ITEM 1. BUSINESS
Business Overview
Artificial Intelligence Technology Solutions Inc. (formerly known as On the Move Systems Corp.) (“AITX” or the “Company”) was incorporated in Florida on March 25, 2010 and reincorporated in Nevada on February 17, 2015. On August 24, 2018, Artificial Intelligence Technology Solutions Inc., changed its name from On the Move Systems Corp (“AITX”).
Robotic Assistance Devices, LLC (“RAD”), was incorporated in the State of Nevada on July 26, 2016 as a LLC and was founded by current President Steve Reinharz. On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc. through the issuance of 10,000 common shares to its sole shareholder.
On August 28, 2017, AITX completed the acquisition of RAD (the “Acquisition”), whereby AITX acquired all the ownership and equity interest in RAD for 3,350,000 shares of AITX Series E Preferred Stock and 2,450 shares of Series F Convertible Preferred Stock. AITX’s prior business focus was transportation services, and AITX was exploring the on-demand logistics market by developing a network of logistics partnerships. As a result of the closing of the Acquisition, AITX has succeeded to the business of RAD, in which AITX purchased all the outstanding shares of capital stock of RAD. As a result, AITX’s business going forward will consist of one segment activity which is the delivery of artificial intelligence and robotic solutions for operational, security and monitoring needs.
The Acquisition was treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of AITX’s operations were disposed of as part of the consummation of the transaction. Therefore, no goodwill or other intangible assets were recorded by AITX as a result of the Acquisition. RAD is treated as the accounting acquirer as its stockholders control the Company after the Acquisition, even though AITX was the legal acquirer. As a result, the assets and liabilities and the historical operations that are reflected in these financial statements are those of RAD as if RAD had always been the reporting company.
AITX’s prior business focus was transportation services, and we were previously exploring the on-demand logistics market by seeking to develop a network of logistics partnerships. On August 28, 2017, AITX acquired all the outstanding shares of RAD . Following the RAD acquisition, the Company is focused on applying advanced artificial intelligence (AI) driven technologies, paired with multi-use hardware and supported by custom software and cloud services, to intelligently automate and integrate a variety of high frequency security, concierge and operational tasks.
RAD’s solutions are offered as a recurring monthly subscription, typically with a minimum 12 month subscription contract. RAD’s solutions earn over 75% gross margin over the life of each deployed asset. Specifically, RAD provides workflow automation solutions delivered through a system of hardware, software and cloud services. All elements of hardware and software design offered by RAD are 100% designed, developed and owned by RAD.
Mission
AITX’ mission is to apply Artificial Intelligence (AI) technology to solve enterprise problems that can be categorized as expensive, repetitive and outside of the core competencies of the prospect organization.
A short list of basic examples include:
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Typical security guard related functions such as monitoring a parking lot during and after hours and responding appropriately. This scenario applies to perimeters, interior yard areas and related similar environments.
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Integrated hardware/software with Artificial Intelligence driven responses, simulating and expanding on what legacy or manned solutions could perform.
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Automation of common access control functions through technology utilized facial recognition and machine vision, leapfrogging most legacy solutions in use today.
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RAD solutions are unique in the fact they:
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Start with an AI-driven response with the easy ability to connect to manned response.
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Use unique hardware purpose built by RAD for delivery of these solutions.
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Deliver services through RAD-developed software and cloud services, allowing enterprise IT groups to focus on core competencies instead of maintenance of complex video and security platforms.
RAD’s first industry focus is the $ 100B+ global security services market. (1)
RAD’s founder, Steve Reinharz, has 20+ years in various leadership/ownership roles in the security industry and was part of a successful exit to a global multinational security company in 2004. Mr. Reinharz has built a committed team of employees that have demonstrated tremendous productivity and self-sacrifice to advance the stated mission.
RAD’s current goal is to disrupt and capture a significant portion of both the human security guard market ($30B +) (2) and ‘physical security’ (cctv, access control, etc.) market ($20B +) through it’s innovative RAD solution ecosystem.
(1) https://www.statista.com/statistics/323113/distribution-of-the-security-services-market-worldwide/
(2) https://www.statista.com/statistics/294206/revenue-of-security-services-in-the-us/
AITX Expected Acquisitions
It is expected that AITX will acquire 2 remaining complementary companies owned by Mr. Reinharz sometime before the end of fiscal year 2020. These companies will be completely rolled into AITX as-is with no special compensation to Mr. Reinharz as setout below.
Mr. Reinharz has not taken any cash salary or earnings from RAD, AITX or any related entity since inception of the RAD in 2016.
BOLO Technologies, Inc., wholly owned by Mr. Reinharz, has had its limited assets of Intellectual Property and software formally integrated into RAD without necessity of any acquisition by RAD. BOLO created an innovative security-centric platform that integrates additional technologies to give security directors and law enforcement the easiest access to create, manage and track ‘Be On The Lookout’ (BOLO) alerts. ‘BOLO’ is a security industry term used to label interesting suspects such as disgruntled former employees, persons of interest wanted for questioning related to suspicious events and several other similar types of functions and services. BOLO Technologies will use advanced AI for data correlation and pattern matching and is focused on giving customers the ability to pre-empt, predict and prevent possible incidents. BOLO uses a service model similar to RAD’s robots-as-a-service model.
‘RAD Canada’, wholly owned by Mr. Reinharz, provides most of the Research & Development for RAD’s solutions. Specifically, all RAD hardware solutions are designed and developed by this entity as well as some firmware, software and cloud software elements. All but two RAD Canada resources have been absorbed into RAD.
AITX, with these acquisitions, will enjoy the benefits of a skilled R&D group that includes skilled industrial and software engineers plus a security-focused platform that provides unique services in high demand. Mr. Reinharz will remain President of all AITX subsidiaries.
Background - First Commercial Rugged Outdoor Security Robot
RAD was started by Mr. Reinharz in the summer of 2016. RAD originally partnered with SMP Robotics Systems Corp (SMP). and commercialized the SMP S5 Robot for the security market. RAD’s commercialization of the platform focused on integrating traditional security industry manufacturers’ solutions onto the robotics platform. After two paid Proof of Concepts for large utility companies (under NDA) and over 18 months of development and testing RAD began deployments with various Fortune 500 customers. These deployments were scheduled to begin in October 2017 but were delayed until December 2017 due to various supply chain challenges.
By March 2018 it was apparent that S5 platform promotion and development was not sustainable and RAD began to pull robots out of service.
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The Robots were rejected by customers due to unsatisfactory reliability and some technical flaws that could not be solved despite full efforts by SMP and RAD. RAD now considers this phase of the company ‘Phase 1’ into robotics. Over 40 deployments were attempted during this period.
RAD has had no contact with SMP Robotics since April 2018.
Much of RAD’s existing convertible debt was acquired in support of the RAD/SMP robotics program.
Background - RAD’s 2nd Generation Ecosystem
RAD’s primary strategy has always been to use AI technology and modern systems to transform the security industry. Mobile robots, indoor and outdoor, are a part of that strategy. However, to completely realize the delivery of these solutions a set of ’stationary robots’ required development.
These stationary robots launched in April 2018 with the Security Control and Observation Tower (SCOT, development of which began in August 2017. SCOT performs many of the same functions of a stationary human security guard, plus many features that human guards cannot perform, and at approximately 15% of the cost. There is no known comparable solution available today that blends technology, usability, special features and cost. This is why SCOT has growing demand and has received considerable accolades.
SCOT’s positive market reception reinvigorated RAD and the focus turned to accelerating the development of the software and cloud services that support SCOT.
SCOT runs on the RAD Software Suite™, as all RAD security solutions do. This software suite is a cloud and mobile solution that is the heart of RAD’s security solution.
After extraordinary efforts by the team, beta SCOT was first shown to customers in Ohio at the end of February 2018. This beta exposition was to test customer reception and receive final voice-of-the-customer input. Security representatives from Cincinnati Reds, Cincinnati Bengals, Cincinnati Police Departments and County of Hamilton Sheriff’s Department were shown this early SCOT and gave SCOT and the preliminary RAD Software Suite a tremendous endorsement. Feedback was incorporated into SCOT and ideas on SCOT derivatives were added to the hardware development roadmap.
At the ISC West show in April 2018 SCOT won three awards: (1) a SIA New Product Award for Law Enforcement/Guarding, (2) 2018 Secure Campus Award from Campus Security and Life Safety and (3) a ‘Govie’ award for government security solutions from Security Today.
(1) SIA’s New Product Showcase recognizes innovative products, services and solutions in electronic physical security, and SCOT™’s award comes in the Law Enforcement/Guarding Systems category. Technologies within the program are used in the protection of life and property in residential, commercial and institutional settings, displaying SCOT™’s importance in long-range human detection and acting as a force multiplier for safety and defense against outside threats.
(2) RAD’s pivot to SCOT and its future derivatives is complete and current facilities can produce a mix of up to 100 units per month with moderate additional investment in equipment and manpower.
RAD has not submitted for any awards since mid-2018 but expects future awards participation.
Currently Available Hardware Solutions
RAD’s hardware lineup has improved and expanded since initial launch in April 2018. RAD’s hardware lineup includes:
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’SCOT 2.0’ has replaced SCOT 1.x. SCOT 1 went through three significant upgrades over the first 12 months of launch to arrive at SCOT 1.3. SCOT 1.3 features a mature software platform and a refined hardware platform. SCOT solutions have operated with over 99% uptime since inception. ’SCOT’ is an acronym for ’Security Control and Observation Tower’. It embodies and offers the full complement of solutions driven by the RAD Cloud.
SCOT 2.0 is a SCOT 1.3 enclosed in an appealing modern enclosure. It also features additional LCD monitors (like a Wally), curved LED panels to support visibility and flexible messaging (as opposed to SCOT 1.x flat LED panels) and an advanced locking system. SCOT 2.0 is the realization of the concepts pioneered, demonstrated and tested throughout the 1.x lineup. The SCOT lineup is indoor/outdoor rated.
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All SCOT1.x units continue to perform and generate revenue for the company. There are no immediately plans to replace 1.x units with 2.0 units. SCOT 1.x units can be supported indefinitely under RAD’s software architecture. It is expected that in time these 1.x units will be applied to industrial applications where aesthetics are secondary to functionality.
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‘WALLY’ was announced in June 2018 in the Allied Universal Services, Inc., booth at the BOMA International Show in San Antonio. WALLY is a wall-mounted derivative of SCOT that is also indoor/outdoor rated. It’s designed to bring the RAD ecosystem to areas such as main lobbies, elevator lobbies, dock access areas and more.
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‘FRED’ was announced in September 2018 and is a complement to the RAD ecosystem by just focusing on various verified entry methods. Appropriate for office access and to be mounted on gate stanchions.
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‘ROSA’ was announced to specific dealers and customers in May 2019. Official general market introduction should happen by August of 2019. ROSA is an acronym for Responsive Observation Security Agent.
Software Solutions
RAD has created a variety of front-end and back-end software solutions to power its ecosystem. Customer facing software includes RADGUARD (on the touchscreens of RAD’s field devices) and RADSOC (Security Operations Center) and RADPMC (Property Management Center).
RAD has developed a variety of utilities that allow automatic over-the-air updates, most of which is within a back-end application called SCOT Manager.
RAD has written world class Visitor Management, Access Control and other applications instead of seeking to partner with legacy manufacturers. It is RAD’s opinion that the legacy paradigm in the physical space underserves the markets in terms of cost, functionality and integration.
RAD has recently integrated its own Video Management System into RADSOC that includes full integration to a variety of features related to security and properly management functions.
RAD’s ability to deliver easy to use, easy to obtain, and easy to support software, combined with custom workflow-automation applications, is the key to RAD’s value proposition.
Manufacturing & Assembly
RAD uses a variety of domestic and overseas machine shops for raw material procurement and machining of the required plastic and metal pieces that build RAD devices.
RAD’s sourcing has redundancy through use of multiple machine shops producing the same products for RAD.
There is no piece of any RAD device that can only be procured from one supplier.
RAD’s margins are based on current small batch production and assembly. Economies of scale will drive greater gross margin as quantities and efficiencies increase.
RAD’s primary assembly and configuration location is in Southern California. It is anticipated that as RAD outgrows its existing facility these functions will be moved out of state, most likely to mid-west location. RAD’s California location would remain as the West Coast Sales & Service Center.
Anticipated location for a comprehensive assembly location is Michigan. This location provides central access to RAD’s largest markets as well as easy access from RAD’s R&D center outside of Toronto, Canada.
Tariff Impact
Anticipated tariffs of 25% across all imported items, not yet in effect, would impact US production costs by an additional 10%. If this happens RAD anticipates absorbing this cost for US units but supplying Canadian demand from local Canadian production (instead of from the US).
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Roadmap
RAD anticipates two major hardware product releases in fiscal 2020.
First, RAD announced a return to the mobile unmanned ground vehicle market at the end of July 2019. This ground drone will benefit from significant innovations during the first 12 months following launch. It’s expected these advanced applications will spawn several ‘killer apps’ that will put this unit, and the RAD Ecosystem, in high demand.
Second, RAD anticipates release of an entirely new solution currently in early stage development. This new solution will become a critical component of the RAD ecosystem.
Furthermore there could be a third significant addition depending on technical and market conditions.
RAD expects to release Wally 2.0 and FRED 2.0 in fiscal 2020. These upgrades are minor.
Team and Culture
AITX has built a strong start-up culture based on performance, sacrifice and rewards. RAD begins every interview with a review of the eight elements that comprise RAD Culture and candidates are encouraged to understand that this is not a traditional company. As a startup RAD faces challenges of limited resources and time and as such, the team members are open to multitasking and wearing multiple hats, as the situation demands, thus allowing the management team to focus on the larger goals and steer the company in the right direction. Our solid RAD team, all share in the same beliefs and core values of the Company; so we easily adjust to changes thus giving RAD an edge in the market. The core team really determines the fate of a company and RAD is no stranger to the difficulties that face a startup, such as unexpected setbacks, delays in funding or a cash crunch. At RAD the whole team has pitched in, doing whatever they can, from working to meet tight deadlines; or willing partaking in financial sacrifices; to assisting where and whenever needed, creating a core team willing to standby the company through the testing times.
RAD’s culture has provided strength throughout the difficult period of robot deployments and the transition to 2nd generation solutions.
Market Environment
RAD experience has proved that the security market is ripe for disruption. Having captured the interest of many Fortune 500 companies (names generally protected under NDA) including Microsoft, Verizon, Boeing, Lockheed Martin, among many others, no other known company has the solutions, distribution channel, reputation, sales or support model to rival RAD in the near term.
Furthermore, the launch of RAD’s mobile solutions will create additional significant distance between any would-be competitors. RAD will be a one-stop shop for proven and comprehensive mobile and stationary workflow improvement devices and systems.
RAD’s technology model includes a ‘new paradigm’ for the security industry: Security in a box. Every RAD solution features connection to the RAD Software Suite which is a platform for AI processing, usage analytics, cloud served video, communications interface, audit logs and much more.
Positive market reception for RAD solutions are due to the following existing conditions:
1.
The security guard industry is characterized by poor customer satisfaction and industry consolidation. It’s self-described to be a ‘race to the bottom’ to provide the lowest cost services to end users because generally speaking end users require some security for general crime deterrent and insurance purposes. There are 1.1M security guards in the United States and the security guard industry represents over $20B in annual sales and the average security guard bill rate is $20/hour.
2.
Enterprise organizations’ security divisions/groups are continuously challenged to reduce cost. For example, Universal Parcel Service (UPS) spends over $120M/year in security guard services, Lockheed Martin over $60M/year and NBC Universal over $25M/year. The security guard industry has not had any significant disruption or innovation since inception.
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Guarding companies struggle to offer quality service at a reasonable price. Security organizations are eagerly receptive to solutions that improve performance and reduce cost.
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4.
RAD’s device rental model allows clients to immediately save significant operating costs. With RAD’s current stationary solutions retailing from under $1/hour to $5/hour we can immediately provide substantial savings and significant additional security.
5.
RAD’s services options allow end users to incorporate or fully replace their existing Security Operation Centers with RAD solutions. This integrated with RAD’s “Solutions-As-A-Service” Rental Program offers customized options to help organizations achieve operational and security goals.
The above conditions speak to the historical lack of innovation in the guarding market largely driven by the lack of development of truly revolutionary systems. This market is now positioned for major disruption with the application of AI based solutions, as lead by RAD. As such, the interest in RAD solutions has been overwhelming. Major companies, including the U.S. largest guarding company Allied Universal Services, are aligning with RAD to offer these services to their customer base.
RAD Solutions Customer Acceptance
RAD end users include one Top 10 company and many Fortune 500 companies. RAD is currently deployed in logistics, commercial real estate, healthcare and retail industries. If RAD deployed to only 5% of any one of these industries facilities the company would enjoy tremendous profitability.
Due to the nature of existing non-disclosure agreements RAD does not normally share customer lists or specific deployment details.
RAD’s batch production of SCOTs & WALLYS have all been committed prior to the completion of the production cycle, with an average delivery time of 45 days. RAD has set a goal, predicated on regular demand, to reduce delivery time to 15 days.
RAD Industry Leadership Role
Mr. Reinharz has earned a prominent role as a spokesperson for AI and change in the security industry. He has lectured and participated in several panels for some of the security industries largest events and organizations. Mr. Reinharz sits on the SIA’s Autonomous Working Group committee which is dedicated to helping shape the industry and support progressive legislation. Most recently Mr. Reinharz provided NY City’s ASIS CPP group a lecture that qualified as a continuing education credit.
RAD gets exposure to prospects, customers and investors through Mr. Reinharz’s efforts to educate the security market. Blogs and industry published articles can be found in the news section of www.roboticassistancedevices.com
It is expected that Mr. Reinharz continues his promotion of the new paradigm for the next few years until adoption is widespread.
Financing
RAD has entered into three royalty revenue agreements and taken on limited additional direct debt to sustain operations and research and development as the company drives towards positive cash flow. Furthermore Steve Reinharz has provided over an additional $250,000 plus 100% deferred earnings during this rebuilding period. Steve Reinharz has received no cash salary and has pledged to receive no salary payouts until RAD has positive cash flow. All RAD employees have also made financial contributions and sacrifices during this period of focus on profitability.
However, positive cash flow cannot fund the pace of expected deployments. As such RAD has been working on alternative funding options. The expected success and durability of RAD’s solutions, and depth and breadth of the sales funnel has attracted the attention of various asset funding companies.
RAD has engaged with one such company that has provided RAD with a term sheet for a starting line of credit up to $2,000,000. The terms provide RAD enough capital for the deployment of units that can generate annual revenue between $2,500,000 and $ 4,000,000 depending on product mix and sales channel. The company that has provided this term sheet has assured RAD that the financing can be expanded well beyond $10,000,000 under expected circumstances. RADs largest client has updated contracts required to allow this financing to take place. RAD estimates they are in the last 50% of work required to secure this financing.
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RAD is engaged in supplemental financing efforts based on existing and future streams of revenue that will provide additional non-dilutive funding to the company. As these efforts mature updates will be issued or shared in the relevant filings.
Go To Market Strategy
RAD’s strategy continues to focus on creation and support of a strong dealer channel. This affords multiple benefits to RAD with few downsides. RAD has successfully integrated through the largest US guarding company and recently signed another top 3 guarding company as a RAD dealer. Furthermore, RAD has been signing up and developing mid-sized and smaller dealers. RAD is on track to develop a focused group of dealers of which most will exclusively represent RAD solutions.
Supplemental to that RAD will, under certain circumstances, accept subscriptions directly from end users. These situations are largely characterized by the end user not having a guarding company, having a guarding company that RAD does not want as a dealer or other extenuating circumstances. RAD has no desired ratio of dealer vs direct subscriptions. Dealer subscriptions remain the primary focus.
Competition
RAD has no direct competition save for one immediate competitor and one potential competitor as disclosed in Risk factors on page 11.
RAD is considered part of the ‘drones’ category of the security industry although at RAD we consider ourselves to be in the workflow automation industry.
RAD deliberately restricts information that is public for three main reasons:
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Usually activities are covered by mutual non-disclosure agreements and RAD generally will not ask for permission to publicize customer activities.
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These are generally security applications and most companies prefer to not advertise the details of their security systems.
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Until RAD hits the ‘tipping point’ we prefer to keep our solutions stealthy to some extent so as not to give our would-be competitors tips to copy us.
It is anticipated that at some point some competition may enter the market. RAD seeks to maintain a 2+ year competitive advantage through a broad line of hardware solutions, the fastest and smoothest user interface and the strongest feature set with the most mature back-end. Furthermore RAD seeks to expand its sales staff and become the dominant incumbent in this new market that it has created.
RAD Results and Forecasts
At the time of this writing RAD has a contracted monthly run rate of over $ 30,000, the bulk of which is based on 2018 RAD pricing. RAD completed a price increase March 1, 2019 which allows positive cash flow achievement with 35% fewer deployments. Moreover, future orders that are allegedly in the final stages of customer procurement should allow RAD to achieve positive cash flow within 6 months or less.
RAD views itself as a fast growth technology company poised for exponential growth. RAD’s sales funnel is over 300 accounts strong in various stages of the sales process. Complementing that could be several hundred more accounts in progress with the dealer base that do not generally provide RAD with current or accurate sales funnel information. As an example, one dealer has shared a CRM report with over 180 accounts yet incoming subscriptions were never listed in the CRM.
Employees
As of June 7, 2019, we had 19 full-time employees and 2 contracted employees. None of our employees are represented by a union. We consider our relations with our employees to be excellent.
Legal Proceedings
See Item 3 - Legal Proceedings.
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ITEM 1A.
ITEM 1A. RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE RISKS AND UNCERTAINTIES DESCRIBED BELOW AND THE OTHER INFORMATION CONTAINED OR INCORPORATED BY REFERENCE IN THIS TRANSITIONAL REPORT ON FORM 10-K BEFORE DECIDING WHETHER TO INVEST IN THE REGISTRANT’S COMMON STOCK. ADDITIONAL RISKS AND UNCERTAINTIES NOT PRESENTLY KNOWN TO THE REGISTRANT OR THAT THE REGISTRANT CURRENTLY DEEMS IMMATERIAL MAY ALSO IMPAIR THE REGISTRANT’S BUSINESS OPERATIONS.
IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THE REGISTRANT’S BUSINESS, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE MATERIALLY ADVERSELY AFFECTED. IN SUCH CASE, THE TRADING PRICE OR THE REGISTRANT’S COMMON STOCK COULD DECLINE AND YOU MAY LOSE PART OR ALL OF YOUR INVESTMENT.
THE FOLLOWING ALSO CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. PLEASE SEE “CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS”.
Risks Related to Our Industry and Our Company
Our business is at an early stage and we have not yet generated any profits or significant revenues.
RAD was formed in 2016 and made its first sale in 2016. Accordingly, the Company has a limited operating history upon which to evaluate its performance and prospects. Our current and proposed operations are subject to all the business risks associated with new enterprises. These include likely fluctuations in operating results as the Company makes significant investments in research, development and product opportunities, and reacts to developments in its market, including purchasing patterns of customers, and the entry of competitors into the market. We cannot assure you that we will generate enough revenue to be profitable in the next three years or at all, which could lead to a loss of part or all of an investment in the Company.
We have a limited number of deployments and our success depends on an unproven market.
The market for advanced physical security technology is relatively new and unproven and is subject to a number of risks and uncertainties. In order to grow our business and extend our market position, we will need to place into service additional robots, expand our service offerings, and expand our presence. Our ability to expand the market for our products depends on a number of factors, including the cost, performance and perceived value associated with our products and services. Furthermore, the public’s perception of the use of robots to perform tasks traditionally reserved for humans may negatively affect demand for our products and services. Ultimately, our success will depend largely on our customers’ acceptance that security services can be performed more efficiently and cost effectively through the use of our robots and ancillary services, of which there can be no assurance.
We cannot assure you that we can effectively manage our growth.
RAD expects to continue hiring additional employees. The growth and expansion of our business and products create significant challenges for our management, operational, and financial resources, including managing multiple relationships and interactions with users, distributors, vendors, and other third parties. As the Company continues to grow, our information technology systems, internal management processes, internal controls and procedures and production processes may not be adequate to support our operations. To ensure success, we must continue to improve our operational, financial, and management processes and systems and to effectively expand, train, and manage our employee base. As we continue to grow, and implement more complex organizational and management structures, we may find it increasingly difficult to maintain the benefits of our corporate culture, including our current team’s efficiency and expertise, which could negatively affect our business performance.
Our costs may grow more quickly than our revenues, harming our business and profitability.
We expect our expenses to continue to increase in the future as we expand our product offerings, expand production capabilities and hire additional employees. We expect to continue to incur increasing costs, in particular for working capital to purchase inventory, marketing and product deployments as well as costs associated with customer support in the field. Our expenses may be greater than we anticipate which would have a negative impact on our financial position, assets and ability to invest further in the growth and expansion of our business.
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The loss of one or more of our key personnel, or our failure to attract and retain other highly qualified personnel in the future, could harm our business.
RAD currently depends on the continued services and performance of key members of the management team, in particular, founder and CEO, Steven Reinharz, and Chief Technology Officer, Aziz Sekander. If we cannot call upon them or other key management personnel for any reason, our operations and development could be harmed. The Company has not yet developed a succession plan. Furthermore, as the Company grows, it will be required to hire and attract additional qualified professionals such as accounting, legal, finance, production, service and engineering experts. The Company may not be able to locate or attract qualified individuals for such positions, which will affect the Company’s ability to grow and expand its business.
We have no employment agreements in place with our executive officers or directors.
We currently do not have any employment agreements in place with our only executive officer and director. Since the Company has no such agreements currently in place, there is a risk that our only executive officer and director may terminate their association with the Company. The loss of our only executive officer and director would have a material and adverse effect on our Company and our business prospects. Further, in the future, the Company may attract additional persons to serve as its executive officers and directors and may negotiate and consummate employment agreements with its executive officers and directors and such agreements may contain issuance of the Company’s securities as part of the compensation, which would lead our shareholders to experience dilution.
Because we do not currently have an audit committee, compensation committee or any other form of corporate governance committee, shareholders will have to rely on our only director, who is not independent, to perform these functions.
We do not have an audit committee, compensation committee or any form of corporate governance committees comprised of an independent director. The Board, which currently consists of our only director, performs these functions as a whole and the only member of the Board is not an independent director.
If we are unable to protect our intellectual property, the value of our brand and other intangible assets may be diminished and our business may be adversely affected.
RAD relies and expects to continue to rely on a combination of confidentiality agreements with its employees, consultants, and third parties with whom it has relationships, as well as trademark, copyright, patent, trade secret, and domain name protection laws, to protect its proprietary rights. As of the date of this report, there are no patents filed on behalf of the Company. The Company plans to file various applications in the United States for protection of certain aspects of its intellectual property. However, third parties may knowingly or unknowingly infringe our proprietary rights, may challenge proprietary rights held by us and pending and future trademark and patent applications may not be approved. In addition, effective intellectual property protection may not be available in every country in which we intend to operate in the future. In any or all of these cases, we may be required to expend significant time and expense in order to prevent infringement or to enforce our rights. Although we plan to take measures to protect our proprietary rights, there can be no assurance that others will not offer products or concepts that are substantially similar to those of RAD and compete with our business. If the protection of our proprietary rights is inadequate to prevent unauthorized use or appropriation by third parties, the value of our brand and other intangible assets may be diminished and competitors may be able to more effectively mimic our service and methods of operations. Any of these events could have an adverse effect on our business and financial results.
Our financial results will fluctuate in the future, which makes them difficult to predict.
RAD’s financial results may fluctuate in the future. Additionally, we have a limited operating history with the current scale of our business, which makes it difficult to forecast future results. As a result, you should not rely upon the Company’s past financial results as indicators of future performance. You should take into account the risks and uncertainties frequently encountered by rapidly growing companies in evolving markets. Our financial results in any given quarter can be influenced by numerous factors, many of which we are unable to predict or are outside of our control, including, but not limited to the following:
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Our ability to maintain and grow our client base;
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Our clients may suffer downturns, financial instability or be subject to mergers or acquisitions;
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The development and introduction of new products by RAD or our competitors;
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Increases in marketing, sales, service and other operating expenses that we may incur to grow and expand our operations and to remain competitive;
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RAD ability to maintain gross margins and operating margins;
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Changes affecting our suppliers and other third-party service providers;
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Adverse litigation judgments, settlements, or other litigation-related costs; and
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Changes in business or macroeconomic conditions including regulatory changes.
Our business is subject to data security risks, including security breaches.
Our products employ technologies which are subject to various data security risks including security breaches and hacking and we cannot guarantee that our products may not be negatively affected by these risks causing them to suffer damages. Any occurrence of the foregoing may damage our brand and increase our costs. Any of these events or circumstances could materially adversely affect our business, financial condition and operating results.
Economic factors generally may negatively affect our operations.
The Company is subject to the general risks of the marketplace in which the Company does business. Moreover, the results of operations of the Company will depend on a number of factors over which the Company will have no control, including changes in general economic or local economic conditions, changes in supply of or demand for similar and/or competing products and services, and changes in tax and governmental regulations that may affect demand for such products and services. Any significant decline in general economic conditions or uncertainties regarding future economic prospects that affect industrial and consumer spending could have a material adverse effect on the Company’s business. For these and other reasons, no assurance of profitable operations can be given.
Our business success depends on large part on the success of our efforts to rent our products through dealerships.
The Company plans to primarily look to rent its robots through dealerships with guarding companies. The Company believes that the guarding partnership model is valuable. The Company currently has such partnerships with 5 dealers and plans to sign on additional dealers. However, there can be no assurance that the Company can successfully secure agreements with dealerships for the use of our products, which could materially impair our sales and our business prospects.
We may not be able to develop automatic charging for our products, which could negatively affect our growth strategy.
Part of the Company’s growth strategy is to implement automatic charging for our products. The Company plans to implement autonomous charging capabilities for its products as part of its long-term efforts. The Company believes that adding this feature would allow companies to add security to areas that are either not suitable for humans or cost effective for permanent security and thus expanding the market for our products. If the Company cannot implement automatic charging for its products it would impact the size of the market for its products and could negatively affect its growth strategy.
We currently face some competition and may face additional competition in the future and if we are not able to compete effectively, our business prospects and operations would be harmed.
RAD’s re-entry into the mobile security robotics market opens the company to one immediate competitor and one potential competitor. Knightscope, Inc., states availability of one outdoor security robot called the ‘K5’ with another outdoor robotic device under development, the ‘K9’. Cobalt Robotics Inc., offers an indoor robotic device that states various security functions. It is possible that either or both of these companies create direct competition to RAD. We are aware of other companies that are already active in our industry and others that are developing physical security technology in the U.S. and abroad that may potentially compete with our technology and services. These, or new, competitors may have more resources than us or may be better capitalized, which may give them a significant advantage, for example, in offering better pricing than the Company, surviving an economic downturn or in reaching profitability. We cannot guarantee that we will be able to compete successfully against existing or emerging competitors. Additionally, existing private security firms may also compete on price by lowering their operating costs, developing new business models or providing other incentives. We cannot give any assurance that we can adequately compete with existing or new competitors which could lead us to expend additional funds toward our marketing efforts and would further adversely affect our business operations.
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Our ability to operate and collect digital information on behalf of our clients is dependent on the privacy laws of jurisdictions in which our machines operate, as well as the corporate policies of our clients, which may limit our ability to fully deploy our technologies in various markets.
Our robots collect, store and analyze certain types of personal or identifying information regarding individuals that interact with the machines. While we maintain stringent data security procedures, the regulatory framework for privacy and security issues is rapidly evolving worldwide and is likely to remain uncertain for the foreseeable future. Federal and state government bodies and agencies have in the past adopted, and may in the future adopt, laws and regulations affecting data privacy, which in turn affect the breadth and type of features that we can offer to our clients. In addition, our clients have separate internal policies, procedures and controls regarding privacy and data security with which we may be required to comply. Because the interpretation and application of many privacy and data protection laws are uncertain, it is possible that these laws may be interpreted or applied in a manner that is inconsistent with our current data management practices or the features of our products. If so, in addition to the possibility of fines, lawsuits and other claims and penalties, we could be required to fundamentally change our business activities and practices or modify our products, which could have an adverse effect on our business. Any inability to adequately address privacy and security concerns, even if unfounded, or comply with applicable privacy and data security laws, regulations, and policies, could result in additional cost and liability to us, damage our reputation, inhibit sales, and adversely affect our business. Furthermore, the costs of compliance with, and other burdens imposed by, the laws, regulations, and policies that are applicable to the businesses of our clients may limit the use and adoption of, and reduce the overall demand for, our products. Privacy and data security concerns, whether valid or not valid, may inhibit market adoption of our products, particularly in certain industries and foreign countries. If we are not able to adjust to changing laws, regulations, our business may be harmed.
Our success depends on the growth of our industry and specifically on the growing adoption and use of physical security technology in general and of our products.
The market for products and for physical security technology is relatively unproven and new, as well as being subject to many risks and uncertainties. Our ability to gain growing market acceptance and adoption of our products, depends on the market’s acceptance of physical security technology in general. If we are unable to increase acceptance of our products and if the market for physical security technology generally does not develop we will not be able to sell our products and our financial performance will be adversely affected.
Our shareholders do not have voting control over the Company due to the Company’s issued and outstanding shares of its Series E Preferred Stock.
Mr. Parsons, the Company’s President, Chief Executive Officer and Chief Financial Officer currently owns 1,000,000 shares of our Series E Preferred Stock and; Steve Reinharz is the CEO of RAD, and is currently the holder of 3,350,000 shares of our Series E Preferred Stock. The outstanding shares of Series E Preferred Stock have the right to take action by written consent or vote based on the number of votes equal to twice the number of votes of all outstanding shares of common stock. As a result, the holders of Series E Preferred Stock have 2/3rds of the voting power of all shareholders at any time corporate action requires a vote of shareholders, and therefore our other shareholders do not have voting control over the Company.
Risks Related to our Common Stock
The Company’s continued operations may be dependent on the Company raising additional capital.
To the extent that the cash flow from operations are insufficient to fund the Company’s operations, we will be required to raise additional capital through equity or debt financing. Any additional equity financing may be dilutive to shareholders, and debt financing, if available, may involve significant restrictive covenants. The Company’s failure or inability to raise capital when needed, or on terms acceptable to the Company and our shareholders, could have a material adverse effect on the Company’s business, financial condition and results of operations. There can be no assurance that such financing will be available on terms satisfactory to the Company, if at all. If we are unable to obtain such financing when needed, in addition to having an adverse effect on our business operations, it would also have a negative adverse effect on the price of our Common Stock.
The Company may conduct further offerings in the future, in which case your shareholdings will be diluted.
The Company may rely on equity sales of common stock to fund operations. The Company may conduct further equity and/or convertible debt offerings in the future to finance operations or other projects that it decides to undertake. If common stock is issued in return for additional funds, or upon conversion or exercise of outstanding convertible debentures or warrants, the price per share could be lower than that paid by existing common stockholders. The Company anticipates continuing to rely on equity sales of
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common stock and issuances of convertible debt and/or warrants convertible or exercisable into shares of common stock in order to fund its business operations. If the Company issues additional shares of common stock, your percentage interest in the Company will be lower. This is often referred to as “dilution,” which could result in a reduction in the per share value of your shares of common stock.
The trading price of our common stock may fluctuate significantly.
Volatility in the trading price of our common stock may prevent our shareholders from being able to sell their shares of our common stock at prices equal to or greater than their purchase price. The trading price of our common stock could fluctuate significantly for various reasons, including:
▪
our operating and financial performance and prospects;
▪
our quarterly or annual earnings or those of other companies in our industry;
▪
the public’s reaction to our press releases, other public announcements and filings with the Securities and Exchange Commission;
▪
changes in earnings estimates or recommendations by research analysts who track our common stock or the stock of other companies in our industry;
▪
strategic actions by us or our competitors;
▪
new laws or regulations or new interpretations of existing laws or regulations applicable to our business;
▪
changes in accounting standards, policies, guidance, interpretations or principles;
▪
changes in general economic conditions in the U.S. and global economies or financial markets, including such changes resulting from war or incidents of terrorism; and
▪
sales of our common stock by us or members of our management team.
In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a significant impact on the trading price of securities issued by many companies. The changes frequently occur irrespective of the operating performance of the affected companies. Hence, the trading price of our common stock could fluctuate based upon factors that have little or nothing to do with our business.
The Company does not anticipate paying dividends in the future.
We have never declared or paid any cash dividends on our common stock. Our current policy is to retain earnings to reinvest in our business. Therefore, we do not anticipate paying cash dividends in the foreseeable future. The Company’s dividend policy will be reviewed from time to time by the Board of Directors in the context of its earnings, financial condition and other relevant factors. Until the Company pays dividends, which it may never do, its shareholders will not be able to receive a return on shares of our common stock unless they are able to sell them, of which there can be no assurance. In addition, there is no guarantee that our common stock will appreciate in value or even maintain the price at which stockholders have purchased their shares or that our stockholders will be able to sell their shares of our common stock at all.
Our shares are subject to the Securities and Exchange Commission’s “penny stock” rules that limit trading activity in the market, which may make it more difficult for our shareholders to sell their common stock.
Penny stocks generally are equity securities with a price of less than $5.00. Since our common stock is trading at less than $5.00 per share, we are subject to the penny stock rules adopted by the Securities and Exchange Commission that require broker-dealers to deliver extensive disclosure to its customers prior to executing trades in penny stocks not otherwise exempt from the rules. The broker-dealer must also provide its customers with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction, and monthly account statements showing the market value of each penny stock held by the customer. Under the penny stock regulations, a broker-dealer selling a penny stock to anyone other than an established customer or accredited investor must make a special suitability determination regarding the purchaser and must receive the purchaser’s written consent to the transaction prior to the sale, unless the broker-dealer is otherwise exempt. Generally, an individual with a net worth in excess of $1,000,000, or annual income exceeding $200,000 individually, or $300,000 together with his or her
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spouse, is considered an accredited investor. The additional burdens from the penny stock requirements may deter broker-dealers from effecting transactions in our securities, which could limit the liquidity and market price of our securities. These disclosure requirements may cause a reduction in the trading activity of our common stock, which likely would make it difficult for our stockholders to resell their securities.
FINRA sales practice requirements may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted Rule 2111 that requires a broker-dealer to have reasonable grounds for believing that an investment is suitable for a customer before recommending the investment. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Because we are a small company with a limited operating history, stockholders may find it difficult to sell their common stock in the public markets.
The number of persons interested in purchasing our common stock s at any given time may be relatively small. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would likely be reluctant to follow an unproven company such as ours. Additionally, many brokerage firms may not be willing to effect transactions in our securities. As a consequence, there may be periods when trading activity in our common stock is minimal or even non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity. We cannot give you any assurance that an active public trading market for our common stock will develop or be sustained, or that trading levels will be sustained.
We will continue to incur significant costs to ensure compliance with United States corporate governance and accounting requirements.
We will continue to incur significant costs associated with our public company reporting requirements, costs associated with applicable corporate governance requirements, including requirements under the Sarbanes-Oxley Act of 2002 and other rules implemented by the Securities and Exchange Commission. We expect all of these applicable rules and regulations will result in significant legal and financial compliance costs and to make some activities more time consuming and costly. We are currently evaluating and monitoring developments with respect to these rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.
An investment in the Company’s common stock is extremely speculative and there can be no assurance of any return on any such investment.
An investment in the Company’s common stock is extremely speculative and there is no assurance that investors will obtain any return on their investment. Investors will be subject to substantial risks involved in an investment in the Company, including the risk of losing their entire investment. The market price of our common stock is subject to significant fluctuations in response to variations in our quarterly operating results, general trends in the market and other factors, many of which we have little or no control over. In addition, broad market fluctuations, as well as general economic, business and political conditions, may adversely affect the market for our common stock, regardless of our actual or projected performance.
Our shareholders’ percentage of ownership may become diluted upon conversion of shares of our Series F convertible preferred stock, 1,000 shares of which are currently issued and outstanding and held by Garett Parsons, our President, Chief Executive Officer and Chief Financial Officer and 2,450 shares of which are currently issued and outstanding and held by Steve Reinharz, the CEO of RAD.
Garett Parsons, our President, Chief Executive Officer and Chief Financial Officer, is the current holder of 1,000 shares of the Company’s Series F Convertible Preferred Stock, and Steve Reinharz, the CEO of RAD, is currently the holder of 2,450 shares of Series F Convertible Preferred Stock. As the holders of such stock, Mr. Parsons and Mr. Reinharz, can each, at any time, convert all, but not less than all of their shares of Series F Convertible Preferred Stock into a number of fully paid and nonassessable shares of the Company’s common stock determined by multiplying the number of issued and outstanding shares of common stock of the Company on the date of conversion by three and 45 100ths (3.45). The conversion of such shares shall cause substantial dilution to the Company’s current shareholders.
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ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.
ITEM 2. PROPERTIES
We maintain our corporate offices at 1 East Liberty. 6th Floor, Reno, Nevada 89501, pursuant to a month-to-month lease. Our annual rental cost for this facility is approximately $936 annually. RAD currently maintains an office at 1218-1222 Magnolia Ave, Suite 106 Bldg. H, Corona, California 92881 pursuant to a month to month lease commencing March 1, 2019. RAD’s annual rent is $12,000 per year. RAD maintains a mailing address for 31103 Ranch Viejo Road, Suite d2114 for a nominal fee of $ 264/yr. RAD previously had its offices at 23121 La Cadena Suite B/C Laguna Hills, California 92675, pursuant to a five-year term ending March 31, 2022. Its annual rental cost for this facility was approximately $65,000, plus a proportionate share of operating expenses of approximately $35,000 annually. The Company also leased premises in northern California. The lease was for three years, beginning in August 2017, and would expire in August 2020. The Company shared these premises with a former supplier who was the co-lessee. Through agreement with the supplier, the Company was to pay 75% of the lease costs and the supplier was to pay 25%. The Company’s share of rent costs was approximately $43,000 annually. On February 1, 2018 the Company entered into an additional lease for premises for a robotic control center. The lease ran from February 1, 2018 to January 31, 2021 for $6,600 annually. At the end of fiscal 2019 the Company terminated all three preceding leases through verbal arrangement with the landlord. Regarding the lease at La Cadena, the Company agreed to a settlement amount to cover unpaid rent, commissions and leasehold improvements paid by the landlord totaling $62,039 to be paid by the Company in 4 monthly installments of $5,000 commencing August 1, 2019 with the remaining balance to be paid in $10,000 monthly installments thereafter. The Company recorded the $62,039 as a loss on settlement. No further liability was recorded for both the northern California and robotic control center leases.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. There are no legal proceedings pending at this time.
In February 2016, AITX received notice that it had been sued in the Clark County District Court of Nevada. The plaintiff alleges that AITX obtained certain trade secrets through a third party also named in the suit. AITX believes the suit is without merit and intend to vigorously defend it. An Arbitration was conducted on May 9, 2017, Plaintiff filed a Notice of Trial de Novo, seeking a review of the merit dismissal. It is counsel’s opinion this Trial de Novo is without merit and AITX should prevail.
In April 2019 the principals of WeSecure (see Note 8) filed lawsuit in California Superior Court seeking damages for non-payment balance of sale of WeSecure assets totaling $25,000, unpaid consulting fees payable to the two principals through to September 2019 totaling $125,924.48, and labor code violations of $48,434.40 all totaling $199,358.88 plus attorney’s fees and damages. The parties finally settled all claims with a full release for $180,000 in June 2019 payable in 14 monthly instalments as follows:
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
Market Information
AITX’s common stock began trading on the “Over the Counter” Bulletin Board (“OTC”) under the symbol “AITX” in June 2011 and as AITX on August 24, 2018. The following table sets forth, for the period indicated, the prices of the common stock in the over-the-counter market, as reported and summarized by OTC Markets Group, Inc. On August 24, 2018, the Company undertook a 100:1 reverse stock split. The share capital has been retrospectively adjusted accordingly to reflect this reverse stock split, except for the conversion price of certain convertible notes as the conversion price is not subject to adjustment from forward and reverse stock splits (see Note 17).
These quotations represent inter-dealer quotations, without adjustment for retail markup, markdown, or commission and may not represent actual transactions. There is an absence of an established trading market for the Company’s common stock, as the market is limited, sporadic and highly volatile, which may affect the prices listed below.
On August 15, 2019, the closing price per share of the Company’s common stock as quoted on the OTC was $0.0006.
Dividends
To date, we have not paid dividends on shares of the Company’s common stock and we do not expect to declare or pay dividends on shares of our common stock in the foreseeable future. The payment of any dividends will depend upon our future earnings, if any, AITX’s financial condition, and other factors deemed relevant by its Board of Directors.
Holders of Common Stock
As of June 8, 2019, there were 64 holders of AITX’s common stock of which 12 were active. . The number of foregoing holders does not include beneficial owners of common stock whose shares are held in the names of banks, brokers, nominees or other fiduciaries.
Common Stock
The Company is authorized to issue 5,000,000,000 shares of common stock, with a par value of $0.00001. The closing price of its common stock on June 7, 2019, as quoted by OTC Markets Group, Inc., was $0.0015. There were 371,306,493 shares of common stock issued and outstanding as of June 7, 2019. All shares of common stock have one vote per share on all matters including election of directors, without provision for cumulative voting. The common stock is not redeemable and has no conversion or preemptive rights. The common stock currently outstanding is validly issued, fully paid and non-assessable. In the event of liquidation of the Company, the holders of common stock will share equally in any balance of its assets available for distribution to them after satisfaction of creditors and preferred shareholders, if any. The holders of the Company’s common are entitled to equal dividends and distributions per share with respect to the common stock when, as and if, declared by the Board of Directors from funds legally available.
Our Articles of Incorporation, Bylaws, and the applicable statutes of the state of Nevada contain a more complete description of the rights and liabilities of holders of our securities.
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During the year ended February 28, 2019, there was no modification of any instruments defining the rights of holders of the Company’s common stock and no limitation or qualification of the rights evidenced by the Company’s common stock as a result of the issuance of any other class of securities or the modification thereof.
On March 5, 2015, AITX effected a 500-for-1 reverse split, upon its reincorporation in Nevada. Each common shareholder received one common share in the Nevada company for every 500 common shares they held in the Florida company. Fractional shares were rounded up, and each share shareholder received at least 5 shares.
On August 24, 2018, the Company undertook a 100:1 reverse stock split. The share capital has been retrospectively adjusted accordingly to reflect this reverse stock split, except for the conversion price of certain convertible notes as the conversion price is not subject to adjustment from forward and reverse stock splits (see Note 12).
Non-cumulative voting
Holders of shares of the Company’s common stock do not have cumulative voting rights, which means that the holders of more than 50% of the outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and, in that event, the holders of the remaining shares will not be able to elect any of our directors.
Securities Authorized for Issuance under Equity Compensation Plans
The following table shows the number of shares of common stock that could be issued upon exercise of outstanding options and warrants, the weighted average exercise price of the outstanding options and warrants, and the remaining shares available for future issuance.
Preferred Stock
The Company is authorized to issue up to 20,000,000 shares of $0.001 par value preferred stock. The board of directors is authorized to designate any series of preferred stock up to the total authorized number of shares.
Series E Preferred Stock
The board of directors has designated 4,350,000 shares of Series E Preferred Stock. As of the date of this report, there are 4,350,000 shares of Series E Preferred Stock outstanding. The Series E Preferred Stock ranks subordinate to the Company’s common stock. The Series E preferred stock is non-redeemable, does not have rights upon liquidation of the Company and does not receive dividends. The outstanding shares of Series E Preferred Stock have the right to take action by written consent or vote based on the number of votes equal to twice the number of votes of all outstanding shares of common stock. As a result, the holder of Series E Preferred Stock has 2/3rds of the voting power of all shareholders at any time corporate action requires a vote of shareholders.
Series F Convertible Preferred Stock
The board of directors has designated 4,350 shares of Series F Convertible Preferred Stock with a par value of $1.00 per share. As of the date of this report, there are 4,350 shares of Series F Convertible Preferred Stock outstanding. The Series F Convertible Preferred Stock is non-redeemable, does not have rights upon liquidation of the Company, does not have voting rights and does not receive dividends. The each holder may, at any time and from time to time convert all, but not less than all, of their shares of
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Series F Convertible Preferred Stock into a number of fully paid and nonassessable shares of common stock determined by multiplying the number of issued and outstanding shares of common stock of the Company on the date of conversion by three and 45 100ths (3.45) on a pro rata basis. So long as any shares of Series F Convertible Preferred Stock are outstanding, the Company shall not, without first obtaining the approval of the majority of the holders: (a) alter or change the rights, preferences or privileges of any capital stock of the Company so as to affect adversely the Series F convertible preferred stock; (b) create any Senior Securities; (c) create any pari passu Securities; (d) do any act or thing not authorized or contemplated by the Certificate of Designation which would result in any taxation with respect to the Series F Convertible Preferred Stock under Section 305 of the Internal Revenue Code of 1986, as amended, or any comparable provision of the Internal Revenue Code as hereafter from time to time amended, (or otherwise suffer to exist any such taxation as a result thereof).
Series G Preferred Stock
The board of directors has designated 1,000 shares of Series G Preferred Stock. As of the date of this report, there are no shares of Series G Preferred Stock outstanding. The Series G preferred stock does not have voting rights, does not have rights upon liquidation of the Company and does not receive dividends.
Transfer Agent and Registrar
The Transfer Agent for our capital stock is Transhare with an address at 15500 Roosevelt Boulevard, Suite 302, Clearwater, Florida 33760. Their telephone number is Office phone: 303-662-1112.
Recent Sales of Unregistered Securities
The following is a summary of transactions by AITX involving sales of its securities that were not registered under the Securities Act.
On August 28, 2017, AITX entered into a Stock Purchase Agreement with RAD and Steve Reinharz, as sole stockholder of RAD. Pursuant to the terms of the Stock Purchase Agreement, AITX acquired, on August 28, 2017, 10,000 shares of RAD’s common stock, representing all of RAD’s issued and outstanding capital stock, from Mr. Reinharz in exchange for the issuance by AITX of (i) 3,350,000 shares of our Series E Preferred Stock and, (ii) 2,450 shares of our Series F Convertible Preferred Stock. In connection with the foregoing, the Registrant relied upon the exemption from registration under the Securities Act of 1933, as amended and the rules and regulations of the Securities and Exchange Commission thereunder, in reliance upon Section 4(a)(2) thereof and Regulation D thereunder.
During the period from June 1, 2017 through July 25, 2017, AITX issued 8,922,279 shares of common stock upon cashless exercise of warrants held by one of the Company’s lenders who also converted $3,358 in interest and principal for 395,667 shares for a total of 9,317,946 shares issued.
On July 8, 2017, AITX issued a convertible note payable for $200,000 which bears interest at 8% per annum and is due July 6, 2018. The note is convertible into common stock of the Company at a 40% discount to the lowest trading price in during the 20 trading days prior to conversion.
In connection with the foregoing, the Registrant relied upon the exemption from registration under the Securities Act of 1933, as amended and the rules and regulations of the Securities and Exchange Commission thereunder, in reliance upon Section 4(a)(2) thereof and Regulation D thereunder.
On February 16, 2017, AITX closed on a Share Purchase Agreement with Capital Venture Holdings LLC (“Capital Venture”), a Wyoming Limited Liability Company, whereby AITX issued Capital Venture 1,000 shares of Series F Convertible Preferred Stock, representing all of the issued and outstanding shares of Series F Convertible Preferred Stock to Capital Venture in consideration for $5,000. Mr. Garett Parsons is the sole and managing member of Capital Venture.
In connection with the foregoing, AITX relied upon the exemption from registration under the Securities Act of 1933, as amended and the rules and regulations of the Securities and Exchange Commission thereunder, in reliance upon Section 4(a)(2) thereof and Regulation D thereunder.
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Penny Stock Regulations
The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be an equity security that has a market price of less than $5.00 per share. Our Common Stock falls within the definition of penny stock and therefore is subject to rules that impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally those with assets in excess of $1,000,000, or annual incomes exceeding $200,000 individually, or $300,000, together with their spouse). For transactions covered by these rules, the broker-dealer must make a special suitability determination for the purchase of such securities and have received the purchaser’s prior written consent to the transaction. Additionally, for any transaction, other than exempt transactions, involving a penny stock, the rules require the delivery, prior to the transaction, of a risk disclosure document mandated by the Securities and Exchange Commission relating to the penny stock market. The broker-dealer must also make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. In addition, the broker-dealer must disclose the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and, if the broker-dealer is the sole market-maker, the broker-dealer must disclose this fact and the broker-dealer’s presumed control over the market. Finally, monthly statements must be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks. Consequently, the “penny stock” rules may restrict the ability of broker-dealers to sell our Common Stock and may affect the ability of investors to sell their Common Stock in the secondary market. In addition to the “penny stock” rules promulgated by the Securities and Exchange Commission, the Financial Industry Regulatory Authority (“FINRA”) has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low-priced securities will not be suitable for at least some customers. The FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit the investors’ ability to buy and sell our stock.
Purchases of Equity Securities by the Registrant and Affiliated Purchasers
We have not repurchased any shares of our common stock during the fiscal year ended February 28, 2019.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those financial statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under the Risk Factors, Forward-Looking Statements and Business sections in this report. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Overview
AITX was incorporated in Florida on March 25, 2010. AITX reincorporated into Nevada on February 17, 2015. AITX’ fiscal year end is February 28. AITX is located at 1 East Liberty, 6th Floor, Reno, NV 89501 and our telephone number is 702-990-3271.
On August 28, 2017, AITX entered into a Stock Purchase Agreement (the “Stock Purchase Agreement”) with RAD and Steve Reinharz, as sole stockholder of RAD. Pursuant to the terms of the Stock Purchase Agreement, AITX acquired, on August 28, 2017, 10,000 shares of RAD’s common stock, representing all of RAD’s issued and outstanding capital stock, from Mr. Reinharz in exchange for the issuance by AITX of (i) 3,350,000 shares of its Series E Preferred Stock and, (ii) 2,450 shares of its Series F Convertible Preferred Stock. As a result of the RAD acquisition, RAD is a wholly owned subsidiary of AITX. As a result of the closing of the RAD acquisition, AITX has succeeded to the business of RAD, in which it purchased all of the outstanding shares of capital stock of RAD. As a result, AITX’ business going forward will consist of one segment activity which is the delivery of artificial intelligence and robotic solutions for operational, security and monitoring needs.
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The RAD acquisition is being treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of our prior operations were disposed of as part of the consummation of the transaction and therefore no goodwill or other intangible assets were recorded. RAD is treated as the accounting acquirer as its stockholders control the Company after the RAD Acquisition, even though the Company was the legal acquirer. As a result, the assets and liabilities and the historical operations that are reflected in these financial statements are those of RAD as if RAD had always been the reporting company.
AITX’s prior business focus was transportation services, and we were previously exploring the on-demand logistics market by seeking to develop a network of logistics partnerships. Following the RAD acquisition described above, the Company took on RAD’s business of applying advanced artificial intelligence (AI) driven technologies, paired with multi-use hardware and supported by custom software and cloud services, to intelligently automate and integrate a variety of high frequency security, concierge and operational tasks.
RAD’s solutions are offered as a recurring monthly subscription, typically with a minimum 12 month subscription contract. RAD’s solutions earn over 75% gross margin over the life of each deployed asset. Specifically, RAD provides workflow automation solutions delivered through a system of hardware, software and cloud services. All elements of hardware and software design offered by RAD are 100% designed, developed and owned by RAD.
Results of Operations
The following table shows our results of operations for the years ended February 28, 2019 and 2018,. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
Revenue
Total revenue for the year ended February 28, 2019 was $114,671, which represented an increase of $8,195, compared to total revenue of $106,476 for the year ended February 28, 2018. The increase in rental revenues actually was $ 53,195 due to the prior year sale of a revenue earning device for $45,000 that was acquired in the acquisition of WeSecure’s assets costing $45,000, thus affecting gross profit below. Note that 2019 was the first year the Company started renting their current product line.
Gross profit
Total gross profit for the year ended February 28, 2019 was $110,149, which represented an increase of $48,673 compared to total gross profit of $61,476 for the year ended February 28, 2018. The increase resulted from the cost of goods on the above-mentioned prior year sale of the WeSecure asset. Removing the $45,000 cost of the asset, the cost of rental revenue activities were $4,522 and nil for the years ended February 28, 2019 and 2018, respectively. The 2019 cost represents inventory adjustments.
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Operating expenses
Operating expenses for the years ended February 28, 2019 and February 28, 2018 comprised of the following:
Our operating expenses were comprised of general and administrative expenses, research and development, depreciation and amortization, and a loss on impairment of fixed assets. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and rent. Our operating expenses during the years ended February 28, 2019 and February 28, 2018 were $4,257,843 and $3,578,301, respectively. The overall $679,542 increase in operating expenses was primarily attributable to the following increases in operating expenses of:
● Research and development expenses increased by $47,971 which resulted from an increase in R&D Consultation fee from RAD Canada of $247,398 because of development costs on the new products and decreases in R&D equipment and other R&D costs of $199,427 which were caused by the development of the older robots that were developed and used in fiscal 2018.
● General and administrative expenses increase by $1,137,424 primarily due to the following increases :
● Stock based compensation increased by $743,425 as 20,436,309 warrants were issued during the year ended February 28, 2019 vs 4,500 warrants issued in the prior fiscal year.
● Professional fees increased by $303,010 due to higher reporting costs and the consulting fee paid to Garett Parsons for the year ended February 28, 2019.
● Wages and salaries increased by $161,403.
Note that since the merger with RAD occurred in August 29, 2018 for fiscal 2018 the results of operations prior to that date for the year ended February 29, 2018 included in the consolidated FS were RAD only, where for the year ended February 28, 2019 the results of operations were combined for the full year.
These above increases were partially offset by decreases in loss on impairment of fixed assets of $490,384 and a reduction of depreciation and amortization of $15,469 both which could be attributed to the write off of revenue producing and demo devices occurring in the year ended February 28, 2018.
Other income (expense)
Other income (expense) consisted of the change of fair value of derivative instruments interest expense and gain on settlement of debt. Other income (expense) during the years ended February 28, 2019 and 2018, was $19,509,231 and ($20,732,176), respectively. The $40,241,407 increase in other income was primarily attributable to the change in the fair value of derivatives and interest expense, including interest expense related to derivative liability in excess of the face value of debt and gain on settlement of debt. Fair value of derivatives was largely affected by the decrease in the market price of the Company’s common stock during the current period.
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●
Change in fair value of derivative liabilities increased by $35,534,360 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock.
●
Interest expense decreased by $5,664,858 due to a decrease in interest expense related to the derivative liability in excess of debt, partially offset by an increase in interest expense on debt.
●
Gain on settlement of debt decreased by $957,811 due to a decrease in the number and amount of debt settlements this year over last year.
Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
For the year ended February 28, 2019, the Company had negative cash flow from operating activities of $1,804,261. As of February 28, 2019, the Company has an accumulated deficit of $20,142,492 and negative working capital of $15,376,920. Management does not anticipate having positive cash flow from operations in the near future. These factors raise a substantial doubt about the Company’s ability to continue as a going concern for the twelve months following the issuance of these financial statements.
The Company does not have the resources at this time to repay its credit and debt obligations, make any payments in the form of dividends to its shareholders or fully implement its business plan. Without additional capital, the Company will not be able to remain in business.
Management has plans to address the Company’s financial situation as follows:
In the near term, management plans to continue to focus on raising the funds necessary to implement the Company’s business plan. Management will continue to seek out debt financing to obtain the capital required to meet the Company’s financial obligations. There is no assurance, however, that lenders will continue to advance capital to the Company or that the new business operations will be profitable. The possibility of failure in obtaining additional funding and the potential inability to achieve profitability raises doubts about the Company’s ability to continue as a going concern.
Capital Resources
The following table summarizes total current assets, liabilities and working capital for the period indicated:
__________
(1)
As February 28, 2019 and February 28, 2018, current liabilities included approximately $6.2 million and $31.1 million, respectively, of derivative liabilities that are expected to be settled in shares of the Company in accordance with the various conversion terms.
As of February 28, 2019 and February 28, 2018, we had a cash balance of $21,192 and $24,773, respectively.
Summary of Cash Flows
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Net cash used in operating activities for the year ended February 28, 2019 was $1,804,261, which included a net income of $15,361,537, non-cash activity such as the change in fair value of derivative liabilities of $26,039,039, gain on settlement of debt of $217,217, change in operating assets of $2,105,485, interest expense related to derivative liabilities in excess of face value of debt of $1,017,250, amortization of debt discount of $4,993,674, loss on impairment of fixed assets $73,172, provision for note receivable $40,000, stock-based compensation of $746,625, and depreciation and amortization of $114,612 to derive the uses of cash in operations.
Net cash used in investing activities.
Net cash used in investing activities for the year ended February 28, 2019 was $202,717. This consisted primarily of the purchase of fixed assets of $232,858 offset by a reduction of the security deposit.
Net cash provided by financing activities.
Net cash provided by financing activities was $2,003,397 for the year ended February 28, 2019. This consisted of proceeds from convertible notes payable of $1,227,608, proceeds from loans payable $539,573, proceeds from deferred variable payment obligation of $ 192,500,net borrowings from loan payable - related party of $218,890, and proceeds from the sale of preferred stock of $174,070, offset by principal payments on convertible notes of $187,000, repayments of loan payable $156,500 and payments of vehicle loans of $5,746.
Off-Balance Sheet Arrangements
We do not have any outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us.
Significant Accounting Policies
Device Parts Inventory
Device parts inventory is stated at the lower of cost or market using the weighted average cost method. The Company records a valuation reserve for obsolete and slow-moving inventory, relying principally on specific identification of such inventory. The Company uses these device parts in the assembly of revenue earning devices (and demo devices) as well as research and development. Depending on use, the Company will transfer the parts to the corresponding asset or expense if used in research and development. A charge to income is taken when factors that would result in a need for an increase in the valuation, such as excess or obsolete inventory, are noted.
Revenue Earning Devices
Revenue earning devices are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of 48 months. The Company continually evaluates revenue earning devices to determine whether events or changes in circumstances have occurred that may warrant revision of the estimated useful life or whether the devices should be evaluated for possible impairment. The Company uses a combination of the undiscounted cash flows and market approaches in assessing whether an asset has been impaired. The Company measures impairment losses based upon the amount by which the carrying amount of the asset exceeds the fair value.
Significant Accounting Policies
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the respective assets which range from three to five years. Major repairs or improvements are capitalized. Minor replacements and maintenance and repairs which do not improve or extend asset lives are expensed currently.
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The Company periodically evaluates the fair value of fixed assets whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is recognized in income.
Research and Development
Research and development costs are expensed in the period they are incurred in accordance with ASC 730, Research and Development unless they meet specific criteria related to technical, market and financial feasibility, as determined by Management, including but not limited to the establishment of a clearly defined future market for the product, and the availability of adequate resources to complete the project. If all criteria are met, the costs are deferred and amortized over the expected useful life or written off if a product is abandoned. At February 28, 2019 and February 28, 2018, the Company had no deferred development costs.
Revenue Recognition
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, supersedes the revenue recognition requirements and industry specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Topic 606 defines a five-step process that must be evaluated and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing accounting principles generally accepted in the United States of America (“U.S. GAAP”) including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company adopted Topic 606 on March 1, 2018, using the modified retrospective method. Under the modified retrospective method, prior period financial positions and results will not be adjusted. There was no cumulative effect adjustment recognized as a result of this adoption. While the Company does not expect fiscal year 2020 net earnings to be materially impacted by revenue recognition timing changes, Topic 606 requires certain changes to the presentation of revenues and related expenses beginning March 1, 2018. Refer to Note 4 - Revenue from Contracts with Customers for additional information.
Distinguishing Liabilities from Equity
The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.
Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.
Initial Measurement
The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.
Subsequent Measurement - Financial Instruments Classified as Liabilities
The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other income (expenses).
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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:
See Note 16 for specific inputs used in determining fair value.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and advances, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments.
Recently Adopted Accounting Pronouncements
See discussion of the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, above.
In August 2016, the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The Company adopted this standard on March 1, 2018, on a retrospective basis. There was no impact of the standard on the Company’s consolidated financial statements.
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In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard on March 1, 2018, on a retrospective basis. There was no impact of the standard on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Modification Accounting for Share-Based Payment Arrangements. The standard amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The new standard is effective for fiscal years beginning after December 15, 2017. There was no impact on the financial statements of adopting this new standard on March 1, 2018.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is effective for public entities for annual reporting periods beginning after December 15, 2018. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company does not expect any material impact of ASU 2016 02 on the financial statements because the leases commencing March 1 ,2019 are month to month.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its consolidated financial statements and related disclosures.
In September 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 using a modified retrospective adoption method. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently assessing the impact this accounting standard will have on its financial statements and related disclosures.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not have any financial instruments that are exposed to significant market risk. We maintain our cash and cash equivalents in bank deposits and short-term, highly liquid money market investments. A hypothetical 100-basis point increase or decrease in market interest rates would not have a material impact on the fair value of our cash equivalents securities, or our earnings on such cash equivalents.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Financial Statements and Financial Statement Schedules appearing on pages through of this annual report on Form 10-K.
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ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
On May 13, 2019, the Board of Directors of Artificial Intelligence Technology Solutions Inc. (the “Registrant”) approved and ratified the engagement of Fruci & Associates II, PLLC (“Fruci PLLC”) as the Registrant’s independent registered public accounting firm effective immediately, and dismissed Marcum LLP (“Marcum LLP”) as the Registrant’s independent registered public accounting firm.
From October 18, 2018 through May13, 2019, there were (i) no disagreements (as described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Registrant and Marcum LLP on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
On October 18, 2018, Artificial Intelligence Solutions Inc. (formerly On the Move Systems Corp.) (the “Company”) engaged Marcum LLP (“Marcum”) as its independent registered public accountants. This engagement occurred in connection with the Company’s prior independent public accountants, GBH CPAs, PC (“GBH”) resigning, effective July 1, 2018, as a result of combining its practice with Marcum. The engagement of Marcum has been approved by the Audit Committee of the Company’s Board of Directors.
During the fiscal year ended February 28, 2018 and through October 18, 2018, there were no disagreements with GBH on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which if not resolved to GBH’s satisfaction would have caused it to make reference thereto in connection with its reports on the financial statements for such years. During the fiscal year ended February 28, 2018 and through October 18, 2018, there were no events of the type described in Item 304(a)(1)(v) of Regulation S-K, except certain material weaknesses in the Company’s internal controls over financial reporting, as discussed in the Form 10-K for the fiscal year ended February 28, 2018.
On February 19, 2018, our Board of Directors approved and ratified the engagement of GBH CPAs, PC (“GBH”) as the Company’s independent registered public accounting firm for the Company’s fiscal year ended February 28, 2018, effective immediately, and dismissed Friedman, LLP (“Friedman”) as the Company’s independent registered public accounting firm.
From September 25, 2017 to February 19, 2018, there were (i) no disagreements (as described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Company and Friedman on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure.
Prior to the appointment of GBH, on September 25, 2017, our Board of Directors approved and ratified the engagement of Friedman LLP (“Friedman”) as our independent registered public accounting firm for the Company’s fiscal year ending February 28, 2018, effective immediately, and dismissed MaloneBailey, LLP (“MaloneBailey”) as our independent registered public accounting firm.
MaloneBailey’s audit report on AITX’ consolidated financial statements as of and for the fiscal year ended February 28, 2017, did not contain an adverse opinion or a disclaimer of opinion and was not qualified or modified as to uncertainty, audit scope or accounting principles, other than an explanatory paragraph regarding the substantial doubt about our ability to continue as a going concern.
During the two months ended February 28, 2017, and the subsequent interim periods through September 25, 2017, there were (i) no disagreements (as described in Item 304(a)(1)(iv) of Regulation S-K and the related instructions) between the Company and MaloneBailey on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which, if not resolved to MaloneBailey’s satisfaction, would have caused MaloneBailey to make reference thereto in their report on the financial statements for such year, and (ii) no “reportable events” within the meaning of Item 304(a)(1)(v) of Regulation S- K.
During the two months ended February 28, 2017, and the subsequent interim periods through September 25, 2017, neither the Company nor anyone acting on its behalf has consulted with Friedman regarding (i) the application of accounting principles to a specific transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements or the effectiveness of internal control over financial reporting, and neither a written report or oral advice was provided to the Company that Friedman concluded was an important factor considered by the Company in reaching a decision as to any accounting, auditing, or financial reporting issue, (ii) any matter that was the subject of a disagreement within the meaning of Item 304(a)(1)(iv) of Regulation S-K, or (iii) any reportable event within the meaning of Item 304(a)(1)(v) of Regulation S-K.
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ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of February 28, 2019, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of February 28, 2019, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
Limitations on Systems of Controls
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses identified in our evaluation, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Securities Exchange Act of 1934 as a process designed by, or under the supervision of, the Company’s principal executive and principal financial officers and effected by the Company’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
•
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
•
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and
•
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As of February 28, 2019, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control-Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, during the period covered by this report, such internal controls and procedures were not effective to detect the inappropriate application of U.S. GAAP rules as more fully described below. This was due to deficiencies that existed in the design or operation of our internal controls over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
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The matters involving internal controls and procedures that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: lack of a functioning audit committee; lack of a majority of independent members and a lack of a majority of outside directors on our board of directors; inadequate segregation of duties consistent with control objectives; and, management is dominated by a single individual. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of February 28, 2019.
Management believes that the material weaknesses set forth above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.
This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.
Changes in Internal Control over Financial Reporting
No changes were made to our internal control over financial reporting during the quarter ended February 28, 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth the names, positions and ages of our directors and executive officers as of the date of this report. Our directors serve for one year and until their successors are elected and qualified. Our officers are elected by the board of directors to a term of one year and serve until their successor is duly elected and qualified, or until they are removed from office. The board of directors has no nominating, auditing or compensation committees.
Biographical information concerning our director and executive officer listed above is set forth below.
Garett Parsons. Mr. Parsons has served as our President, Chief Executive Officer, Chief Financial Officer and member of our board of directors since February 2017. Mr. Parsons has over 10 years of financial consulting for both private and public equity markets. Mr. Parsons has extensive experience in the field of asset valuation, funding structures and public release document generation. His education includes a Bachelor of Arts in Political Science/Economics from California State University Sacramento and an Associate of Arts in Liberal Studies/ Business San Joaquin Delta College and West Hills College.
There are no family relationships between any of the executive officers and directors. During the past 10 years, Mr. Parsons was involved in any of the legal proceedings listed in Item 401(f) of Regulation S-K. There are no arrangements or understandings between Mr. Parsons and any other person pursuant to which he was or is to be selected as an executive officer or director.
Board Committees and Director Independence
As Mr. Parsons serves as our sole director, we do not have a separately designated audit committee, compensation committee or nominating and corporate governance committee. The functions of those committees are being undertaken by our sole director. Because we do not have any independent directors and have only one director, our sole director believes that the establishment of committees of the Board would not provide any benefits to our company and could be considered more form than substance.
We currently do not have any non-employee or independent directors, as such term is defined in the listing standards of The NASDAQ Stock Market, and we do not anticipate appointing additional directors in the near future.
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Our sole director is not an “audit committee financial expert” within the meaning of Item 401(e) of Regulation S-K. As with most small, early stage companies until such time our company further develops its business, achieves a stronger revenue base and has sufficient working capital to purchase directors and officer’s insurance, the Company does not have any immediate prospects to attract independent directors. When the Company is able to expand our Board of Directors to include one or more independent directors, the Company intends to establish an Audit Committee of our Board of Directors. It is our intention that one or more of these independent directors will also qualify as an audit committee financial expert. Our securities are not quoted on an exchange that has requirements that a majority of our Board members be independent, and the Company is not currently otherwise subject to any law, rule or regulation requiring that all or any portion of our Board of Directors include “independent” directors, nor are we required to establish or maintain an Audit Committee or other committee of our Board of Directors.
Procedures for Nominating Directors
There have been no material changes to the procedures by which security holders may recommend nominees to the Board since the most recently completed fiscal quarter. We do not have a policy regarding the consideration of any director candidates that may be recommended by our stockholders, including the minimum qualifications for director candidates, nor has our sole director established a process for identifying and evaluating director nominees. We have not adopted a policy regarding the handling of any potential recommendation of director candidates by our stockholders, including the procedures to be followed. Our sole director has not considered or adopted any of these policies, as we have never received a recommendation from any stockholder for any candidate to serve on our Board of Directors. Given our relative size and lack of directors and officers insurance coverage, we do not anticipate that any of our stockholders will make such a recommendation in the near future.
While there have been no nominations of additional directors proposed, in the event such a proposal is made, all current members of our Board will participate in the consideration of director nominees.
Director Qualifications
Mr. Parsons was appointed to our board in February 2017. Mr. Parsons has significant operational experience in our industry and brings both a practical understanding of the industry and as well as hands-on experience in our business sector to our board and a greater understanding of certain of the challenges we face in executing our growth strategy.
Code of Ethics and Business Conduct
We have adopted a code of ethics meeting the requirements of Section 406 of the Sarbanes-Oxley Act of 2002. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely, and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of violations; and provide accountability for adherence to the provisions of the code of ethics.
Director Compensation
Mr. Parsons, our sole director, does not receive any additional compensation for his services as a director. We reimburse our directors for all reasonable ordinary and necessary business-related expenses, but we did not pay director’s fees or other cash compensation for services rendered as a director during the years ended February 28, 2019 and February 29, 2018 to any of the individuals serving on our Board during that period. We have no standard arrangement pursuant to which our directors are compensated for their services in their capacity as directors. We may pay fees for services rendered as a director when and if additional directors are appointed to the Board of Directors.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, or written representations that no other reports were required, and to the best of our knowledge, we believe that all of our officers, directors, and owners of 10% or more of our common stock filed all required Forms 3, 4, and 5.
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ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes all compensation recorded by us in the past two fiscal years for Mr. Parsons, our President, Chief Executive Officer and Chief Financial Officer.
2019 SUMMARY COMPENSATION TABLE
__________
(1)
Mr. Parsons was appointed President, Chief Executive Officer and Chief Financial Officer on February 16, 2017.
Employment Agreements
We are not currently a party to an employment agreement with Mr. Parsons, our sole executive officer. We may enter into an employment agreement with Mr. Parsons in the future, however. We have no plans providing for the payment of any retirement benefits.
Outstanding Equity Awards at 2019 Fiscal Year-End
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for Mr. Parsons, our sole executive officer outstanding as of February 28, 2019:
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
At February 28, 2019, AITX had 200,261,790 shares of its common stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our common stock as of February 28, 2019, and reflects:
●
each of our executive officers;
●
each of our directors;
●
all of our directors and executive officers as a group; and
●
each stockholder known by us to be the beneficial owner of more than 5% of our outstanding shares of common stock.
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Information on beneficial ownership of securities is based upon a record list of our stockholders and we have determined beneficial ownership in accordance with the rules of the SEC. We believe, based on the information furnished to us, that the persons and entities named in the table below have sole voting and investment power with respect to all shares of common stock that they beneficially own, subject to applicable community property laws, except as otherwise provided below.
__________
(1)
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Beneficial ownership also includes shares of stock subject to options and warrants currently exercisable or exercisable within 60 days of the date of this table. In determining the percent of common stock owned by a person or entity as of the date of this Report, (a) the numerator is the number of shares of the class beneficially owned by such person or entity, including shares which may be acquired within 60 days on exercise of warrants or options and conversion of convertible securities, and (b) the denominator is the sum of (i) the total shares of common stock outstanding on as of the date of this Report 200,261,790 shares, and (ii) the total number of shares that the beneficial owner may acquire upon exercise of the derivative securities. Unless otherwise stated, each beneficial owner has sole power to vote and dispose of its shares.
(2)
Based on 200,261,790 shares of the Company’s common stock issued and outstanding as of the date of this report.
(3)
Mr. Parsons is the Company’s President, Chief Executive Officer and Chief Financial Officer and owns 1,000,000 shares of our Series E Preferred Stock and 1,000 shares of our Series F Preferred Stock. If Mr. Parsons converted the 1,000 shares of the Company’s Series F Preferred stock, he would receive 200,261,790 shares of the Company’s common stock, which is included in the chart above as if such conversion has occurred. Further, the outstanding shares of Series E preferred stock have the right to take action by written consent or vote based on the number of votes equal to twice the number of votes of all outstanding shares of common stock. As a result, the holder of Series E preferred stock has 2/3rds of the voting power of all shareholders at any time corporate action requires a vote of shareholders.
(4)
Steve Reinharz is the CEO of RAD and is the holder of (i) 3,350,000 shares of our Series E Preferred Stock and, (ii) 2,450 shares of our Series F Convertible Preferred Stock. If Mr. Reinharz converted the 2,450 shares of the Company’s Series F Convertible Preferred Stock, he would receive 306,261,157 shares of the Company’s common stock, which is included in the chart above as if such conversion has occurred. Further, the outstanding shares of Series E preferred stock have the right to take action by written consent or vote based on the number of votes equal to twice the number of votes of all outstanding shares of common stock. As a result, the holder of Series E preferred stock has 2/3rds of the voting power of all shareholders at any time corporate action requires a vote of shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
We do not have a written policy for the review, approval or ratification of transactions with related parties or conflicted transactions. When such transactions arise, they are referred to our board of directors for its consideration.
The director of RAD loaned RAD certain funds to pay for RAD’s expenses. The loans are non-interest bearing (save for deferred salary portion of loan which bears interest at 12% see Note 13) and unsecured, with no specific terms of repayment or collateral. For the year ended February 28, 2019 and 2018 , the Company received net advances of $218,890 and $219,613, respectively, from its loan payable to a related party. At February 28, 2019, the balance due to the related party was $782,844, and $316,142 at February 28, 2018.
During the year ended February 28, 2019 and 2018 , the Company paid $484,251 and $236,853, respectively in consulting fees for research and development to a company owned by a principal shareholder.
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ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
On May 13, 2019, the Board of Directors of Artificial Intelligence Technology Solutions Inc. (the “Registrant”) approved and ratified the engagement of Fruci & Associates II, PLLC (“Fruci PLLC”) as the Registrant’s independent registered public accounting firm effective immediately, and dismissed Marcum LLP (“Marcum LLP”) as the Registrant’s independent registered public accounting firm.
On October 18, 2018, Artificial Intelligence Solutions Inc. (formerly On the Move Systems Corp.) (the “Company”) engaged Marcum LLP (“Marcum”) as its independent registered public accountants. This engagement occurred in connection with the Company’s prior independent public accountants, GBH CPAs, PC (“GBH”) resigning, effective July 1, 2018, as a result of combining its practice with Marcum. The engagement of Marcum has been approved by the Audit Committee of the Company’s Board of Directors.
On September 25, 2017, our Board of Directors approved and ratified the engagement of GBH CPAs, PC (“GBH CPAs”) as our independent registered public accounting firm for the Company’s fiscal year ending February 28, 2018, effective immediately, and dismissed Malone Bailey as the Company’s independent registered public accounting firm.
The following table shows the fees that were billed for the audit and other services provided by Fruci PLLC for the fiscal years ended February 28, 2019 and 2018.
Audit Fees - This category includes the audit of our annual financial statements, review of financial statements included in our Quarterly Reports on Form 10-Q and services that are normally provided by the independent registered public accounting firm in connection with engagements for those fiscal years. This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees - This category consists of assurance and related services by the independent registered public accounting firm that are reasonably related to the performance of the audit or review of our financial statements and are not reported above under “Audit Fees.” The services for the fees disclosed under this category would include consultation regarding correspondence with the SEC, other accounting consulting and other audit services.
Tax Fees - This category consists of professional services rendered by our independent registered public accounting firm for tax compliance and tax advice. The services for the fees disclosed under this category include tax return preparation and technical tax advice.
All Other Fees - This category consists of fees for other miscellaneous items.
As part of its responsibility for oversight of the independent registered public accountants, the Board has established a pre-approval policy for engaging audit and permitted non-audit services provided by our independent registered public accountants. In accordance with this policy, each type of audit, audit-related, tax and other permitted service to be provided by the independent auditors is specifically described and each such service, together with a fee level or budgeted amount for such service, is pre-approved by the Board. All of the services provided by Fruci, MaloneBailey and GBH CPAs described above were approved by our Board.
The Company’s principal accountant did not engage any other persons or firms other than the principal accountant’s full-time, permanent employees.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)(1) Financial Statements
The consolidated financial statements and Report of Independent Registered Public Accounting Firm are listed in the Index to Financial Statements and Financial Statement Schedules on page and included on pages through.
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(2) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting regulations of the SEC are either not required under the related instructions, are not applicable (and therefore have been omitted), or the required disclosures are contained in the financial statements included herein.
(3) Exhibits.
Exhibit No.
Description of Document
2.1
Stock Purchase Agreement, dated August 28, 2017, by and among the registrant, Steve Reinharz and Robotic Assistance Devices Inc. (incorporated by reference to Exhibit 10.1 to the registrant’s current report on Form 8-K filed with the Commission on August 31, 2017).
3.1
Articles of Incorporation of the registrant filed with the Nevada Secretary of State on September 8, 2014. (incorporated by reference to Exhibit 3.1 to the registrant’s transition report on Form 10-KT filed with the Commission on March 12, 2018).
3.2
Plan and Agreement of Merger of Artificial Intelligence Technology Solutions Inc. (a Florida corporation) and Artificial Intelligence Technology Solutions Inc. (a Nevada corporation). (incorporated by reference to Exhibit 3.2 to the registrant’s transition report on Form 10-KT filed with the Commission on March 12, 2018).
3.3
Bylaws of the registrant (incorporated by reference to Exhibit 3.2 to the registrant’s registration statement on Form S-1 (File No. 333-168530), filed with the Commission on August 4, 2010).
3.4
Certificate of Designations filed with the Nevada Secretary of State on February 8, 2017. (incorporated by reference to Exhibit 3.4 to the registrant’s transition report on Form 10-KT filed with the Commission on March 12, 2018).
3.5
Certificate of Designations filed with the Nevada Secretary of State on May 3, 2017. (incorporated by reference to Exhibit 3.5 to the registrant’s transition report on Form 10-KT filed with the Commission on March 12, 2018).
3.6
Amendment to Certificate of Designations filed with the Nevada Secretary of State on May 3, 2017 (incorporated by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed with the Commission on May 12, 2017).
10.1
Preferred Stock Purchase Agreement dated January 31, 2017 and entered into between the Company and Capital Venture Holdings LLC. (incorporated by reference to Exhibit 10.1 to the registrant’s transition report on Form 10-KT filed with the Commission on March 12, 2018).
14.1
Code of Ethics (incorporated by reference to Exhibit 14.1 to the registrant’s registrant statement on Form S-1 (File No. 333-168530), filed with the Commission on August 4, 2010).
21.1
List of Subsidiaries. *
31.1
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. *
32.1
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *
101.INS
XBRL Instance **
101.SCH
XBRL Taxonomy Extension Schema **
101.CAL
XBRL Taxonomy Extension Calculation **
101.DEF
XBRL Taxonomy Extension Definition **
101.LAB
XBRL Taxonomy Extension Labels **
101.PRE
XBRL Taxonomy Extension Presentation **
__________
*
Filed or furnished herewith.
**
To be submitted by amendment.
- 33 -
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
Date: August 26, 2019
By:
/s/ Garett Parsons
Garett Parsons
President, Chief Executive Officer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Garett Parsons
President, Chief Executive Officer, Chief Financial Officer, and Director (principal executive officer, principal financial officer and principal accounting officer)
August 26, 2019
Garett Parsons
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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Artificial Intelligence Technology Solutions Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Artificial Intelligence Technology Solutions Inc. (“the Company”) as of February 28, 2019 and 2018, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended February 28, 2019, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended February 28, 2019, in conformity with accounting principles generally accepted in the United States of America.
Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has an accumulated deficit, negative working capital, and management does not anticipate positive cash flows in the near future. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2 to the financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.
We have served as the Company’s auditor since 2019.
Spokane, Washington
August 26, 2019
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED FEBRUARY 28, 2019 AND 2018
The accompanying notes are an integral part of these consolidated financial statements.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION
Artificial Intelligence Technology Solutions Inc. (formerly known as On the Move Systems Corp.) (“AITX” or the “Company”) was incorporated in Florida on March 25, 2010 and reincorporated in Nevada on February 17, 2015. On August 24, 2018, Artificial Intelligence Technology Solutions Inc., changed its name from On the Move Systems Corp (“OMVS”).
Robotic Assistance Devices, LLC (“RAD”), was incorporated in the State of Nevada on July 26, 2016 as a LLC. On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc. through the issuance of 10,000 common shares to its sole shareholder.
On August 28, 2017, AITX completed the acquisition of RAD (the “Acquisition”), whereby AITX acquired all the ownership and equity interest in RAD for 3,350,000 shares of AITX Series E Preferred Stock and 2,450 shares of Series F Convertible Preferred Stock. AITX’s prior business focus was transportation services, and AITX was exploring the on-demand logistics market by developing a network of logistics partnerships. As a result of the closing of the Acquisition, AITX has succeeded to the business of RAD, in which AITX purchased all of the outstanding shares of capital stock of RAD. As a result, AITX’s business going forward will consist of one segment activity which is the delivery of artificial intelligence and robotic solutions for operational, security and monitoring needs.
The Acquisition was treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of AITX’s operations were disposed of as part of the consummation of the transaction. Therefore, no goodwill or other intangible assets were recorded by AITX as a result of the Acquisition. RAD is treated as the accounting acquirer as its stockholders control the Company after the Acquisition, even though AITX was the legal acquirer. As a result, the assets and liabilities and the historical operations that are reflected in these financial statements are those of RAD as if RAD had always been the reporting company.
2. GOING CONCERN
The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern.
For the year ended February 28, 2019, the Company had negative cash flow from operating activities of $1,804,261. As of February 28, 2019, the Company has an accumulated deficit of $20,142,492, and negative working capital of $15,376,920. Management does not anticipate having positive cash flow from operations in the near future. These factors raise a substantial doubt about the Company’s ability to continue as a going concern for the twelve months following the issuance of these financial statements.
The Company does not have the resources at this time to repay its credit and debt obligations, make any payments in the form of dividends to its shareholders or fully implement its business plan. Without additional capital, the Company will not be able to remain in business.
Management has plans to address the Company’s financial situation as follows:
In the near term, management plans to continue to focus on raising the funds necessary to implement the Company’s business plan. Management will continue to seek out debt financing to obtain the capital required to meet the Company’s financial obligations. There is no assurance, however, that lenders will continue to advance capital to the Company or that the new business operations will be profitable. The possibility of failure in obtaining additional funding and the potential inability to achieve profitability raises substantial doubts about the Company’s ability to continue as a going concern.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
3. ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and in conformity with the instructions on Form 10-K and Rule 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”). The audited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Robotic Assistance Devices, Inc., On the Move Experience, LLC and OMV Transports, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. The audited consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of such statements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates.
Cash
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market instruments. The Company places its cash and cash equivalents with high-quality, U.S. financial institutions and, to date has not experienced losses on any of its balances.
Accounts Receivable
Accounts receivable are comprised of balances due from customers, net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances. There were no allowances provided for the years ended February 28, 2019 and 2018.
Device Parts Inventory
Device parts inventory is stated at the lower of cost or market using the weighted average cost method. The Company records a valuation reserve for obsolete and slow-moving inventory, relying principally on specific identification of such inventory. The Company uses these device parts in the assembly of revenue earning devices (and demo devices) as well as research and development. Depending on use, the Company will transfer the parts to the corresponding asset or expense if used in research and development. A charge to income is taken when factors that would result in a need for an increase in the valuation, such as excess or obsolete inventory, are noted.
Revenue Earning Devices
Revenue earning devices are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of 48 months. The Company continually evaluates revenue earning devices to determine whether events or changes in circumstances have occurred that may warrant revision of the estimated useful life or whether the devices should be evaluated for possible impairment. The Company uses a combination of the undiscounted cash flows and market approaches in assessing whether an asset has been impaired. The Company measures impairment losses based upon the amount by which the carrying amount of the asset exceeds the fair value.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the respective assets which range from three to five years. Major repairs or improvements are capitalized. Minor replacements and maintenance and repairs which do not improve or extend asset lives are expensed currently.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company periodically evaluates the fair value of fixed assets whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is recognized in income.
Intangible Assets
The Company’s intangible assets are stated at cost and amortized on a straight-line basis over their five year expected useful life. The Company periodically determines if there is any impairment in value every year.
Research and Development
Research and development costs are expensed in the period they are incurred in accordance with ASC 730, Research and Development unless they meet specific criteria related to technical, market and financial feasibility, as determined by Management, including but not limited to the establishment of a clearly defined future market for the product, and the availability of adequate resources to complete the project. If all criteria are met, the costs are deferred and amortized over the expected useful life or written off if a product is abandoned. At February 28, 2019 and February 28, 2018, the Company had no deferred development costs.
Contingencies
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
Revenue Recognition
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, supersedes the revenue recognition requirements and industry specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Topic 606 defines a five-step process that must be evaluated and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing accounting principles generally accepted in the United States of America (“U.S. GAAP”) including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company adopted Topic 606 on March 1, 2018, using the modified retrospective method. Under the modified retrospective method, prior period financial positions and results will not be adjusted. There was no cumulative effect adjustment recognized as a result of this adoption. While the Company does not expect fiscal year 2019 net earnings to be materially impacted by revenue recognition timing changes, Topic 606 requires certain changes to the presentation of revenues and related expenses beginning March 1, 2018. Refer to Note 4 - Revenue from Contracts with Customers for additional information.
Income Taxes
On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc., through the issuance of 10,000 common shares to its sole shareholder. Prior to the conversion on July 25, 2017, income taxes are not provided in the financial statements as presented as RAD was an LLC and the income or loss flowed through to the shareholder for the two months ended February 28, 2017. Thereafter, income taxes are accounted for under the asset and liability method from that date forward. Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The Company will record a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Leases
Lease agreements are evaluated to determine if they are capital leases meeting any of the following criteria at inception: (a) transfer of ownership; (b) bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the leased property; or (d) the present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor.
If at its inception, a lease meets any of the four lease criteria above, the lease is classified by the Company as a capital lease; and if none of the four criteria are met, the lease is classified by the Company as an operating lease.
Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in liabilities.
Distinguishing Liabilities from Equity
The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.
Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.
Initial Measurement
The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.
Subsequent Measurement - Financial Instruments Classified as Liabilities
The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other income (expenses).
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles.
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
●
Level 1 - Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
●
Level 2 - Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
●
Level 3 - Inputs that are unobservable for the asset or liability.
Measured on a Recurring Basis
The following table presents information about our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fell:
See Note 16 for specific inputs used in determining fair value.
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and advances, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments.
Earnings (Loss) per Share
Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options and/or warrants. Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive.
Basic loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share.
Recently Adopted Accounting Pronouncements
See discussion of the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, above.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In August 2016, the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The Company adopted this standard on March 1, 2018, on a retrospective basis. There was no impact of the standard on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard on March 1, 2018, on a retrospective basis. There was no impact of the standard on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, Modification Accounting for Share-Based Payment Arrangements. The standard amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The new standard is effective for fiscal years beginning after December 15, 2017. There was no impact on the financial statements of adopting this new standard on March 1, 2018.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is effective for public entities for annual reporting periods beginning after December 15, 2018. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company is currently evaluating the effects of ASU 2016-02 on its financial statements for both lessees and lessors.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its consolidated financial statements and related disclosures.
In September 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 using a modified retrospective adoption method. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently assessing the impact this accounting standard will have on its financial statements and related disclosures.
Subsequent Events
The Company has evaluated all transactions through the date the financial statements were issued for subsequent event disclosure consideration.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue is earned primarily from two sources: 1) direct sales of goods or services and 2) short-term rentals. Direct sales of goods or services are accounted for under Topic 606, and short-term rentals are accounted for under Topic 840 (which addresses lease accounting and will be updated after the adoption of Topic 842 on March 1, 2019) as operating leases.
As disclosed in the revenue recognition section of Note 3 - Accounting Polices, the Company adopted Topic 606 in accordance with the effective date on March 1, 2018. Note 3 includes disclosures regarding the Company’s method of adoption and the impact on the Company’s financial statements. Revenue is recognized on direct sales of goods or services when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services.
Upon adoption of Topic 842, also referred to above in Note 3, the Company plans to account for revenue earned from rental activities where an identified asset is transferred to the customer and the customer has the ability to control that asset, will be accounted for under this topic. The Company is currently evaluating the effects of Topic 842 on its financial statements.
The Company recognizes revenue from its device rental activities when persuasive evidence of a contract exists, the performance obligations have been satisfied, the transaction price is fixed or determinable and collection is reasonably assured. Performance obligations associated with device rental transactions are satisfied over the rental period. Rental periods are short-term in nature. Therefore, the Company has elected to apply the practical expedient which eliminates the requirement to disclose information about remaining performance obligations. Payments are due from customers at the completion of the rental, except for customers with negotiated payment terms, generally net 30 days or less, which are invoiced and remain as accounts receivable until collected.
The following table presents revenues from contracts with customers disaggregated by product/service:
5. PREPAID EXPENSES AND DEPOSITS
Prepaid expenses and deposits on robots expected to be received within one year were comprised of the following:
6. REVENUE EARNING ROBOTS
Revenue earning robots consisted of the following:
During the year ended February 28, 2019, the Company made total additions to revenue earning devices of $229,958.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the year ended February 28, 2018, the Company made total additions to revenue earning robots of $384,588. Due to all the revenue earning robots becoming non-operational through February 28, 2018, the Company wrote down revenue earning robots with a net book value of $414,746 to $0 as loss on impairment of fixed assets.
Depreciation expense was $42,784 and $51,348 for the years ended February 28, 2019 and 2018, respectively.
7. FIXED ASSETS
Fixed assets consisted of the following:
During the year ended February 28, 2019, the Company made additions to fixed assets of $2,900 and wrote-off fixed assets having a net book value of $25,938 and recorded a corresponding loss on impairment of fixed assets. The company transferred automobiles having a net book value of $38,405 to vehicles for disposal since they will be given back to the lender in the next fiscal quarter. (see Note - 14)
During the year ended February 28, 2018, the Company acquired total fixed assets of $335,043. Due to all the demo robots becoming non-operational through February 28, 2018, the Company wrote down fixed assets with a net book value of $148,810 to $0 as loss on impairment of fixed assets.
Depreciation expense was $58,177 and $73,080 for the years ended February 28, 2019, and 2018, respectively.
8. INTANGIBLE ASSETS
Intangible assets consisted of the following:
On October 2, 2017, the Company acquired goods and other intangibles through an asset purchase agreement with WeSecure Robotics, Inc. (“WeSecure”) in exchange for $125,000 payable in 5 monthly $25,000 installments commencing in October 2017 and ending February 2018. The intangible asset primarily consisted of customer relationships and lists acquired as a part of the asset purchase agreement. The Company is treating this transaction as a business combination The Company is treating this transaction as a business combination under ASU 2017-01 - Business Combinations: Clarifying the Definition of a Business.
Under the asset purchase agreement, the two principals of WeSecure were also hired on at will basis: one as a sales director for a salary of $8,000 per month and the other as a consultant at $1,000 per month. The salary has been committed to until September 1, 2019, regardless of employment within the Company. In addition, the two principals will receive collectively a commission of $500/month for each SMP robot rented by an identified customer for one year, as long as the customer stays with the Company for two years and an additional year of commission if the two principals remain employed with the Company through September 1, 2020. They will also receive a commission of 5% net revenues on sales to identified customers for non-SMP robots for 2 years. In addition, the Company agreed to issue 450,000 options to the two principals to purchase shares its common stock at an exercise price of $0.05 per share that vest on October 2, 2021 (see further discussion in Note 18).
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company acquired the following net assets and liabilities as a part of this transaction:
Amortization expense was $12,272 and $5,653 for the years ended February 28, 2019, and 2018 , respectively.
The Company evaluated the fair value of the customer lists and relationships at February 28, 2019 and found that there was an impairment. Accordingly the Company wrote off the $61,901 and related accumulated depreciation of $17,925 which yielded a loss on impairment of fixed assets of $43,976.
At February 28, 2018, the Company had made four payments totaling $100,000, with a remaining balance due of $25,000 that has been included on the balance sheet as balance due on acquisition to WeSecure. The acquisition was to be fully paid at February 28, 2018 per the agreement, and the vendor has filed a lawsuit for $ 180,000 , included the balance due on acquisition , unpaid salaries detailed above and costs. The Company has provided for lawsuit amount with the balance owing in accounts payable and accrued expenses. See Note 18.
9. NOTE RECEIVABLE
On March 13, 2017, the Company loaned $40,000 to a third party vendor. The note bore interest at 18% per annum and was payable on April 13, 2017. The note was not repaid by the due date. The note was subsequently amended to bear interest of 2% per month plus a $10,000 fee. It was payable on December 31, 2017 and is secured in senior rank on all assets of the borrower. The Company evaluated the note receivable to determine whether its lending activities create a variable interest entity that would require consolidation and determined that it does not create a variable interest entity. Based on the current information available, the Company recorded a full allowance for this note of $40,000, during March 2018 with a corresponding adjustment to bad debt expense.
10. CUSTOMER DEPOSITS
As of February 28, 2017, the Company received a $10,000 deposit from a customer towards the rental of equipment with no expected delivery, and accordingly the deposit is expected to be returned to the customer sometime in fiscal 2020.
11. DEFERRED VARIABLE PAYMENT OBLIGATION
On February 1, 2019 the Company entered into an agreement with an investor whereby the investor would pay up to $900,000 (including $192,500 paid in January and February 2019) in exchange for a perpetual 9% rate on the Company’s reported quarterly revenue from operations excluding any gains or losses from financial instruments (Revenues). These variable payments (Payments) are to be made 30 days after the fiscal quarter. If the Payments would deplete RAD’s available cash by more than 30%, the Payments may be deferred for up to 12 months after the quarterly report at an interest rate of 6% per annum on the unpaid amount. The investor has agreed to pay the remaining $707,500 over the remaining nine-month period in minimum $60,000 monthly installments, commencing March 1, 2019 and Concluding November 30, 2019. The investor has advanced an additional $147,000 pursuant to this agreement between March 1 through to May 31, 2019. If the total investor advances turns out to be less than $900,000, this would not constitute a breach of the agreement, rather the 9% rate would be adjusted on a pro-rata basis.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In the event that at least 10% of the assets of the Company are sold by the Company, the investor would be entitled to the fair market value (FMV) of all future Payments associated with the assets sold as determined by an independent valuator to be chosen by the investor. The FMV cannot exceed 20% of the total asset disposition price defined as the total price paid for the assets plus all future Payments associated with the assets sold. In the event that the common or preferred shares are sold by the Company to a third party as to effect a change in control, then the investor must be paid the FMV of all future Payments in one lump payment. The FMV cannot exceed 20% of the share disposition price defined as the total price the third party paid for the shares plus the total value of all future Payments.
The Payments will first become payable on June 30, 2019 based on the quarterly Revenues for the quarter ended May 31, 2019.
In the event that the variable payment obligation has been repaid the Company will expense any further payments as a financing expense.
As the Company’s long-term future revenues were difficult to accurately forecast, the value of the deferred variable payment obligation was determined to be equivalent to the value of the consideration the Company has received.
At February 28, 2019 the value of the deferred payment obligation was $192,500 (2018-$0),including a current portion of $2,108.
12. CONVERTIBLE NOTES PAYABLE
Convertible notes payable consisted of the following:
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
__________
*
The indicated notes were in default as of February 28, 2019.
(1)
The note is convertible beginning six months after the date of issuance.
(2)
The notes are convertible at a discount (as indicated) to the average market price and are accounted for and evaluated under ASC 480 as discussed in Note 3.
(3)
The conversion price is not subject to adjustment from forward or reverse stock splits.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the years ended February 28, 2019 and 2018, the Company incurred original issue discounts of $85,143 and $251,500, respectively, and debt discounts from derivative liabilities of $1,668,025 and $3,106,385, respectively, related to new convertible notes payable. These amounts are included in discounts on convertible notes payable and are being amortized to interest expense over the life of the convertible notes payable. During the years ended February 28, 2019 and 2018, the Company recognized interest expense related to the amortization of debt discount of $4,641,181 and $1,102,430, respectively. The Company recorded penalty interest of $343,970 during the year February 28, 2019 (February 2018-$0) that is payable upon maturity if not already converted or settled prior to maturity.
All the notes above are unsecured. As of February 28, 2019, the Company had total accrued interest payable of $1,476,050, of which $1,390,706 is classified as current and $85,344 is classified as noncurrent. As of February 28, 2018, the Company had total accrued interest payable of $750,509, of which $694,592 is classified as current and $55,917 is classified as noncurrent
See description below for description of the convertible notes issued during the years ended February 28, 2019 and 2018.
Convertible notes issued
The Company determined that the embedded conversion features in the convertibles notes described below should be accounted for as derivative liabilities as a result of their variable conversion rates.
On January 5, 2018, the Company issued a convertible promissory note to an investor with an aggregate principal amount of $250,000, due on January 5, 2019 for cash proceeds of $225,000 payable in tranches, with an original issue discount of $25,000. Each tranche matures one year after disbursement. The promissory note is convertible into common shares of the Company and a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 25 trading days prior to conversion, and has a 10% per annum interest rate commencing on January 5, 2018. On March 14, 2018, this note was amended to include the issuance of warrants to purchase 333,333 shares of the Company’s common stock with an exercise price of $0.15 with a 3-year maturity, and to change the date of the note to March 14, 2018, coinciding with the payment of the first tranche of $50,000 including cash proceeds of $43,000, fees of $2,000 and an original issue discount of $5,000.
On March 1, 2018, the Company issued a convertible redeemable note to an investor with an aggregate principal amount of $95,000, due on March 1, 2019 for cash proceeds of $95,000. The promissory note is convertible into units of the Company comprised of one share of common stock and one warrant to purchase a share of common stock with a three-year maturity and a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 15% per annum interest rate.
In March 2018 and April 2018, an investor paid the Company $200,000 in exchange for a June 7, 2017 back-end note for $200,000, whose maturity was extended to June 9, 2019. The note is convertible into common shares of the Company and a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has an 8% per annum interest rate.
On April 9, 2018, the Company issued a convertible redeemable note to an investor with an aggregate principal amount of $55,000, due on April 9, 2019 for cash proceeds of $55,000. The promissory note is convertible into units of the Company comprised of one share of common stock and one warrant to purchase a share of common stock with a three-year maturity and a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 15% per annum interest rate.
In April 2018, the Company received $76,000 of proceeds from an investor for two back-end notes with a total principal amount of $80,000, including original issue discounts of $4,000 and a one-year maturity. The back-end notes are convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and have an 8% per annum interest rate.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On May 2, 2018, the Company received $70,000 of proceeds from an investor for a promissory note with a principal amount of $77,000, including an original issue discounts of $7,000 and an eight-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 10% per annum interest rate.
On May 4, 2018, the Company received $71,500 of proceeds from an investor for a promissory note with a principal amount of $82,500, including an original issue discounts of $11,000 and a one-year maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 12% per annum interest rate.
On May 23, 2018, the Company received $90,108 of proceeds from an investor for a promissory note with a principal amount of $110,000, including an original issue discounts of $19,892 and an eight-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 10% per annum interest rate.
In July and August 2018,and December 2018 the Company received $180,000 of proceeds from an investor for a back-end note date July 6, 2017 principal amount of $200,000, including original issue discounts of $20,000 and a June 30, 2019 maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has an 8% per annum interest rate.
In July and August 2018, the Company received $32,500 of proceeds from an investor for a promissory note with a principal amount of $32,500, and a one-year maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 15% per annum interest rate commencing on August 1, 2018.
On September 13, 2018, the Company received $50,000 of proceeds from an investor for a promissory note with a principal amount of $53,000, including an original issue discounts of $3,000 and a nine-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 45% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 12% per annum interest rate.
On September 20, 2018, the Company received $39,350 of proceeds from an investor for a promissory note with a principal amount of $39,350 and a one-year maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 15% per annum interest rate.
On September 24, 2018, the Company received $40,000 of proceeds from an investor for a promissory note with a principal amount of $44,000, including an original issue discounts of $4,000 and a nine-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 40% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 8% per annum interest rate.
On November 1, 2018, the Company received $50,000 of proceeds from an investor for a promissory note with a principal amount of $53,000, including an original issue discounts of $3,000 maturing August 15, 2019. The promissory note is convertible into common shares of the Company at a conversion price equal to 45% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 12% per annum interest rate.
On November 30, 2018, the Company received $118,750 of proceeds from an investor for a back-end promissory note dated August 8, 2017 with a principal amount of $125,000, including an original issue discounts of $6,250 maturing June 9, 2019. The promissory note is convertible into common shares of the Company at a conversion price equal to 40% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 8% per annum interest rate.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the year ended February 28, 2019, the Company also had the following convertible note activity:
●
A debt holder transferred debt of $344,040, including accrued interest, to third parties who exchanged it for new convertible notes totaling $344,040, $100,000 with a one-year maturity, maturing on April 17, 2019, bearing interest at 8% per annum and are convertible into common shares of the Company at a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion; $144,404, with a one-year maturity, maturing on April 20, 2019, bearing interest at 8% per annum, and are convertible into common shares of the Company at a conversion price equal to 60% of the lowest bid price of the Company’s common stock for the last 30 trading days prior to conversion; and $100,000 with an eight-month maturity, maturing on December 14, 2018, bearing interest at 10% per annum, and are convertible into common shares of the Company at a conversion price equal to 55% of the lowest bid price of the Company’s common stock for the last 30 trading days prior to conversion. A gain on settlement of debt of $268,145 was recorded that includes the amount of associated derivative liability that was written-off.
●
A debt holder transferred debt of $299,200, including accrued interest, to third parties who exchanged it for a replacement convertible note totaling $299,200, a one-year maturity, maturing on September 25, 2018, and bearing interest at 15% per annum. The replacement convertible note is convertible into units of the Company comprised of one share of common stock and one warrant to purchase a share of common stock with a three-year maturity and a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion. A loss on settlement of debt of $484,484 was recorded that includes the amount of associated derivative liability that was written-off.
●
A debt holder transferred debt of $132,149, including accrued interest, to third parties who exchanged it for a replacement convertible note totaling $132,149, with an eight-month maturity, maturing on March 19, 2019, bearing interest at 15% per annum, and are convertible into common shares of the Company at a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion. A gain on settlement of debt of $71,100 was recorded that includes the amount of associated derivative liability that was written-off.
●
The Company exchanged a replacement note issued on April 17, 2018 with a principal of $100,000 and a one-year maturity, maturing on April 17, 2019, and bearing interest at 8% per annum for another replacement note issued on August 23, 2018 with a principal of $100,000 and a one-year maturity, maturing on August 23, 2019, and bearing interest at 8% per annum, and are convertible into common shares of the Company at a conversion price equal to 55% of the lowest bid price of the Company’s common stock for the last 30 trading days prior to conversion. A gain on settlement of debt of $90,629 was recorded that includes the amount of associated derivative liability that was written-off.
●
A debt holder transferred debt of $103,984, including accrued interest, to third parties who exchanged it for new convertible notes totaling $344,040: $50,000 with a six-month maturity, maturing on March 17, 2019, bearing interest at 10% per annum, and are convertible into common shares of the Company at a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 20 trading days prior to conversion; $53,984, with a six-month maturity, maturing on May 26, 2019, bearing interest at 10% per annum, and are convertible into common shares of the Company at a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 20 trading days prior to conversion. A gain on settlement of debt of $121,305 was recorded that includes the amount of associated derivative liability that was written-off.
●
The Company settled a September 1, 2017 note for repayment $125,000, and a gain of $64,441 was recorded due to the associated derivative liability that was written-off.
●
During the year ended February 28, 2019, holders of certain convertible note payables elected to convert principal and accrued interest in the amounts shown below into shares of common stock. No gain or loss was recognized on conversions as they occurred within the terms of the agreement that provided for conversion. Accordingly , for the year ended February 28, 2019, holders of certain convertible notes payable elected to convert a total of $889,811 of principal and $35,782 accrued interest, and $12,000 of fees into 199,0101,627 shares of common stock and warrants to purchase 20.430,476 shares of common stock (see Note 16 for detail of warrants issued).
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the year ended February 28, 2018 the Company also had the following convertible note activity:
In September 2017, the Company settled the March 8, 2017 note and paid $72,762, including the remaining $50,000 of principal balance and $1,929 in accrued interest, and a prepayment penalty of $20,833. The Company incurred this penalty to avoid additional costs related to the conversion of this note. The Company recorded a gain on settlement of debt of $84,507 related to the write-off of the associated derivative liability.
During the year ended February 28, 2018, the Company repaid principal on convertible notes payable of $50,000.
During the year ended February 28, 2018, a debt holder transferred debt of $337,958 and accrued interest of $147,713 to a third party who exchanged it for new convertible note for $300,000, maturing September 1, 2018 and bearing no interest. A gain on settlement of debt of $1,090,521 was recorded that includes the amount of associated derivative liability that was written off.
During the year ended February 28, 2018, holders of certain convertible note payables elected to convert principal and accrued interest in the amounts shown below into shares of common stock. No gain or loss was recognized on conversions as they occurred within the terms of the agreement that provided for conversion. Accordingly, for the year ended February 28, 2018, holders of certain convertible notes payable elected to convert a total of $123,000 of principal into 230,167 shares of common stock.
During the year ended February 28, 2018 and prior to the reverse merger, the Company canceled 600,000 shares of common stock. The shares had been issued during the year ended February 28, 2017 for the conversion of principal of a convertible note payable of $600. As a result of the shares being canceled, $600 was added back to the principal of the note.
13. RELATED PARTY TRANSACTIONS
For the year ended February 28, 2019 and 2018 , the Company received net advances of $235,240 and $237,948, respectively, from its loan payable-related party. At February 28, 2019, the loan payable-related party was $782,844 and $316,142 at February 28, 2018. Included in the balance due to the related party is $352,392 of deferred salary and interest, $210,000 of which bears interest at 12%. At February 28,2018 there was $180,852, with $24,000 bearing interest at 12%. The accrued interest included at February 28, 2019 was $13,650 (2018- $0).
During the year ended February 28, 2019 and 2018, the Company paid $484,251 and $236,853, respectively in consulting fees for research and development to a company owned by a principal shareholder.
14. OTHER DEBT - VEHICLE LOANS
In December 2016, RAD entered into a vehicle loan for $47,704 secured by the vehicle. The loan is repayable over 5 years maturing November 9, 2021, and repayable $1,019 per month including interest and principal. In November 2017, RAD entered into another vehicle loan secured by the vehicle for $47,661. The loan is repayable over 5 years, maturing October 24, 2022 and repayable at $923 per month including interest and principal. The principal repayments were $5,746 and $6,591 for the years ended February 28, 2019 and 2018, respectively. Regarding the second vehicle loan , the vehicle was returned at the end of fiscal 2019 and the car was subsequently sold by the lender for proceeds of $21,907 which went to reduce the outstanding balance of the loan. . A loss of $3,257 was recorded as well. A balance of $21,578 remains on this vehicle loan at February 28,2019. The remaining total balances of the amounts owed on the vehicle loans were $57,287 and $82,162 as of February 28, 2019 and February 28, 2018, respectively, of which $57,287 and $17,830 were classified as current and $0 and $64,332 as long-term, respectively. The Company ceased making payments of principal and interest during the year and the company will return the remaining vehicle to the financing company for disposal. The company has re-allocated the remaining vehicle from fixed assets to vehicles for disposal at the remaining net book value of $ 13,251.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15. LOANS PAYABLE
Loans payable consisted of the following:
__________
*
Note is in default. No notice has been given by the note holder.
(1)
Repayable in 12 monthly instalments of $2,376 commencing September 16, 2018 and secured by revenue earning devices having a net book value of at least $25,000.Only one $2,376 repayment has been made by the Company and no notices have been received.
(2)
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $25,882. Accrued interest of $936 has been recorded.
(3)
Repayable in 12 monthly instalments of $4,562 commencing August 11, 2018 and secured by revenue earning devices having a net book value of at least $48,000. No repayments have been made by the Company and no notices have been received. Accrued interest of $9,300 has been record at February 28, 2019.
(4)
Repayable $166 per day including fees and interest of $5,850. Original proceeds of $20,850 less repayment of $11,908.
(5)
The note may be pre-payable at any time. The note balance includes 33% original issue discount of $3,448.
(6)
Repayable in 10 monthly instalments of $848 commencing January 10, 2019 and secured by revenue earning devices having a net book value of at least $186,000.
(7)
Principal repayable in one year. Interest repayable in 10 monthly instalments of $460 commencing January 11, 2019 and secured by revenue earning devices having a net book value of at least $186,000.
(8)
$20,000 repaid in quarter ended February 28, 2019.
(9)
$185,000 Canadian loan. Interest payable every calendar quarter commencing June30, 2019, if unpaid accrued interest to be paid at maturity. An additional interest amount calculated as 4% of RAD revenues from SCOT rentals for the fiscal years 2020 and 2021 shall be payable March 31, 2020 and March 31, 2021, respectively. Secured by a general security charging all of RAD’s present and after-acquired property in favour of the lender on a first priority basis subject to the following: the lender’s security in this respect shall be postpone-able to security in favour of institutional financing obtained by RAD.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. DERIVATIVE LIABILITES
As of February 28, 2019, and 2018 the Company revalued the fair value of all of the Company’s derivative liabilities associated with the conversion features on the convertible notes payable and determined that it had a total derivative liability of $6,170,139 and $31,113,844, respectively.
The Company estimated the fair value of the derivative liabilities using the Monte-Carlo model using the following key assumptions during the nine months February 28, 2019:
The Company estimated the fair value of the derivative liabilities using the Monte-Carlo model using the following key assumptions during the year ended February 28, 2018:
During the years ended February 28, 2019, and February 28, 2018 the Company released $1,215,588 and $685,040, respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes.
The changes in the derivative liabilities (Level 3 financial instruments) measured at fair value on a recurring basis for the nine months ended February 28, 2019 were as follows:
The changes in the derivative liabilities (Level 3 financial instruments) measured at fair value on a recurring basis for the year ended February 28, 2018 were as follows:
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
17. SHAREHOLDERS’ EQUITY (DEFICIT)
Summary of Preferred Stock Activity
During the year ended February 28 2019, the Company received $174,070 for the sale of 65 Series F preferred shares. As of the reporting date, these shares have not been issued and are included in preferred stock to be issued on the balance sheet.
During the year ended February 28, 2018, AITX issued 1,000,000 and 1,000 shares of its Series E and Series F preferred stock, respectively, totaling $1,000 and $1,000, respectively, in connection with the recapitalization of AITX by RAD.
Summary of Common Stock Activity
On August 24, 2018, the Company undertook a 100:1 reverse stock split. The share capital has been retrospectively adjusted accordingly to reflect this reverse stock split, except for the conversion price of certain convertible notes as the conversion price is not subject to adjustment from forward and reverse stock splits (see Note 12).
On April 23, 2019 the Board of Directors approved an increase in authorized share capital to 5,000,000,000 shares of common stock and to change the par value of the common stock to $0.00001 per share. This became effective on June 20, 2019. The share capital has been retrospectively adjusted accordingly to reflect this change in par value.
During the year ended February 28, 2019, the Company issued 199,0101,627 shares of its common stock for the conversion of debt and related interest and fees totaling $937,493 including $889,811 for of principal, $35,782 interest, $12,000 in fees in connection with debt converted during the period, as well as the release of the related derivative liability (see Note 15).
During the year ended February 28, 2018 and prior to the Acquisition, AITX issued the following shares of common stock:
●
Issued 760,088 shares of its common stock totaling $8 in connection with debt converted during the period;
●
Cancelled 6,000 shares of its common stock totaling $0; and
●
Issued 89,223 shares of its common stock totaling $1 in connections with warrants exercised during the period.
Following the Acquisition through February 28, 2018, the Company issued 230,167 shares of its common stock for the conversion of $123,000 of outstanding convertible debt.
As part of the asset purchase agreement described in Note 8, the Company issued 4,500 options to purchase shares at an exercise price of $5.00 per share that vest on October 2, 2021.
The options have a grant date fair value of $27,843, based on the Black-Scholes Option Pricing model with the following assumptions:
The Company will amortize the $27,843 over the four-year term on a straight-line basis as stock-based compensation. For the years ended February 28, 2019, and February 29, 2018, the Company amortized $6,596 and $2,840, respectively, to stock-based compensation with a corresponding adjustment to additional paid-in capital. At February 28, 2019, and February 29, 2018, the unamortized expense was $18,047 and $25,003, respectively and the intrinsic value was $0.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
During the year ended February 28, 2019, the Company issued the following warrants:
●
On April 16, 2018, the Company issued warrants to purchase 64,000 shares of the Company’s common stock in connection with its issuance of 64,000 shares of the Company’s common stock to an investor. The warrants have an exercise price of $2.00 per share and a three-year term.
●
On June 6, 2018, the Company issued warrants to purchase 6,640 shares of the Company’s common stock in connection with its issuance of 6,640 shares of the Company’s common stock to an investor. The warrants have an exercise price of $0.44 per share and a three-year term.
●
On August 24, 2018, the Company issued warrants to purchase 102,000 shares of the Company’s common stock in connection with its issuance of 102,000 shares of the Company’s common stock to an investor. The warrants have an exercise price of $0.15 per share and a three-year term.
●
In September and October 2018, the Company issued warrants to purchase 1,116,125 shares of the Company’s common stock in connection with its issuance of 1,116,125 shares of the Company’s common stock to an investor. The warrants have an exercise price ranging from $0.015-$0.035 per share and a three-year term
●
During the period December 1, 2018 to February 28, 2019 , the Company issued warrants to purchase 19,141,171 shares of the Company’s common stock in connection with its issuance of 19,141,711 shares of the Company’s common stock to an investor. The warrants have an exercise price ranging from $0.014-$0.031 per share and a three-year term
The Company also issued 2,500 warrants with an exercise price of $3.00 per share and a 3-year term on June 11, 2018, and 3,333 warrants with an exercise price of $15.00 and a three year term on March 14, 2018 in connection with loan payables (see Note 14).
The above warrants have an aggregate grant date fair value of $741,149 based on the Black-Scholes Option Pricing model with the following assumptions:
For the year ended February 28, 2019, the Company recorded a total of $746,265 to stock-based compensation for options and warrants with a corresponding adjustment to additional paid-in capital.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
18. COMMITMENTS AND CONTINGENCIES
Litigation
Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.
In February 2016, AITX received notice that it had been sued in the Clark County District Court of Nevada. The plaintiff alleges that AITX obtained certain trade secrets through a third party also named in the suit. AITX believes the suit is without merit and intend to vigorously defend it. An arbitration was conducted on May 9, 2017, Plaintiff filed a Notice of Trial de Novo, seeking a review of the merit dismissal. It is counsel’s opinion this Trial de Novo is without merit and AITX should prevail.
In April 2019 the principals of WeSecure (see Note 8) filed lawsuit in California Superior Court seeking damages for non-payment balance of sale of WeSecure assets totaling $25,000, unpaid consulting fees payable to the two principals through to September 2019 totaling $ $125,924.48, and labor code violations of $ $48,434.40 all totaling $199,358.88 plus attorney’s fees and damages. The parties finally settled all claims with a full release for $180,000 in June 2019 payable in 14 monthly instalments as follows:
The company has fully accrued the above $180,000.
The related legal costs are expensed as incurred.
Operating Lease
The Company currently maintains an office at 1218-1222 Magnolia Ave, Suite 106 Bldg. H ,Corona, California 92881 pursuant to a month to month lease commencing March 1,2019. The Company’s annual rent is $12,000 per year.
RAD maintains a mailing address for 31103 Ranch Viejo Road, Suite d2114 for a nominal fee of $ 264/yr. RAD previously had its offices at 23121 La Cadena Suite B/C Laguna Hills, California 92675, pursuant to a five-year term ending March 31, 2022. Its annual rental cost for this facility was approximately $65,000, plus a proportionate share of operating expenses of approximately $35,000 annually. The Company also leased premises in northern California. The lease was for three years, beginning in August 2017, and would expire in August 2020. The Company shared these premises with a former supplier who was the co-lessee. Through agreement with the supplier, the Company was to pay 75% of the lease costs and the supplier was to pay 25%. The Company’s share of rent costs was approximately $43,000 annually. On February 1, 2018 the Company entered into an additional lease for premises for a robotic control center. The lease ran from February 1, 2018 to January 31, 2021 for $6,600 annually. At the end of fiscal 2019 the Company terminated all three preceding leases through verbal arrangement with the landlord. Regarding the lease at La Cadena, the Company agreed to a settlement amount to cover unpaid rent , commissions and leasehold improvements paid by the landlord totaling $62,039 to be paid by the Company in 4 monthly instalments of $5,000 commencing August 1, 2019 with the remaining balance to be paid in $10,000 monthly instalments thereafter. The Company recorded the $62,039 as a loss on settlement. No further liability was recorded for both the northern California and robotic control center leases.
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company’s leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $134,940 for the year ended February 28, 2019 and $$90,582 for the year ended February 28, 2018.
At February 28, 2019, the Company had deferred rent of $0 (February 28, 2018-$6,742).
At February 28, 2019 there were no Company’s future minimum payments.
Convertible Notes Payable
Certain convertible notes payable carry conditions whereby in the event of ant default of any condition the Company would be subject to certain financial penalties.
19. EARNINGS (LOSS) PER SHARE
The net income (loss) per common share amounts were determined as follows:
The anti-dilutive shares of common stock equivalents for the years ended February 28, 2019 and February 28, 2018 were as follows:
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
20. INCOME TAXES
Due to the Company’s net losses, there were no provisions for income taxes for the years ended February 28, 2019 and February 28,2018, respectively.
On December 22, 2017, new federal tax reform legislation was enacted in the United States (the “2017 Tax Act”), resulting in significant changes from previous tax law. The 2017 Tax Act reduces the federal corporate income tax rate to 21% from 34% effective January 1, 2018. The rate change, along with certain immaterial changes in tax basis resulting from the 2017 Tax Act, resulted in a reduction of the Company’s deferred tax assets of $202,948 and a corresponding reduction in the valuation allowance. The following table reconciles the U.S. federal statutory income tax rate in effect for the year ended February 28, 2019, and the Company’s effective tax rate:
In assessing the realization of deferred tax assets, management considers whether it is more likely than not that some portion or all of deferred assets will not be realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.
Based on the available objective evidence, management believes it is more likely than not that the net deferred tax assets will not be fully realizable. Accordingly, management has applied a full valuation allowance against its net deferred tax assets at February 28, 2019. The net change in the total valuation allowance from February 28, 2018 and February 28, 2019 was an increase of $679,935.
Deferred income tax assets as of February 28, 2019 and 2019 are as follows:
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. As of February 28, 2018, the Company did not have any significant uncertain tax positions or unrecognized tax benefits. The Company did not have associated accrued interest or penalties, nor was any interest expense or penalties recognized for the year ended February 28, 2019.
As of February 28, 2019, the Company has federal net operating loss carryforwards of approximately $2,550,000. Utilization of NOL and tax credit carryforwards may be subject to a substantial annual limitation due to ownership change limitations that may have occurred or that could occur in the future, as required by the Internal Revenue Code (the “Code”), as amended, as well as similar state provisions. In general, an “ownership change” as defined by the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change of more than 50 percent of the outstanding stock of a company by certain shareholders or public groups.
21. SUBSEQUENT EVENTS
Subsequent to February 28, 2019, convertible note holders converted $135,186 of principal, $7,321 interest and $500 in fees into 171,044,703 shares of the Company’s common stock.
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 (see Note 18).
On May 9, 2019 the Company issued a promissory note of $7,850 to a shareholder in exchange for $5,260 in advances received, including a 33% original issue discount. The note is unsecured, bears interest at 15% and matures on June 30, 2019.
On May 9, 2019 the Company entered into two agreements with investors whereby the investors would pay up to $450,000 in exchange for a perpetual 5.11% royalty on the Company’s reported quarterly revenue. These royalty payments are to be made 90 days after the fiscal quarter with the first payment being due June 30, 2019. If the royalty payments would deplete RAD’s available cash by more than 30%, the payment may be deferred. The investors have agreed to an initial investment of $ 161,500 with the remainder to be paid over four month period in monthly instalments of $72,125 commencing July 1, 2019. If the total investment turns out to be less than $450,000, this would not constitute a breach of the agreement, rather the royalty rate would be adjusted on a pro-rata basis.
On May 31, 2019 the Company issued a promissory note of $86,567 to a shareholder in exchange for $58,000 in advances received, including a 33% original issue discount. The note is unsecured, bears interest at 15% and matures on June 30, 2019.
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 30, 2019. As of this filing no Reverse splits have been authorized by the Board of Directors.