 

(732,294

)

(66%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations  

 

 

(329,054

)

 

(1,089,043

)

 

759,989

 

(70%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

1,019,660

 

 

15,966,954

 

 

(14,947,294

)

(94%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

690,606

 

$

14,877,911

 

$

(14,187,305

)

(95%

)


Revenue


Total revenue for the three-month period ended May 31, 2019 was $40,305 which represented an increase of $23,639, compared to total revenue of $16,666 for the three months ended May 31, 2018. As the Company only began its rental activities of its new products in the quarter ended May 31, 2018 this 142% increase is a result of both a natural increase in business over time and an larger product line.


Gross profit


Total gross profit for the three-month period ended May 31, 2019 was $40,102 which represented an increase of $27,695, compared to gross profit of $12,407 for the three months ended May 31, 2018. The increase resulted primarily from the increased revenues noted above.


Operating Expenses


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 May 31, 2019 and May 31, 2018, were $369,156 and $1,101,450, respectively. The overall decrease of $732,294 was primarily attributable to the following changes in operating expenses of:


 

 

Period

 

Change

 

 

 

Three Months
Ended
May 31, 2019

 

Three Months
Ended
May 31, 2018

 

Dollars

 

Percentage

 

Research and development

 

$

(52,153

$

168,630

 

$

(220,783

)

(131%

)

General and administrative

 

 

400,091

 

 

910,967

 

 

(510,876

)

(56%

Depreciation and amortization

 

 

21,218

 

 

21,853

 

 

(635

)

(3%

)

Operating expenses

 

$

369,156

 

$

1,101,450

 

$

(732,294

)

(66%

)


- 26 -



General and administrative expenses decreased by $510,876. In comparing the three months ended May 31, 2019 and May 31, 2018 this decrease was primarily due to decreases in wages and salaries of $280,639 as the company had only one management employee in 2019 and used consultants for other duties whereas in 2018 there were 15 employees, professional fees decreased by $56,420 mostly due to a reduction in auditor fees, trade show expenses decreased by $121,953 as the Company had more trade shows in 2018 introducing new SCOT and other upcoming products, travel decreased by $38,291 and rent decreased by $30,236 due the company going from renting 3 locations in 2018 to only one new location in 2019 as disclosed in Note 16.

 

 

Research and development decreased by $220,783 due to credits received in the quarter ended May 31, 2019 that were a result of billing corrections of ($106,444) and the charges in the quarter ended May 31, 2019 were $9,370 compared to$135,340 for the prior year’s quarter. This decrease was due to less product development being done this period as in 2018 the new product line was being developed.

 

 

Depreciation and amortization decreased by $635. There were no significant changes in fixed assets.


Other Income (Expense)


Other income (expense) consisted of the change of fair value of derivative instruments and interest. Other income (expense) during the three months ended May 31, 2019 and May 31, 2018, was $1,019,660 and $15,966,954, respectively. The $14,947,294 decrease in other income was primarily attributable to the change in the fair value of derivatives, interest expense, including interest expense related to derivative liability in excess of the face value of debt) and loss on settlement of debt. Fair value of derivatives was largely affected by the decrease in the market price of the Company’s common stock during the current period.


Change in fair value of derivative liabilities decreased by $16,087,792 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock.

 

 

Interest expense decreased by $1,296,134 due to a decrease in interest expense related to the derivative liability in excess of debt and a decrease in debt discounts that was partially offset by an increase in interest expense on debt.

 

 

Gain on settlement of debt decreased by $155,636 due to a decrease in the number and amount of debt settlements this quarter over the prior year’s quarter.


Net incomes


We had net income of $690,606 for the three months ended May 31, 2019, compared to net income of $14,877,911 for the three months ended May 31, 2018. The change is primarily the result of the change in the fair value of the derivative liabilities and other items discussed above.


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 three months ended May 31, 2019, we have generated revenue and are trying to achieve positive cash flows from operations.


As of May 31, 2019, we had a cash balance of $21,333, accounts receivable of $48,987 and $14,057,239 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.


- 27 -



Capital Resources


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


 

 

May 31, 2019

 

February 28, 2018

 

Current assets

 

$

342,543

 

$

366,681

 

Current liabilities(1)

 

 

14,366,465

 

 

15,743,601

 

Working capital (deficit)

 

$

(14,023,922

)

$

(15,376,920

)

__________

(1)

As of May 31, 2019 and February 28, 2019, current liabilities included approximately $4.3 million and $6.2 million, respectively, of derivative liabilities that are expected to be settled in shares of the Company in accordance with the various conversion terms.


As of May 31, 2019 and February 28, 2019, we had a cash balance of $21,333 and $21,192, respectively.


Summary of Cash Flows


 

 

 

 

 

 

 

 

 

 

Three Months
Ended
May 31, 2019

 

Three Months
Ended
May 31, 2018

 

Net cash used in operating activities

 

$

(443,387

)

$

(677,324

)

Net cash used in investing activities

 

$

(5,715

)

$

(119,651

)

Net cash provided by financing activities

 

$

449,243

 

$

907,552

 


Net cash used in operating activities.


Net cash used in operating activities for the three months ended May 31, 2019 was $443,387, which included a net income of $690,606, non-cash activity such as the change in fair value of derivative liabilities of $1,764,101, gain on settlement of debt of $112,509, change in operating assets of $238,049, amortization of debt discount of $483,350, and depreciation and amortization of $21,218 to derive the uses of cash in operations.


Net cash used in investing activities.


Net cash used in investing activities for the three months ended May 31, 2019 was $5,715, which was the purchase of fixed assets.


Net cash provided by financing activities.


Net cash provided by financing activities was $449,243 for the three months ended May 31, 2019. This consisted of proceeds from deferred payment obligation of $308,500, proceeds from loans payable $103,856,and net borrowings from loan payable – related party of $67,427 offset by payments on loans payable of $30,540.


Off-Balance Sheet Arrangements


None.


Critical Accounting Policies and Estimates


Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K/A for the year ended February 28, 2019 filed with the SEC on August 29, 2019 and should be read in conjunction with the Original filing on Form 10-K filed with the SEC on August 26, 2019.


- 28 -



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, 2019 and February 28, 2019 there was $180,852, with $24,000 bearing interest at 12%. The accrued interest included at May 31, 2019 and February 28, 2019 was $8,950 and $13,650, respectively.


During the year 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 corrections to billing of ($106,444) from the prior period and the charges in the quarter ended May 31, 2019 were $9,370.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable for a smaller reporting company.


ITEM 4. CONTROLS AND PROCEDURES


Management’s Report on Internal Control over Financial Reporting


We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of May 31, 2019. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of May 31, 2019, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.


 

1.

As of May 31, 2019, we did not maintain effective controls over our control environment. Specifically, we have not developed and effectively communicated to our employees our accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

 

 

 

 

2.

As of May 31, 2019, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.


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


Change in Internal Controls over Financial Reporting


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


- 29 -



PART II — OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


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.


ITEM 1A. RISK FACTORS


This item is not applicable to smaller reporting companies.


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


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


ITEM 3. DEFAULTS UPON SENIOR SECURITIES


The Company has not defaulted upon senior securities.


ITEM 4. MINE SAFETY DISCLOSURES


Not applicable to the Company.


ITEM 5. OTHER INFORMATION


None.


- 30 -



ITEM 6. EXHIBITS


3.1

Articles of Incorporation (1)

 

 

3.2

Bylaws (2)

 

 

14

Code of Ethics (2)

 

 

21

Subsidiaries of the Registrant (3)

 

 

31.1

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

 

 

32.1

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

 

 

101

XBRL data files of Financial Statement and Notes contained in this Quarterly Report on Form 10-Q. (3) (4)

__________

(1)

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

 

 

(2)

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

 

 

(3)

Filed or furnished herewith.

 

 

(4)

In accordance with Regulation S-T, the Interactive Data Files in Exhibit 101 to the Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed.”


- 31 -



SIGNATURES


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


 

Artificial Intelligence Technology Solutions Inc.

 

 

 

 

Date: November 27, 2019

BY: /s/ Garett Parsons

 

Garett Parsons

 

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


- 32 -


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