Artificial Intelligence Technology Solutions Inc S-1/A, filed May 9, 2024
Artificial Intelligence Technology Solutions Inc. (AITX)
As filed with the Securities and Exchange Commission on May 9, 2024
Registration No. 333-278493
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
/
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
(Exact name of registrant as specified in its charter)
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| (State or jurisdiction of incorporation or organization) | (Primary Standard Industrial Classification Code Number) | (IRS Employer Identification Number) |
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Chief Executive Officer
(Name, address, including zip code, and telephone number, including area code, of agent for service)
Copies to:
Frederick M. Lehrer, P. A.
Frederick M. Lehrer, Esquire
2108 Emil Jahna Road
Clermont, Florida 34711
flehrer@securitiesattorney1.com
(561) 706-7646
Approximate date of commencement of proposed sale to the public: From time to time after the effectiveness of this registration statement.
If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: ☒
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant files a further amendment that specifically states that this registration statement will thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement becomes effective on such date as the U.S. Securities and Exchange Commission, acting pursuant to Section 8(a), may determine.
The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission, of which this prospectus is a part, shall have been declared effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED MAY 9, 2024
2,500,000,000 Shares of Common Stock
This prospectus relates to the sale by the Selling Stockholder, GHS Investments, LLC (“GHS”), of Artificial Intelligence Technology Solutions, Inc. (the “Company”) of up to 2,500,000,000) shares of common stock, par value $0.00001 per share. We will not receive proceeds from the sale of the shares by the Selling Stockholder. However, we may receive aggregate gross proceeds of up to $13.4 million from the sale of our common stock registered herein to the Selling Stockholder, pursuant to the March 22, 2023 Equity Financing Agreement entered into with GHS (the “Purchase Agreement”).
Our common stock is quoted on the OTC Pink under the symbol “AITX.” On May 6, 2024, the last reported sales price of our common stock on the OTC Pink was $0.0067 per share.
The Purchase Agreement provides that the Company may discretionarily sell to GHS up to $30,000,000 of shares (“Purchase Shares”) of the Company’s common stock upon our issuance of Purchase Notices to GHS (See “Purchase Agreement with GHS Investments, LLC” on page 1 of this prospectus for a description of the GHS Purchase Agreement). The Selling Stockholder will sell its Purchase Shares at prevailing market prices or in privately negotiated transactions, other details of the sales which are contained in the section titled “Plan of Distribution” on page 13.
GHS is an underwriter within the meaning of the Securities Act of 1933, as amended (the “Securities Act”), and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. We will bear all costs, expenses and fees in connection with the registration of the common stock. The Selling Stockholder will bear all commissions and discounts, if any, attributable to its sales of our common stock.
Investing in our securities is highly speculative and involves a high degree of risk. You should carefully consider the risks and uncertainties described under the heading “Risk Factors” beginning on page 3 of this prospectus before making a decision to purchase our securities.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
We may amend or supplement this prospectus from time to time by filing amendments or supplements as required. You should read the entire prospectus and any amendments or supplements carefully before you make your investment decision.
The date of this prospectus is May 9, 2024.
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Table of Contents
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You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information from that contained in this prospectus. The Selling Stockholder is offering to sell and seeking offers to buy shares of our common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. This prospectus does not constitute an offer to sell, or a solicitation of an offer to buy the securities in any circumstances under which the offer or solicitation is unlawful. Neither the delivery of this prospectus nor any distribution of securities in accordance with this prospectus shall, under any circumstances, imply that there has been no change in our affairs since the date of this prospectus.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider in making your investment decision. Before investing in our common stock, you should carefully read this entire prospectus, including our financial statements and the related notes and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in each case included elsewhere in this prospectus.
Unless the context otherwise requires, references to “we,” “our,” “us,” “Artificial Intelligence” or the “Company” in this prospectus mean Artificial Intelligence Technology Solutions, Inc. and its wholly-owned subsidiaries.
Company Overview
We apply AI technology to solve enterprise problems that are expensive, repetitive, difficult to staff, and outside of the core competencies of the client organization. Our main focus is disrupting and capturing a significant portion of the global security services market, specifically the human security guard market and the physical security market. RAD solutions are unique in that they start with an AI-driven autonomous response utilizing cellular optimized communications, while easily connecting to a human operator for a manned response as needed. We use purpose-built hardware and deliver our services through RAD-developed software and cloud services allowing enterprises IT groups to focus on their core competencies.
Definitive Information Statement
On March 26, 2024, we filed a Schedule 14C Definitive Information Statement to provide notice that our Board of Directors approving the filing of a Certificate of Amendment to the Company’s Articles of Incorporation to increase its authorized common stock by two billion five hundred million (2,500,000,000) common stock shares to a total of twelve billion five hundred million (12,500,000,000) common stock shares (the “Authorized Share Increase”) and our consenting shareholder executing a written consent authorizing the Authorized Share Increase. On (date), the state of Nevada approved the Authorized Share Increase.
About this Offering
Equity Financing Agreement with GHS Investments, LLC
On March 22, 2023, we entered into the Equity Financing Agreement with GHS referred to herein as the “Purchase Agreement”.
Pursuant to the Purchase Agreement, we have the right, in our sole discretion, subject to the conditions and limitations contained therein, to direct GHS, by delivery of a purchase notice (a “Purchase Notice”) to purchase (each, a “Purchase”) over the 24 month term of the Purchase Agreement, a minimum of $10,000 and up to a maximum of $1,500,000. Puts are further limited to the Investor owning no more than 4.99% of the outstanding stock of the Company at any given time. The aggregate value of Purchase Shares sold to GHS may not exceed $30,000,000. Each Purchase Notice will set forth the Purchase Price and number of Purchase Shares in accordance with the terms of the Purchase Agreement. The maximum dollar amount of each Put will not exceed 250% of the average daily trading volume for the common stock during the 10 consecutive trading days preceding the Put Notice Date.
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The Purchase Price is defined in the Purchase Agreement as 80% of the Market Price. If the average Closing Price for the Common Stock during the three (3) trading days preceding a Put Notice is equal to or greater than one cent ($.01) per share, the applicable Purchase Price shall equal eighty five percent (85%) of the Market Price. Following an up-list to the NASDAQ or an equivalent national exchange by the Company, the Purchase price shall equal 90% of the lowest Volume Weighted Average Price for the Common Stock during the Pricing Period, subject to a floor of $4.50 per share, below which the Company shall not deliver a Put.
The Purchase Agreement prohibits GHS from purchasing any shares of common stock if those shares, when aggregated with all other shares of our common stock then beneficially owned by GHS would result in GHS having beneficial ownership, at any single point in time, of more than 4.99% of the then total outstanding shares of our common stock. There are no trading volume requirements or restrictions under the Purchase Agreement and we will control the timing and amount of any sales of its common stock to GHS.
We may not deliver a Purchase Notice to GHS and GHS is not obligated to purchase the Purchase Shares unless each of the following conditions are satisfied: there is an effective Registration Statement; the Common Stock is listed or quoted for trading on the Principal Market; we are not in breach of in default of the Purchase Agreement or Registration Rights Agreement; no injunction has been issued prohibiting the purchase of the or the issuance of the Securities; and the issuance of the Securities does not violate the Principal Market requirements.
The Purchase Agreement is for a term of twenty four months but may terminate earlier on the date that GHS has purchased the aggregate Offering Amount of $30,000,000 of the Purchase Shares that are sold to GHS. We and GHS each have the right to terminate the Purchase Agreement at any time upon thirty days-notice. The Purchase Agreement will be suspended and remain suspended if any of the following events occur: if our Common Stock is suspended by the applicable authority, our Common Stock ceases to be quoted; we breach a representation, warranty, covenant in the Purchase Agreement;, and upon the occurrence of bankruptcy proceedings by or against us.
Subject to the foregoing, actual sales of Purchase Shares to GHS under the Purchase Agreement will depend on a variety of factors to be determined by us from time to time, including, among others, market conditions, the trading price of the Common Stock and determinations by us as to the appropriate sources of funding for our operations.
April 29, 2024 Securities Purchase Agreement with GHS
On April 29, 2024, we completed a Securities Purchase Agreement with GHS, which provides for GHS’ purchase of 300 Shares of our Convertible Redeemable Series B Preferred Shares for a total purchase price of $300,000 with net proceeds of $290,000. In addition as a commitment fee the Company issued an additional 20 Series B Convertible, Redeemable Preferred Shares. The shares have a redemption value of $1,200 per share. The Company must redeem one third of these shares or 106 2/3 for $108,000 in 30, days and each 30 days thereafter until all the shares are redeemed at 90 days. The Company must pay an 8% dividend from issue date to redemption date. Each holder may, at any time and from time to time convert all, but not less than all, of their shares of Series B Convertible, Redeemable Preferred Stock into a number of fully paid and nonassessable shares of common stock determined by dividing the redemption value by the Conversion Price. The Conversion price is equal to the lower of (1) a fixed price equaling the closing bid price of the Common Stock on the trading day immediately preceding the date of the acquisition of the shares and (2) the lowest traded price of the Common Stock during the ten (10) calendar days immediately preceding, but not including, the Conversion Date. Following an event of default,” as defined in the Purchase Agreement, the Conversion price shall equal the lower of: (a) the then applicable Conversion Price; or (b) a price per share equaling eighty five percent (85%) of the lowest traded price for the Company’s common stock during the fifteen (15) Trading Days immediately preceding, but not including, the Conversion Date.
Prior Issuances with GHS
From July 11, 2023 to April 7, 2024, we issued 3,478,774,156 common stock shares to GHS.
Agreement with JH Darbie & Company
September 24, 2023 Placement Agent Agreement
We have a September 24, 2023 Placement Agreement with JH Darbie & Company (“Darbie”) to introduce third party investors to us for which we are obligated to pay Darbie: (a) upon consummation of the closing of a financing on our behalf, a finder’s fee in cash equal to 8% of the gross proceeds of an equity/convertible security (4% of for Equity Lines of Credit) and/or cash equal to 3% of the gross proceeds of a non-convertible debt transaction; (b) pay Darbie non-callable warrants equal to 8% warrant coverage of the amount raised (0% warrant coverage for Equity Lines of Credit. In conjunction with (b), the warrants will entitle the holder to purchase our securities at a purchase price equal to 120% of the introduced party’s exercise price of the transaction or the public market closing price of our common stock on the date of the transaction, whichever is lower.
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RISK FACTORS
Risks Related to Our Business
Our business is at an early stage, and we have not yet generated any profits.
RAD I, our primary operating subsidiary, was formed in 2016 and made its first sale in 2016. Accordingly, we have 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 young enterprises. These include likely fluctuations in operating results as we make significant investments in research, development and product opportunities, we react to developments in our 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.
Our auditor has expressed substantial doubt about our ability to continue as a going concern.
Our financial statements of which this prospectus is a part have been prepared on a going concern basis. We may be unable to generate profitable operations in the future and/or obtain the necessary financing to meet our obligations and pay liabilities arising from normal business operations when they come due. The outcome of these matters cannot be predicted with any certainty at this time. These factors raise substantial doubt that we will be able to continue as a going concern. Our financial statements do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary should we be unable to continue as a going concern.
Our financial results will fluctuate in the future, which makes them difficult to predict.
Our 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 our past financial results as indicators of future performance. In addition, 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:
| ● | our ability to maintain and grow our client base; | |
| ● | clients suffering downturns, financial instability or becoming subject to mergers or acquisitions; | |
| ● | our ability to develop and introduce new products and the ability of our competitors to do the same; | |
| ● | our ability to maintain gross margins and operating margins; | |
| ● | increases in marketing, sales, service and other operating expenses incurred in expanding our operations and remaining competitive; | |
| ● | changes affecting our suppliers and other third-party service providers; | |
| ● | adverse litigation judgments, settlements, or other litigation-related costs; and | |
| ● | changes in business or macroeconomic conditions, including regulatory changes. |
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 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.
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We cannot assure you that we can effectively manage our growth.
Our business growth and expansion and additional products, which 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 we continue to grow, our information technology systems, internal management processes, internal controls and procedures and production processes may be inadequate 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 implement more complex organizational and management structures consistent with our growth, 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.
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.
We depend on the continued services and performance of key members of the management team, in particular, founder and Chief Executive Officer, Steven Reinharz, Chief Financial Officer, Anthony Brenz, and RAD I Chief Executive Officer, Mark Folmer. While we currently have employment agreements with Messrs. Reinharz and Brenz, we do not have any employment agreements in place with our other officers. If we cannot call upon Messrs. Reinharz and Mr. Brenz or Mark Folmer or other key management personnel for any reason, our operations and development could be harmed. We have not yet developed a succession plan. Furthermore, as we grow, we will be required to hire and attract additional qualified professionals such as accounting, legal, finance, production, service and engineering experts. We may be unable to locate or attract qualified individuals for such positions, which will affect our ability to grow and expand our business.
Because our Board of Directors does not currently have an audit committee, compensation committee, nomination 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, nomination committee, or any form of corporate governance committees that includes any independent members. Instead, the Board of Directors performs these functions as a whole. As a result, we do not receive the independent advice of other persons.
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.
We rely and expect 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 our behalf. We plan 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 offered through RAD I 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 a material adverse effect on our business and financial results.
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Economic factors generally may negatively affect our operations.
We are subject to the general risks of the marketplace where we conduct business. Our results of operations will depend on a number of factors over which we 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 our business. For these and other reasons, no assurance of profitable operations can be given.
General political, social and economic conditions can adversely affect our business.
Demand for our products and services depends, to a significant degree, on general political, social and economic conditions in our markets. Worsening economic and market conditions, downside shocks, or a return to recessionary economic conditions could serve to reduce demand for our products and services and adversely affect our operating results. In addition, an economic downturn could impact the valuation and collectability of certain long-term receivables held by us. Additionally, the global economy and financial markets may be adversely affected by geopolitical events, including the current or anticipated impact of military conflict and related sanctions imposed on Russia by the United States and other countries due to Russia’s recent invasion of Ukraine.
Our businesses may be materially adversely affected by the recent coronavirus (COVID-19) outbreak or the related market decline and volatility.
On January 30, 2020, the World Health Organization declared the outbreak of the coronavirus disease (“COVID-19”) a “Public Health Emergency of International Concern.” On March 11, 2020, the World Health Organization characterized the outbreak as a “pandemic”. The significant outbreak of COVID-19 has resulted in a widespread health crisis that adversely affected economies and financial markets worldwide during 2020 and 2021, including the businesses which we operate and own a percentage of. The recent market decline and volatility in connection with the COVID-19 pandemic could also materially and adversely affect any future potential acquisitions. Furthermore, with restrictions on travel, the limited ability to have meetings with personnel, vendors and services providers are expected to have an adverse effect on our businesses. While we expect the effects of the pandemic to negatively impact our results from operations, cash flows and financial position, the current level of uncertainty over the economic and operational impacts of COVID-19 means the related financial impact cannot be reasonably estimated at this time. We have experienced customer delays and extensions for projects, supply chain delays, furloughs of personnel, increased utilization of telework, increased safety protocols to address COVID-19 risks, decreased installations and other impacts from the COVID-19 pandemic. We have experienced workforce shortages in connection with the COVID-19 pandemic. Our ability to attract and retain additional employees may limit its ability to grow across its businesses.
We are proactively working to adjust our operations to properly reflect the market environment during the immediate pandemic while maintaining sufficient resources for the expected rebound later this year. The extent to which COVID-19 impacts our businesses will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its impact, among others. If the disruptions posed by COVID-19 or other matters of global concern continue for an extensive period of time, our operations may be materially adversely affected.
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The future reoccurrence of the COVID-19 pandemic could adversely affect our business, financial condition and results of operations.
A future COVID-19 pandemic, including the emergence of variants for which vaccines may not be effective, may negatively affect our business by causing or contributing to, among other things:
| ● | Higher shipping costs and longer shipping times, especially for shipments from China and Europe; | |
| ● | Limited access to parts needed for our products due to the ongoing issues with global chip supply, which may affect our ability to meet our production goals; | |
| ● | Higher labor costs due to a diminished supply of potential employees and higher employee recruitment and retention costs; and | |
| ● | Disruptions in production due to employees becoming ill from Covid. |
The extent of COVID-19’s effect on our operational and financial performance in the future will depend on future developments, including the duration, spread and intensity of the pandemic, our continued ability to manufacture and distribute our products, any future government actions affecting consumers and the economy generally, changing economic conditions and any resulting inflationary impacts, as well as timing and effectiveness of global vaccines, all of which are uncertain and difficult to predict considering the rapidly evolving landscape. Although the potential effects that COVID-19 may continue to have on us are not clear, these effects could materially adversely affect our business, financial condition and results of operations.
Our business is subject to data security risks, including security breaches.
Our products employ technologies that 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. We use wireless data carrier providers to transmit data and information of all kinds, and those wireless providers may suffer security breaches that release our confidential information. The 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 results of operations.
Our business success depends on large part on the success of our efforts to lease our products through dealerships.
Although we engage in some direct sales to potential customers, our primary focus is on leasing its robots to end-users through dealers that market to firms providing security guard and integrated security services. We believe our model based on partnerships with these dealers is valuable and currently has such partnerships with over twenty dealers, with plans to sign on additional dealers. However, there can be no assurance that we can successfully secure agreements with dealerships for the use of our products, which could materially impair our sales, financial condition, and business prospects.
We currently face competition and may face additional competition in the future; if we are unable to compete effectively, our business prospects and operations would be harmed.
RAD I’s re-entry into the mobile security robotics market presents us with two potential competitors. Knightscope, Inc., states that it has available one outdoor security robot called the ‘K5’ and has another outdoor robotic device under development, the ‘K9’. Cobalt Robotics Inc., offers an indoor robotic device that is designed to perform various security functions. Although either or both of these companies may create direct competition to RAD I’s products, neither of these companies has a mobile robot that performs the breadth of duties that can be performed by ROAMEO. We are also aware of other companies that are already active in our industry and other companies that are developing physical security technology in the U.S. and abroad that may potentially compete with our technology and services. These, or additional new, competitors may have more resources than we do or may be better capitalized, which may give them a significant advantage because they may be able to offer better pricing, survive an economic downturn or reach profitability compared with us. We cannot guarantee that we will be able to compete successfully against existing or emerging competitors. In addition, 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, and additional attempts to compete could lead us to expend additional funds toward our marketing efforts and 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 and regulations, our business may be harmed.
Our success depends on the growth of our industry, most specifically on the growing adoption and use of physical security technology in general and the adoption and use of our products.
The market for our products and for physical security technology in general is relatively new and unproven and is 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 as we hope, we will not be able to sell our products, which would adversely affect our financial performance.
Risks Related to our Securities
An investment in our securities is extremely speculative, and there can be no assurance of any return on the investment.
An investment in our securities is extremely speculative, and there is no assurance that investors will obtain any return on their investment. Investors will be subject to substantial risks, including the risk of losing their entire investment in our securities. For example, 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 common stock shareholders do not have voting control over us due to the rights granted to holders of our Series E Convertible Preferred Stock.
Steven Reinharz, our Chief Executive Officer, is currently the holder of all 3,350,000 shares of our Series E Convertible Preferred Stock. The Series E Convertible Preferred Stock holds 2/3rds of the voting power of all shareholders at any time that corporate action requires a vote of shareholders. As a result, holders of common stock do not have voting control over the Company.
Because we are a “smaller reporting company,” we may take advantage of certain scaled disclosures available to us, resulting in holders of our securities receiving less information than they would receive from a public company that is not a smaller reporting company.
We are a “smaller reporting company” as defined in the Exchange Act. As a smaller reporting company, we may take advantage of certain of the scaled disclosures available to smaller reporting companies and will be able to take advantage of these scaled disclosures for so long as (i) our voting and non-voting common stock held by non-affiliates is less than $250 million measured on the last business day of our second fiscal quarter, or(ii) our annual revenue is less than $100 million during the most recently completed fiscal year and our voting and non-voting common stock held by non-affiliates is less than $700 million measured on the last business day of our second fiscal quarter. To the extent we take advantage of any reduced disclosure obligations, it may make it harder for investors to analyze our results of operations and financial prospectus in comparison with other public companies.
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To fund our operations, we may conduct further offerings in the future, in which case our common stock may be diluted.
To fund our business operations, we anticipate continuing to rely on sales of its securities, which may include common stock, preferred stock, convertible debt and/or warrants convertible or exercisable into shares of common stock. Common stock may be issued in return for additional funds or upon conversion or exercise of outstanding convertible debentures or warrants. If additional common stock is issued, the price per share of the common stock could be lower than the price paid by existing holders of common stock, and the percentage interest of those shareholders will be lower. This result is referred to as “dilution,” which could result in a reduction in the per share value of your shares of common stock. Our failure or inability to raise capital when needed or on terms acceptable to us and our shareholders could have a material adverse effect on our business, financial condition and results of operations and would also have a negative adverse effect on the price of our common stock.
We have and may in the future utilize debt financing to fund our operations.
If we undertake debt financing to fund our operations, the financing may involve significant restrictive covenants. In addition, there can be no assurance that such financing will be available on terms satisfactory to us, if at all. Our failure or inability to obtain financing when needed or on terms acceptable to us and our shareholders could have a material adverse effect on our business, financial condition and results of operations and would also have a negative adverse effect on the price of our common stock.
The trading price of our common stock may fluctuate significantly.
Volatility in the trading price of shares of our common stock may prevent shareholders from being able to sell shares of 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 earning or those of other companies in the same industry; | |
| ● | sales of our common stock by our management; | |
| ● | public reaction to our press releases, public announcements and filing with the SEC; | |
| ● | changes in earnings estimates or recommendations by research analysts who track common stock or the stock of other companies in the same 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; and | |
| ● | changes in general economic conditions in the U.S. and in global economies and financial markets, including changes resulting from war or terrorist incidents. |
In addition, in recent years, the stock market has experienced significant price and volume fluctuations. This volatility has had a substantial impact on the trading price of securities issued by many companies. The changes frequently occur irrespective of the operating performance of the affected companies. As a result, the trading price of our common stock could fluctuate based upon factors that have little or nothing to do with our business.
Because we are a small company with a limited operating history, holders of common stock may find it difficult to sell their stock in the public markets.
The number of persons interested in purchasing our common stock at any given time may be relatively small. This situation is attributable to a number of factors. One factor is that we are a small company that is still relatively unknown to stock analysts, stock brokers, institutional investors, and others in the investment community that generate or influence sales volume. Another factor is that, even if we came to the attention of these persons, they tend to be risk-averse and would likely be reluctant to follow an unproven company such as ours. Furthermore, many brokerage firms may not be willing to effect transactions in our securities, including our common stock. As a consequence, there may be periods when trading activity in our common stock is minimal or even non-existent, as compared to trading activity in the securities of a seasoned issuer with a large and steady volume of trading activity. We cannot give you any assurance that an active public trading market for our common stock or other securities will develop or be sustained, or that, if developed, the trading levels will be sustained.
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Our shares of common stock are subject to the SEC’s “penny stock” rules that limit trading activity in the market, which may make it more difficult for holders of common stock to sell their shares.
Penny stocks are generally defined as equity securities with a price of less than $5.00. Because our common stock trades at less than $5.00 per share, we are subject to the SEC’s penny stock rules that require a broker-dealer to deliver extensive disclosure to its customers before 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, disclose the compensation of the broker-dealer and its salesperson in the transaction, and provide monthly account statements showing the market value of each penny stock held by the customer. Under the penny stock regulations, unless the broker-dealer is otherwise exempt, 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 before the sale. As a general rule, an individual with a net worth over $1,000,000 or an annual income over $200,000 individually or $300,000 together with his or her 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 shares of our common stock. These disclosure requirements may reduce the trading activity of our common stock, which may make it more difficult for shareholders of our common stock 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. Before 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 shares of common stock and may have an adverse effect on the market for our securities.
We do 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. Our dividend policy will be reviewed from time to time by our Board of Directors in the context of its earnings, financial condition and other relevant factors. Until we pay dividends, which we may never do, the holders of shares of common stock will not receive a return on those shares unless they are able to sell those shares at the desired price, if at all, 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 holders purchased their common stock.
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, including costs associated with applicable corporate governance requirements such as those required by the Sarbanes-Oxley Act of 2002, and with other rules issued or implemented by the SEC. 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.
Our business is at an early stage, and we have not yet generated any profits.
RAD I, our primary operating subsidiary, was formed and made its first sale in 2016. Accordingly, we have 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 young enterprises. These include likely fluctuations in operating results as we 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 us.
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Due to his ownership of Series E Preferred Stock, our Chief Executive Officer has voting rights equal to 66-2/3% of the voting rights held by all of our outstanding capital stock, giving him substantial control over our business and affairs and creating actual or potential conflicts of interests between his interests and the interests of the shareholders.
Our Chief Executive Officer holds 3,350,000 shares of Series E Preferred Stock. Because the Series E Preferred Stock has voting rights equal to 66-2/3% of the voting rights held by all of our outstanding capital stock, he has voting control over any matter to be voted upon by the shareholders of the Company, allowing him to exercise substantial control over our business and affairs. Moreover, his ownership of the Series E Preferred Stock creates the potential for conflicts of interest between his interests and the interests of the shareholders holding junior shares, including those holding common shares.
The Chief Executive Officer’s ownership of Series F Preferred Stock permits him to convert the Series F Preferred Shares into a multiple of shares of the then-outstanding common stock. Any such conversion of his Series F Preferred Shares would cause substantial dilution of the shares of common stock held by our common stock shareholders.
The Chief Executive Officer owns 2,450 shares of Series F Preferred Stock. The Series F Preferred Stock is convertible at the option of the holder into a multiple of the then-outstanding shares of common stock. The Chief Executive Officer’s conversion of shares of Series F Preferred Stock into common stock would substantially dilute the outstanding shares of common stock held by the common stock shareholders.
RISKS RELATED TO THE EQUITY FINANCING AGREEMENT WITH GHS
Should GHS sell the ____ shares being registered herein or some lesser material amount pursuant to the Equity Financing Agreement and/or the Securities Purchase Agreement, , sales of our Shares into the open market may cause material decreases in our stock price and decrease the percentage ownership of shares held by our other shareholders.
The one billion shares of our common stock that are being registered herein may be sold into the market by GHS, thereby causing dilution of the shares and material stock price declines. Additionally, the respective percentage ownership held by each of our shareholders will materially decrease as a result of GHS sale of one billion shares or a lesser material share amount.
Funding from the Purchase Agreement and the Securities Purchase Agreement may be limited or insufficient to fund our operations or to implement our strategy.
Under our Purchase Agreement with GHS, upon effectiveness of the registration statement of which this prospectus is a part, and subject to other conditions, we may direct GHS to purchase up to 6,000,000,000 shares of our common stock over a 24-month period. Under our Securities Purchase Agreement with GHS. Factors may negatively affect the amount of proceeds we receive, including our share price, discount to market, and other factors relating to our common stock.
There can be no assurance that we will be able to receive all or any of the total commitment from GHS because the Purchase Agreement contains certain limitations, restrictions, requirements, conditions and other provisions that could limit our ability to cause GHS to buy common stock from us. For instance, we are prohibited from issuing a Draw Down Notice if the amount requested in such Draw Down Notice exceeds the Maximum Draw Down Amount, or the sale of Shares pursuant to the Draw Down Notice would cause us to sell or GHS to purchase an aggregate number of shares of our common stock which would result in beneficial ownership by GHS of more than 4.99% of our common stock (as calculated pursuant to Section 13(d) of the Exchange Act and the rules and regulations thereunder). Moreover, there are limitations with respect to the frequency with which we may provide Draw Down Notices to GHS under the Purchase Agreement. Also, as discussed above, there must be an effective registration statement covering the resale of any Shares to be issued pursuant to any draw down under the Purchase Agreement, and the registration statement of which this prospectus is a part, which covers the resale of up to 6,000,000,000 shares that may be issuable pursuant to draw downs under the Purchase Agreement.
The extent to which we rely on GHS as a source of funding will depend on a number of factors, including the amount of working capital needed, the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. If obtaining sufficient funding from GHS were to prove unavailable or prohibitively dilutive, we would need to secure another source of funding. Even if we sell all 16000,000,000 shares of common stock under the Purchase Agreement with GHS, we will still need additional capital to fully implement our current business, operating plans, and development plans.
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You may experience future dilution as a result of this offering or future equity offerings.
We are registering for resale one billion shares that we may sell to GHS under the Purchase Agreement, which GHS may sell in the open market or in private transactions. Sales of our common stock shares under the Purchase Agreement may cause the material declines in the trading price of our common stock.
The Selling Stockholder will pay less than the then-prevailing market price for our common stock.
The common stock to be issued to Selling Stockholder GHS pursuant to the Purchase Agreement will be purchased at a discount to the closing price of the shares of our common stock during the applicable pricing period. The Selling Stockholder has a financial incentive to sell our common stock immediately upon receiving the shares to realize the profit equal to the difference between the discounted price and the market price. If GHS sells the shares, the price of our common stock could decrease. If our stock price decreases, GHS may have a further incentive to sell the shares of our common stock that it holds. These sales may have a further impact on our stock price.
We may use the net proceeds from sales of our common stock to GHS pursuant to the EFA in ways with which you may disagree.
We intend to use the net proceeds from sales of our common stock to GHS pursuant to the Purchase Agreement for working capital and general corporate purposes. As of the date of this prospectus, we cannot specify with certainty all of the particular uses of the proceeds from sales of common stock to GHS pursuant to the Purchase Agreement. Accordingly, we will have significant discretion in the use of the net proceeds of sales of common stock to GHS pursuant to the Purchase Agreement. It is possible that we may allocate the proceeds differently than investors in this offering desire or that we will fail to maximize our return on these proceeds. We may, subsequent to this offering, modify our intended use of the proceeds from sales of common stock to GHS pursuant to the Purchase Agreement to pursue strategic opportunities that may arise, such as potential acquisition opportunities. You will be relying on the judgment of our management with regard to the use of the net proceeds from the sales of common stock to GHS pursuant to the Purchase Agreement, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. Any failure to apply the proceeds from sales of common stock to GHS pursuant to the Purchase Agreement effectively could have a material adverse effect on our business and cause a decline in the market price of our common stock.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements.
In some cases, you can identify forward-looking statements by terminology, such as “expects”, “anticipates”, “intends”, “estimates”, “plans”, “potential”, “possible”, “probable”, “believes”, “seeks”, “may”, “will”, “should”, “could” or the negative of such terms or other similar expressions. Accordingly, these statements involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed in them. Any forward-looking statements are qualified in their entirety by reference to the factors discussed throughout this prospectus.
You should read this prospectus and the documents that we reference herein and have filed as exhibits to the registration statement, of which this prospectus is part, completely and with the understanding that our actual future results may be materially different from what we expect. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Because the risk factors referred to above could cause actual results or outcomes to differ materially from those expressed in any forward-looking statements made by us or on our behalf, you should not place undue reliance on any forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for us to predict which factors will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of the information presented in this prospectus, and particularly our forward-looking statements, by these cautionary statements.
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USE OF PROCEEDS
We will not receive any proceeds from the sale of common stock offered by the Selling Stockholder. However, we will receive proceeds from the sale of our common stock to Selling Stockholder pursuant to the Financing Agreement. The proceeds from our exercise of the Put right pursuant to the Financing Agreement will be used for general corporate and working capital purposes and acquisitions or assets, businesses or operations or for such other corporate purposes as the Board deems to be in our best interests. As of the date of this prospectus, we cannot specify with certainty all of the particular uses, and the respective amounts we may allocate to those uses, for the proceeds we may receive. Accordingly, we will have broad discretion in the way that we use these proceeds.
SELLING STOCKHOLDER
This prospectus relates to the resale from time to time by the selling stockholder identified herein of up to an aggregate of one billion shares of our common stock.
The Purchase Shares are being registered to permit public sales of such securities, and the selling stockholder may offer the Purchase Shares for resale from time to time pursuant to this prospectus. The selling stockholder may also sell, transfer or otherwise dispose of all or a portion of their Purchase Shares in transactions exempt from the registration requirements of the Securities Act or pursuant to another effective registration statement covering the sale of such securities.
The following table sets forth, based on information provided to us by the selling stockholder or known to us, the name of the selling stockholder, and the number of shares of our common stock beneficially owned by the selling stockholder before and after this offering. The number of shares owned are those beneficially owned, as determined under the rules of the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under these rules, beneficial ownership includes any shares of common stock as to which a person has sole or shared voting power or investment power and any shares of common stock that the person has the right to acquire within 60 days through the exercise of any option, warrant or right, through conversion of any security or pursuant to the automatic termination of a power of attorney or revocation of a trust, discretionary account or similar arrangement. The selling stockholder is not a broker-dealer or an affiliate of a broker-dealer. The selling stockholder has not had any material relationship with us or any of our predecessors or affiliates within the past three years.
We have assumed all of the Purchase Shares reflected offered hereunder will be sold from time to time in the offering covered by this prospectus. Because the selling stockholder may offer all or any portions of the Purchase Shares listed in the table below, no estimate can be given as to the amount of those Purchase Shares covered by this prospectus that will be held by the selling stockholder upon the termination of the offering.
GHS will be deemed to be an underwriter within the meaning of the Securities Act. Any profits realized by the selling stockholder may be deemed to be underwriting commissions.
| Selling Stockholder | Number of Shares Beneficially Owned Prior to Offering | Maximum Number of Shares Offered | Number of Shares owned After Offering | Percentage of Shares Owned After Offering | ||||||||||||
| GHS Investments, LLC | 0 | * | 0 | * | ||||||||||||
| * | The Maximum Number of Shares Offered is comprised of: (a) ( ) shares being registered herein with respect to the Equity and Financing Agreement. Assumes that all of the Purchase Shares held by the selling stockholder covered by this prospectus are sold and that the selling stockholder acquires no additional shares of common stock before the completion of this offering. However, as the selling stockholder can offer all, some, or none of their Purchase Shares, no definitive estimate can be given as to the number of Purchase Shares that the selling stockholders will ultimately offer or sell under this prospectus. Mark Grober exercises dispositive power over the shares. The address of GHS is 420 Jericho Turnpike, Suite 102, Jericho, NY 11753. |
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PLAN OF DISTRIBUTION
The selling stockholder may, from time to time, sell any or all of its shares of our common stock on OTC Pink or any other stock exchange, market officers existing as of the time of such repeal or modification trading facility on which the shares of our common stock are traded, or in private transactions. These sales may be at fixed prices, prevailing market prices at the time of sale, at varying prices, or at negotiated prices. The selling stockholder may use any one or more of the following methods when selling shares:
| ● | ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers; | |
| ● | block trades in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; | |
| ● | purchases by a broker-dealer as principal and resale by the broker-dealer for its account; | |
| ● | privately negotiated transactions; | |
| ● | broker-dealers may agree with the selling stockholders to sell a specified number of such shares at a stipulated price per share; or | |
| ● | a combination of any such methods of sale. |
Additionally, broker-dealers engaged by the selling stockholder may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling stockholder (or, if any broker-dealer acts as agent for the purchaser of shares, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this prospectus, in the case of an agency transaction not in excess of a customary brokerage commissions.
GHS is an underwriter within the meaning of the Securities Act, and any broker-dealers or agents that are involved in selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. Any commissions received by such broker-dealers or agents, and any profit on the resale of the shares purchased by them, may be deemed to be underwriting commissions or discounts under the Securities Act. GHS has informed us that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute our common stock.
Discounts, concessions, commissions and similar selling expenses, if any, attributable to the sale of shares will be borne by the selling stockholder. The selling stockholder may agree to indemnify any agent, dealer, or broker-dealer that participates in transactions involving sales of the shares if liabilities are imposed on that person under the Securities Act.
We are required to pay certain fees and expenses incurred by us incident to the registration of the shares covered by this prospectus. We will not receive any proceeds from the resale of any of the shares of our common stock by the selling stockholder. We will receive proceeds from the sale of our common stock to GHS under the GHS Purchase Agreement. Neither the GHS Purchase Agreement with GHS nor any rights of the parties under the GHS Purchase Agreement may be assigned or delegated to any other person.
The Purchase Shares will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the Purchase Shares may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the Purchase Shares may not simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of shares of the common stock by the selling stockholder or any other person. We will make copies of this prospectus available to the selling stockholder.
DESCRIPTION OF BUSINESS
Business and Historical Overview
Robotic Assistance Devices, LLC was incorporated in the State of Wyoming on July 26, 2016, as an LLC and was founded by current President Steve Reinharz. Mr. Reinharz, has 25+ 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 started his first security integration company in 1996, which he grew to 30+ employees before closing that company in 2003. In 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc. (“RAD”), through the issuance of 10,000 common shares to its sole shareholder.
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, On the Move Systems Corp. changed its name to Artificial Intelligence Technology Solutions Inc. (“AITX”).
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In 2017, AITX acquired all the ownership and equity interests in RAD (the “Acquisition”). Before the Acquisition, AITX’s business focus had been transportation services, and AITX was exploring the on-demand logistics market by developing a network of logistics partnerships. After the Acquisition, AITX shifted its business focus to align with RAD’s mission. Since that time, AITX has been engaged in pursuing the delivery of artificial intelligence (AI) and robotic solutions for operational, security, and monitoring needs. More specifically, we is focused on applying advanced 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.
Since substantially all of AITX’s operations were disposed of with the transaction’s consummation, the Acquisition was treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes. AITX recorded no goodwill or other intangible assets as a result of the Acquisition. RAD is treated as the accounting acquirer as its stockholders control over us after the Acquisition, even though AITX was the legal acquirer. Therefore, the assets, liabilities, and historical operations reflected in these financial statements are those of RAD as if RAD had always been the reporting company.
RAD’s solutions are offered as a recurring monthly subscription, typically with a minimum 12-month subscription contract. RAD’s solutions are expected to earn over 75% gross margin over the life of each deployed asset when under subscription. RAD also sells units which generally limits gross margin to the 50% range. 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.
Company Strategies
We apply our Artificial Intelligence (AI) technology to solve enterprise problems categorized as expensive, repetitive, difficult to staff, and outside of the core competencies of our client or prospective client organizations.
A short list of basic examples include:
| 1. | Typical security guard-related functions such as monitoring a parking lot during and after hours and responding appropriately. This scenario applies to perimeters, interior yard areas, and related similar environments. | |
| 2. | Integrated hardware/software with AI-driven responses, simulating and expanding on what legacy or manned solutions could perform. | |
| 3. | Automation of common access control functions through technology utilizing facial recognition and machine vision, leapfrogging most legacy solutions in use today. |
RAD’s first industry focus is the more than $100 billion global security services market.1 RAD’s current goal is to disrupt and capture a significant portion of both the human security guard market (over $30 billion)2 and “physical security” (video surveillance, access control, visitor management, etc.) market (over $20 billion) through its innovative RAD solution ecosystem.
RAD solutions are unique because they:
| 1. | Start with an AI-driven autonomous response utilizing cellular-optimized communications, while easily connecting to a human operator for a manned response, as needed. | |
| 2. | Use unique hardware purpose-built by RAD for delivery of these solutions. Various form factors have been customized to deliver this new functionality. | |
| 3. | Deliver services through RAD-developed software and cloud services, allowing enterprise IT groups to focus on core competencies instead of maintenance of complex video and security platforms. |
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/
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AITX Subsidiaries
AITX owns and operates three (3) wholly-owned subsidiaries.
| 1. | Robotic Assistance Devices, Inc. (RAD I) is the primary operating company of AITX. We hold the dealer and end-user contracts, employ all US employees, operates the California and Michigan facilities, and is the primary industry-facing entity of AITX. RAD I owns all intellectual property related to RADSoC™, RAD Mobile SOC™, RADGuard™, and their core operating architecture. RAD I owns everything related to AITX’s line of stationary devices and their manufacturing. RAD I also implements and services the devices. |
| 2. | Robotic Assistance Devices Group, Inc. (RAD G) is RAD G is an AITX subsidiary, separate from RAD I and RAD M, created for the purposes of expected future sales through a channel that is incompatible and non-competitive with RAD I’s existing channel. RAD G is focused on the development of advanced software and electronics solutions Additional solutions under development are likely to have a direct go-to-market strategy that complements RAD I’s strategy. Development efforts for these entities are highly confidential and will remain so until marketable solutions are ready to launch. |
| 3. | Robotic Assistance Devices Mobile, Inc. (RAD M) is RAD M is an AITX subsidiary, separate from RAD I and RAD G, created for the purposes of future developments, partnerships, and marketing in which we may engage in the future. RAD M is focused on the development of autonomous mobile devices, both ground-based and airborne. |
Background - First Commercial Rugged Outdoor Security Robot
Steven Reinharz started RAD 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 proofs-of-concept 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 start in October 2017 but were delayed until December 2017 due to various supply chain challenges.
By March 2018 it was apparent that S5 platform was not sustainable and RAD began to pull robots out of service.
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. The Company attempted over 40 deployments 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. This convertible debt has largely been converted to long-term debt and warrants as shown in these financial filings.
ROAMEO will deliver on AITX’s goal of bringing the first outdoor, rugged, commercial security and facility robot to market. This mobile solution will complement the stationary systems AITX already has operating in physical security applications serving customers in a wide range of environments.
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 ultimately realize the delivery of these solutions, a set of “stationary robots” required development.
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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 as a stationary human security guard, plus many tasks that human guards cannot, and does so at approximately 15% of the cost. There is no known comparable solution available today that blends technology, usability, unique features, and price. SCOT received an enthusiastic response from the security market and industry accolades. SCOT’s positive reception reinvigorated RAD, which accelerated the development of the software and cloud services that support SCOT. SCOT runs on the RAD Software Suite™. This software suite is a cloud and mobile platform at the heart of all RAD security solutions.
A beta version SCOT was first shown to potential customers at the end of February 2018 in an exposition held in Ohio that tested customer reception and elicited voice-of-the-customer input. SCOT and the preliminary RAD Software Suite received a favorable customer response. Customer feedback was incorporated into SCOT, and ideas on SCOT derivatives were added to the hardware development roadmap.
In April 2018, at the ISC West, a large annual physical security event held in the United States, SCOT won three awards: (1) The Security Industry Association’s (SIA) New Product Award for Law Enforcement/Guarding3, (2) A 2018 Secure Campus Award from Campus Security and Life Safety Magazine, and (3) A ‘Govie’ award for government security solutions from Security Today Magazine.
RAD has since won numerous awards for its solutions, including:
RAD Light My Way™, Secure Campus 2022 Awards, in the categories of ‘Security & Personal Safety Devices’ & ‘Artificial Intelligence’
AVA™ 3.0 with STAN™, Security Industry Association NPS Awards, in the category of ‘Access Control Software, Hardware, Devices and Peripherals’
ROSA™ with RAD Light My Way, CBRE Innovation Challenge 2021, in the category of ‘Best Workplace Experience Solution Award’
ROSA 180™, American Security Today 2021 ASTORS Awards, in the categories of ‘Best Robotic Perimeter Protection’ & ‘Best Motion Detection Solution’
RAD’s pivot to SCOT and its future derivatives is complete, and RAD’s current facilities can produce a mix of up to 100 units per month with moderate additional investment in equipment and manpower.
Software Solutions
RAD has created a variety of front-end and back-end software solutions to power its ecosystem. RADGUARD is customer-facing software (on the touchscreens of RAD’s field devices), and management solutions include 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 are within a back-end application called SCOT Manager.
RAD has developed Visitor Management, Access Control, and other applications itself 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 recently introduced its own Video Management System into RADSOC, delivering a fully integrated solution that facilitates robust security and property management capabilities.
We believe that RAD’s ability to deliver easy-to-use, easy-to-obtain, and easy-to-support software, combined with custom workflow-automation applications, is key to our success.
3 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.
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Manufacturing & Assembly
RAD uses various 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. In addition, all pieces within any RAD device can be procured from a choice of suppliers.
RAD’s margins are based on current small batch production and assembly. We expect that economies of scale will drive greater gross margin as quantities and efficiencies increase.
Team and Culture
AITX has built a strong start-up culture based on performance, sacrifice, and rewards. Attracting employees who can thrive in this environment requires a different approach to corporate growth and development. RAD’s governing philosophy centers around the principles of “Emotional Intelligence. Self-awareness, composure, internal motivation, empathy, and social skills are prerequisites for joining the RAD team, and each candidate interview begins with a review of the foundational elements that comprise RAD culture.
Team members are open to multitasking and wearing multiple hats, as situations demand. This allows management to focus on larger goals and long-term strategies. We try to ensure that our entire staff shares the same core beliefs and values , allowing us to adapt and adjust quickly to changes that might grind other companies to a halt. Members have been no stranger to the difficulties that face a startup, including unexpected setbacks, delays in funding, or a cash crunch, but they have persevered with dedication and enthusiasm for our greater mission. They have met incredibly tight deadlines, volunteered to make financial sacrifices, and assisted wherever and however they can.
We believe that RAD’s high-EQ work culture creates productive, motivated employees that has allowed us to weather the difficult period of robot deployments and our transition to 2nd generation solutions.
Market Environment
RAD believes that its experience has shown that the security market is ripe for disruption. It has captured the interest of many Fortune 500 companies. We belief that no other company operating in the physical security space has the solutions, distribution channel, reputation, sales or support model to rival RAD in the near term. In addition, we expect that the launch of RAD’s mobile solutions will significantly increase the gap between it and 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, a platform for AI processing, usage analytics, cloud-sided video, communications interface, audit logs, and much more.
Prospective ROAMEO Impact
Our release of ROAMEO positions it as a near-competitor to Knightscope, a Palo Alto based robotics company in business since 2012. RAD’s approach is different from Knightscope’s on many elements of technology.
RAD expects that a small number of expected ROAMEO orders will make a substantial impact on RAD’s financial performance and create momentum for significant adoption of the entire RAD lineup.
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Customer Acceptance of RAD Solutions
RAD end-users include one Fortune Top 10 company and a number of other Fortune 500 companies. RAD is currently deployed in logistics, commercial real estate, healthcare, amusement, manufacturing and retail industries. We believe that if RAD is ultimately deployed to only 5% of the facilities within any of these industries, we will be profitable.
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 steady demand, to reduce delivery time to 15 days.
RAD Industry Leadership Role
Steven 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 industry’s 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 a lecture to NYC’s ASIS CPP group that qualified as a continuing education credit.
It is expected that Steven Reinharz will continue his promotion of the new paradigm for the next few years until adoption is widespread.
Go To Market Strategy
RAD’s strategy continues to focus on the creation and support of a strong dealer channel. This approach affords multiple benefits to RAD with few downsides. RAD has successfully integrated through the largest U.S. guarding company and recently signed another top-three guarding company as a RAD dealer. Furthermore, RAD has been signing up and developing mid-sized and smaller dealers. RAD is on track to establish a focused group of dealers, most of whom will exclusively represent RAD solutions.
Supplemental to nurturing a solid dealer channel, 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
We may be subject to competition by competitors that have greater operating histories, cash and operational resources than we do.
Employees
As of May , 7, 2024, we have a headcount of 97 fully dedicated full-time equivalents, including 46 RAD Inc. employees, 28 overseas contractors, and 23 employees of a Canadian research and development company. None of our employees are represented by a union. We consider our employee relations to be excellent. AITX’ principle shareholder owns a minority interest in the Canadian research and develop company but has not received any compensation of any kind from that company to date.
Accomplishments & Highlights
AITX, and its subsidiaries RAD I, RAD M, and RAD G, list of accomplishments highlights successes in adding to the strength of its executive leadership team, expanding its sales and distribution channels, launching new products, while growing its presence, visibility and profile within its existing marketplaces. Milestones and accomplishments over the past 12 months include:
SOC 2 Compliance
The SOC 2 Report has become a benchmark standard, and now an often-specified requirement, in the software procurement process. Established by the American Institute of Certified Public Accountants (AICPA), criteria and reporting principles are outlined as a means for organizations to create a documented framework of policies and procedures to prove how they manage and secure data in the cloud and ensure protection of customer privacy and ensure internal communications are suitably handled. This achievement reflects our stated goals of best-in-class data protection and internal processes.
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| ● | Implementation of ERP (enterprise resource planning) System |
During the fiscal year the Company made a strategic investment in state-of-the-art ERP software to optimize its business process management, production capabilities and to better serve customers. We expect to have greater visibility on sales activities, trends, lead management and sales forecasting utilizing the new ERP.
| ● | Announced Strategic Alliances and Partnerships |
We took steps to integrate its technology portfolio with other tech companies, working to bring solutions to market in a faster, more financially efficient manner. Announced alliances include:
March 24, 2021 - RAD to Integrate EAGL Gunshot Detection Technology into All Security Devices
https://radsecurity.com/robotic-assistance-devices-to-integrate-eagl-gunshot-detection-technology-into-all-security-devices/
August 19, 2021 - AITX Announces Details of Strategic Relationship with Ghost Robotics Corporation
https://radsecurity.com/aitx-announces-details-of-strategic-relationship-with-ghost-robotics-corporation/
| ● | Authorized Dealers Added to Dealer Network |
RAD has more than 40 authorized dealers across the United States, Canada, and the EU, with plans for continued expansion. Dealers include the largest security companies in the world, including Allied Universal and Securitas. The ongoing addition of authorized dealers introduces and delivers RAD products to new markets. Dealer announcement and highlights include:
| ● | Discussion on Sales |
Sales funnel growth continued throughout the fiscal year with 419 net new sales account opportunities added to the funnel. An opportunity is mostly defined as an account that is exhibiting a problem that can be solved by RAD, has a budget, and has reached the point in the sales process where they have a quote they can sign.
During the fiscal year the sales team grew to 5 full time business development managers including the senior VP of Revenue, Troy McCanna. Mr. McCanna was elevated to this role in September of 2023 and leads four sales people. These four sales people include two long-term team members that have proven their capabilities and two newer sales team members that each have over 10 years of security industry sales experience.
The Company recognizes that conversion rate of opportunities remains low, which is somewhat typical for new-technology companies seeking to change the paradigm of operations for existing and mature industries. Specifically the Company identifies these obstacles to shortening the sales cycle:
Buyer fear of deploying new technology and the perceived risks associated with trying something new. The Company is tackling this challenge with using more referrals and references from existing clients as well as additional credibility-building through existing clients and industry organizations such as ASIS (RAD’s President holds a Board seat) and SIA (AITX’ CEO holds a Board seat).
Compliance questionnaires can take up 18 months, slowing down final approvals. Company addresses this with packages of information related to penetration testing and cyber standards compliance and is set up to quickly turnaround detailed IT compliance questionnaires, some of which can be hundreds of detailed questions.
Security Director’s perceived need for ‘1 pane of glass’ and related integration challenges. The Company works through these by sharing the RAD paradigm and allowing integration with outside companies such as Immix and Milestone.
As of February 29, 2024, the Company had 444 devices deployed with a backlog of 116 contracted and not deployed. Deployed devices include 67 sold units, about one third of which contribute SaaS revenue with the rest scheduled to produce SaaS revenue this fiscal year.
In fiscal year the company forecasted new device contracts in the range between 250-1250. The final number of new device contracts was 400. These 400 new contracts and general FY2024 performance grew monthly recurring revenue by approximately 4 times.
Currently the company has a defined and quoted sales pipeline of 1230 units of which 70% are ROSA, 21% RIO and 8% AVA. The company expects the % of sales for this fiscal year to weigh more heavily towards RIO with over 50% of the quotes and opportunities to be RIO related. The company is expected between 800-1,200 additional RAD Inc devices to be contracted this fiscal year.
Additionally the company expects to sell up to 20,000 of it’s ‘RADCAM’ product from it’s RAD R subsidiary.
Uniformly end users and dealers report significant problems with recruiting and retaining manned labor. This fact is the primary driver of clients’ and dealers interest in RAD solutions. Management feels that the labor problem is going to increase in severity as inflationary pressures continue to drive up employee wages (making guard services more expensive) and reduce economic activity (presumably forcing companies to search out lower cost solutions to existing problems).
Management, based on daily conversations with clients, dealers and prospects, feels very strongly that there will be continued increasing demand for our solutions.
| ● | Additional Points of Interest |
Management expects that as volume production grows, starting with ROSA, the company can achieve significant improvements in cost of goods sold. Part of these savings will be passed to the market in the form of reduced costs. Timing is dependent on parts costs reduction and timing of improvement of production efficiencies.
Management has registered a portfolio of Trademarks. Management may, depending on budget and finance, seek to acquire utility patents for a few innovations that the Company feels desire patent protection and are easily defensible.
Management suggests that revenue from device monitoring from RAD partners could, over time, become up to 15% of company revenues. There is little to no cost associated with this revenue stream.
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MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market for Common Stock
Our common stock trades on the OTC Pink under the symbol “AITX”.
Holders
As of May 7), 2024, there were approximately 34 holders of our common stock, not including shares held in “street name” in brokerage accounts, which are unknown.
Dividends
We have not declared or paid any cash dividends on its common stock and does not anticipate paying dividends for the foreseeable future.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management Discussion and Analysis
Results of Operations for the year end of February 29, 2024 and February 28, 2023
Forward-Looking Statements
The following discussion of our financial condition and results of operations for the year ends ended February 29, 2024 and February 28, 2023 should be read in conjunction with our unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended February 28, 2023, as filed on June 14, 2023 with the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms “AITX”, the “Company”, “we”, “us”, and “our” refer to Artificial Intelligence Technology Solutions Inc.
Overview
AITX was incorporated in Florida on March 25, 2010. AITX reincorporated into Nevada on February 17, 2015. AITX’s fiscal year end is February 28 (February 29 during leap year). AITX is located at 10800 Galaxie Ave., Ferndale Michigan, 48220, and our telephone number is 877-767-6268.
AITX’s mission is to apply Artificial Intelligence (AI) technology to solve enterprise problems categorized as expensive, repetitive, difficult to staff, and outside of the core competencies of the client organization.
A short list of basic examples include:
| 1. | Typical security guard-related functions such as monitoring a parking lot during and after hours and responding appropriately. This scenario applies to perimeters, interior yard areas, and related similar environments. | |
| 2. | Integrated hardware/software with AI-driven responses, simulating and expanding on what legacy or manned solutions could perform. | |
| 3. | Automation of common access control functions through technology utilizing facial recognition and machine vision, leapfrogging most legacy solutions in use today. |
RAD solutions are unique because they:
| 1. | Start with an AI-driven autonomous response utilizing cellular-optimized communications, while easily connecting to a human operator for a manned response, as needed. | |
| 2. | Use unique hardware purpose-built by RAD for delivery of these solutions. Various form factors have been customized to deliver this new functionality. | |
| 3. | Deliver services through RAD-developed software and cloud services, allowing enterprise IT groups to focus on core competencies instead of maintenance of complex video and security platforms. |
We encourage everyone to ensure they have the most up to date news by visiting AITX at AITX News - AITX - Artificial Intelligence Technology Solutions.
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Results of Operations
The following table shows our results of operations for the years ended February 29, 2024 and February 28, 2023. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
| Period | ||||||||||||||||
| Year Ended | Year Ended | Change | ||||||||||||||
| February 29, 2024 | February 28, 2023 | Dollars | Percentage | |||||||||||||
| Revenues | $ | 2,227,559 | $ | 1,331,956 | $ | 895,603 | 67 | % | ||||||||
| Gross profit | 1,096,457 | 653,883 | 442,574 | 68 | % | |||||||||||
| Operating expenses | 15,085,869 | 13,344,563 | 1,741,306 | 13 | % | |||||||||||
| Loss from operations | (13,989,412 | ) | (12,690,680 | ) | (1,298.732 | ) | 10 | % | ||||||||
| Other income (expense), net | (6,719,304 | ) | (5,418,777 | ) | (1,300,527 | ) | (24 | )% | ||||||||
| Net loss | $ | (20,708,716 | ) | $ | (18,109,457 | ) | $ | (2,599,259 | ) | 14 | % | |||||
The following table presents revenues from contracts with customers disaggregated by product/service:
| Year Ended | Year Ended | Change | ||||||||||||||
| February 29, 2024 | February 28, 2023 | Dollars | Percentage | |||||||||||||
| Device rental activities | $ | 1,626,207 | $ | 754,126 | $ | 872,081 | 116 | % | ||||||||
| Direct sales of goods and services | 601,352 | 577,830 | 23,522 | 4 | % | |||||||||||
| $ | 2,227,559 | $ | 1,331,956 | $ | 895,603 | 67 | % | |||||||||
Revenue
Total revenue for the year ended February 29, 2024 was $2,227,559, which represented an increase of $895,603 compared to total revenue of $1,331,956 for the year ended February 28, 2023. Rental activities increased by $872,071 or 116%, as the Company continues to grow its product line and customer base. Direct sales grew by 4% driven by higher training revenue for the year ended February 29, 2024.
Gross profit
Total gross profit for the year ended February 29, 2024 was $1,096,457, which represented an increase of $442.574, compared to total gross profit of $653,883 for the year ended February 28, 2023. The increase is a result of the increase in revenues above, and gross profit % which was 49% for the year ended February 29, 2024 was also 49% for the prior year. The Gross profit % was stable as the increase in higher margin rental activities in the product mix, and overhead being allocated over a higher sales base was offset by a higher inventory provision for the permanent impairment in value of two products that the Company will not be continuing.in their current form
Operating expenses
Operating expenses for the years ended February 29, 2024 and February 28, 2023 comprised of the following:
| Period | Change | |||||||||||||||
Year Ended February 29, 2024 | Year Ended February 28, 2023 | Dollars | Percentage | |||||||||||||
| Research and development | $ | 2,878,134 | $ | 3,625,468 | $ | (747,334 | ) | (21) | % | |||||||
| General and administrative | 10,525,531 | 8,980,709 | 1,544,822 | 17 | % | |||||||||||
| Depreciation and amortization | 854,047 | 478,115 | 375,932 | 79 | % | |||||||||||
| Impairment on revenue earning devices | 584,177 | - | 548,177 | - | ||||||||||||
| Operating lease cost and rent | 260,406 | 260,271 | 135 | 0 | % | |||||||||||
| (Gain) loss on disposal of fixed assets | (16,426 | ) | - | (16,426 | ) | - | ||||||||||
| Operating expenses | $ | 15,085,869 | $ | 13,344,563 | $ | 1,741,306 | 13 | % | ||||||||
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Our operating expenses were comprised of general and administrative expenses, research and development, depreciation and amortization, operating lease and rent and a (gain) loss on disposal 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 29, 2024 and February 28, 2023 were $15,085,869 and $13,344,563, respectively. The overall $1,741,206 decrease in operating expenses was primarily attributable to the following changes in operating expenses:
| ● | Research and development expenses decreased by $747,334 as the Company focused on current product development and spent less money on longer term projects. | |
| ● | General and administrative expenses increased by $1,544,822 primarily due to the following changes: |
— |
For the year ended February 29, 2024 stock based compensation to CEO in equity awards was $1,521,000 with a charge of $272,599 for the Employee Stock Option Plan (ESOP) all totaling $1,793,599 compare with stock based compensation to CEO in equity awards was $499,500 with $118,500 fees paid to consultants and a charge of $ 122,050 for the ESOP all totaling $740,050 for the year ended February 28, 2023. This represents an increase of $1,053,549 in stock based compensation. The stock based compensation for the CEO is payable in Series G and has been deferred until after a year. | |
| — | Wages, salaries and payroll levies for the CEO increased by $731,447 in discretionary bonus charged, $537,747 of which is deferred compensation and will not be paid out this year. | |
| — | Wages, salaries and payroll levies for the staff decreased by $218,382 due to staff reductions early in the fiscal year. | |
| — | Professional fees decreased by $117,726 due to decreases in financial reporting and consulting costs. | |
| — | Office expense increased by $74,476. | |
| — | Freight, duty and brokerage increased by $154,172 due to higher purchases in 2024. | |
| — | Advertising and marketing costs decreased by $179,742 as the Company reduced its promotion efforts. | |
| — | Bad debts expense decreased by $139,989 due to write off of uncollectible accounts in the prior year. | |
| — | Supplies increased slightly by $11,102. | |
| — | Trade shows and travel decreased by $111,752 as a result of less promotional and business travel in fiscal 2024. | |
| — | The remaining increases were distributed amongst other general and administrative accounts such as website design warehouse expense, repairs and maintenance, and utilities amongst others. |
| ● | Operating lease cost and rent increased by $135.There was a new vehicle lease and a lease for premises that expired during the current fiscal year. | |
| ● | Depreciation and amortization increased by $375,932 due to the increase in revenue earning devices and demo devices, computer equipment, tooling ,leasehold improvements and manufacturing equipment in fixed assets. | |
| ● | (Gain) loss on disposal of fixed assets increased by $16,426 due to a vehicle disposal in 2024 that yielded a gain. |
| ● | Impairment on revenue earning devices was $584,177 for the year ending February 29,2024 due to the discontinuance of two products in their present form. There was no such impairment in the prior year’s period |
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 29, 2024 and February 28, 2023, was ($6719,304) and ($5,418,777), respectively.
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The change in other income (expense) was due to the following:
| ● | Change in fair value of derivative liabilities decreased by $3,595 due to the re-valuation of derivative liability on convertible notes that were converted or settled during the prior year ended February 28, 2023. At both February29, 2024 and February 28, 2023 there was no longer any convertible debt. | |
| ● | Interest expense increased by $1,331,580. Amortization of debt discounts for the year ended February 29, 2024 of $2,384,163 compared with $1,980,033 for the year ended February 28, 2023. Interest expense was $4,011,681 for the year ended February 29, 2024 compared with $ $3,196,882 for the year ended February 28, 2023. Deferred variable payment obligation (DVPO) expense was $362,200 for the year ended February 29,2024 compared with $216,577 for the year ended February 28, 2023. Interest and debt amortization were both higher during the current year due to approximately $2 million in new debt. The increase in DVPO is related to the increase in sales. | |
| ● | Gain on settlement of debt increased by $34,788 due to a settlement in accounts payable during the current fiscal year. |
The Company’s loss from operations for the year ended February 29, 2024 was $13,989,412 which represented an increase in loss of $1,298,732 compared to a loss of $12,690,680 for the year ended February 28, 2023. The higher revenues and gross profit in 2024 were offset by higher operating expenses for the reasons set out above. Note that the Company had a net loss of $20.708,716 for the year ended February 29, 2024, as compared to net loss of $18,109,457 for the year ended February 28, 2023. This change is mostly attributable to an increase in other expense and an increase in general and administrative costs.
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 29, 2024, the Company had negative cash flow from operating activities of $12,951,743. As of February 29, 2024 the Company has an accumulated deficit of $132,962,457 and negative working capital of $18,099,085. Management does not anticipate having positive cash flow from operations in the near future. These factors raise 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 all 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. At the same time management points to its successful history with maintaining Company operations and reminds all with reasonable confidence this will continue. Management has plans to address the Company’s financial situation as follows:
Management is committed to raise either non-dilutive funds or minimally dilutive funds. There is no assurance that these funds will be able to be raised nor can we provide assurance that these possible raises may not have dilutive effects. In March 2023, the Company entered into an equity financing agreement whereby an investor will purchase up to $30,000,000 of the Company’s common stock at a discount over a two-year period. There remains approximately $21 million left to issue under this arrangement. Management believes that it has the necessary support to continue operations by continuing its funding methods in the following ways : growing revenues ,through equity proceeds, and issuing non-convertible debt. Management has had many recent conversations with the Company’s primary debt holder and believes that the non-convertible debt on the balance sheet will be extended. Management notes that non-convertible debt on the books has been extended by this debt holder twice in the past and notes that this debt holder has been a strong supporter of the Company.
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Capital Resources
The following table summarizes total current assets, liabilities and working capital for the period indicated:
| February 29, 2024 | February 28, 2023 | |||||||
| Current assets | $ | 3,616,566 | $ | 3,438,992 | ||||
| Current liabilities | 21,715,651 | 15,070,593 | ||||||
| Working capital | $ | (18,099,085 | ) | $ | (11,631,601 | ) | ||
As of February 29, 2024 and February 28, 2023, we had a cash balance of $105,926 and $939,759, respectively.
Summary of Cash Flows
| Year Ended February 29, 2024 | Year Ended February 28, 2023 | |||||||
| Net cash used in operating activities | $ | (12,951,743 | ) | $ | (12,577,395 | ) | ||
| Net cash provided by (used in) investing activities | $ | 4,194 | $ | (308,402 | ) | |||
| Net cash provided by financing activities | $ | 12,113,716 | $ | 9,177,410 | ||||
Net cash used in operating activities for the year ended February 29, 2024 was $12,951,753, which included a net loss of $20,708,716, non-cash activity such as the gain on settlement of debt of ($16,426), amortization of debt discount of $2,384,163, stock based compensation of $1,793,599, reduction in right of use asset $120,131, accretion of lease liability $130,020, increase in related party accrued payroll and interest $105,101, inventory provision of $437,820, bad debts expense $42,892, depreciation and amortization of $854,047 and change in operating assets and liabilities of $1,360,189.
Net cash provided by (used in) investing activities.
Net cash provided by investing activities for the year ended February 29, 2024 was $4,194. This consisted of the purchase of fixed assets of ($22,165) ,proceeds of disposal of fixed asset of $21,000 an reimbursement of security deposit of $5,359.
Net cash provided by (used in) financing activities.
Net cash provided by financing activities was $12,113,716 for the year ended February 29, 2024. This consisted of share proceeds net of issuance costs of $10,825,895 and proceeds from loans payable $1,750,000 offset by repayments of loans payable of $408,000 and net repayments on loan payable-related party of $54,179, respectively.
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MANAGEMENT
Directors and Executive Officers
Our business and affairs are managed under the direction of our Board and committees of the Board. Directors serve until the next annual meeting and until their successors are elected and qualified. Officers are appointed to serve until serve at the pleasure of the Board, subject to all rights, if any, of such officer under any contract of employment. The following table presents information regarding our executive officers and directors as of the date of this prospectus(1):
| Name | Age | Position | ||
| Steven Reinharz (1) | 49 | Chief Executive Officer, Secretary and Director (2) | ||
| Anthony Brenz | 63 | Chief Financial Officer |
| (1) | Director as of March 2, 2021 |
| (2) | All directors hold office until the next annual meeting of stockholders and until their successors have been duly elected and qualified. |
There are no agreements with respect to electing directors. Except as set forth below, none of the directors held any directorships during the past five years in any company with a class of securities registered pursuant to Section 12 of the Exchange Act or subject to the requirements of Section 15(d) of such act, or of any company registered as an investment company under the Investment Company Act of 1940.
Executive Officers
Biographical information concerning our director and executive officers listed above is set forth below.
Steven Reinharz. RAD was founded by Mr. Reinharz in July of 2016, and he has been continuously employed by RAD and its affiliated companies since that time. He is the holder of a majority of our capital stock. Mr. Reinharz has served as a member of the Board of Directors since March 2, 2021 and as our Chief Executive Officer, Chief Financial Officer, and Secretary of the Company since March 2, 2021 and resigned as our Chief Financial Officer as of April 26, 2021 upon Anthony Brenz’s appointment as our Chief Financial Officer. As our Chief Executive Officer and President of RAD, Mr. Reinharz leverages his extensive knowledge and interest in robotics and artificial intelligence to design and develop robotic solutions that increase business efficiency and deliver immediate and impressive cost savings. Mr. Reinharz is an active voice in both the security and artificial intelligence industries. He started and ran his own security integration company from the age of 24 to 31, becoming one of California’s leading system integrators. Mr. Reinharz later was part of a team that successfully sold an integrator to a global security firm for $42 million and has held various other security industry roles. Mr. Reinharz speaks and contributes to panels at ISC East and West, and ASIS. Mr. Reinharz is a leading member of several industry association committees, mostly through the Security Industry Association. Mr. Reinharz has called Orange County, California home since 1995, having grown up in Montreal and Toronto. He earned a dual Bachelor of Science degree in Political Science and Commercial Studies.
Anthony Brenz was appointed as our Chief Financial Officer on April 26, 2021. He is an accomplished senior financial and operational executive for over 20 years of experience in finance and operations, including corporate strategy, procurement and supply chain, human resources, and customer service. From April 2018 to December 2020, Anthony Brenz was the Vice President/Director Finance of AirBoss Flexible Products Company. From September 2014 to April 2018, he was the Chief Financial Officer/Vice President of Finance of Thomson Aerospace and Defense (a Parker Meggitt Company). From August 2012 to September 2014, he was the Vice President/Director of Finance of M B Aeospace US Holdings, Inc. Anthony Brenz received a Bachelor of Accountancy from Walsh College in Troy Michigan in 1989 and has been licensed as a Certified Public Accountant in Michigan since 1989.
There are no family relationships between any of the executive officers and directors.
Board Committees and Director Independence
Mr. Reinharz serves as director, and 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 directors. Since we do not have any independent directors and have only two directors, our directors believes that the establishment of committees of the Board would not provide any benefits to us and could be considered more form than substance.
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We currently have an employee director, Mr. Reinharz, but no 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.
Our directors are not “audit committee financial experts” within the meaning of Item 401(e) of Regulation S-K. As with most small, early stage companies, until such time that we further develop our 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 we are s able to expand our Board of Directors to include one or more independent directors, we intend 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
Steven Reinharz is our sole director and was appointed on March 2, 2021. He is the founder of our operating company, Robotic Assistance Devices, Inc. (see Steven Reinharz’ biography on page 25).
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
Apart from a settlement paid upon Garett Parsons resignation on June 22, 2021 totaling $265,700 no other compensation was paid for his services as a director. We reimburse our directors for all reasonable ordinary and necessary business-related expenses, but we did not pay any other director’s fees or any other cash compensation for services rendered as a director during the years ended February 28, 2023 and February 28, 2022 to any of the individuals serving on our Board during that period.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Exchange Act requires our executive officers and directors, and persons who beneficially own more than 10% of a registered class of our equity securities to file with the SEC initial statements of beneficial ownership, reports of changes in ownership and annual reports concerning their ownership of our common shares and other equity securities, on Forms 3, 4 and 5 respectively. Executive officers, directors and greater than 10% stockholders are required by the SEC regulations to furnish us with copies of all Section 16(a) reports they file. Based on our review of the copies of such forms received by us, or written representations that no other reports were required, and to the best of our knowledge, we believe that all of our officers, directors, and owners of 10% or more of our common stock filed all required Forms 3, 4, and 5.
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EXECUTIVE COMPENSATION
The following table summarizes all compensation recorded by us in the past two fiscal years for Mr. Reinharz , our President and Chief Executive Officer , Anthony Brenz, our Chief Financial Officer and Garret Parsons our former President, Chief Executive Officer and Chief Financial Officer.
2024 AND 2023 SUMMARY COMPENSATION TABLE
| Name and Principal Position | Year | Salary or Fees ($) | Bonus ($) | Stock Awards(2) ($) | Option Awards ($) | Non-Equity Incentive Plan Compensation ($) | Non-Qualified Deferred Compensation Earnings ($) | All Other Compensation ($) | Total ($) | |||||||||||||||||||||||||||
| Steven Reinharz | 2024 | 300,000 | 461,233 | 1,521,000 | — | — | 538,767 | — | 2,821,000 | |||||||||||||||||||||||||||
| Chief Executive Officer, Chief Financial Officer, Secretary (1) | 2023 | 300,000 | 280,908 | 499,500 | — | — | — | — | 1,080,408 | |||||||||||||||||||||||||||
| Anthony Brenz | 2024 | 188,813 | 1,000 | — | 17,975 | — | — | 1,200 | 208,988 | |||||||||||||||||||||||||||
| Chief Financial Officer (1) | 2023 | 190,000 | 1,500 | — | — | — | — | — | 191,500 | |||||||||||||||||||||||||||
| (1) | Steven Reinharz was appointed Chief Executive Officer, Chief Financial Officer and Secretary on March 2, 2021.Mr.Reinharz ceased being Chief Financial Officer on June 24, 2021 and on that date appointed Anthony Brenz as Chief Financial Officer |
| (2) | Stock awards are payable in Series G and are included in long term liabilities as they will not be paid out in the current year. |
Employment Agreements
On April 9, 2021 Mr. Reinharz entered into an employment agreement with us in connection with his service as Chief Executive Officer. The agreement began on April 9, 2021 and has a three-year term, renewable thereafter on an annual basis if neither party files a notice of termination 90 days prior to the term renewal date. The agreement provides for compensation of $240,000 base salary (to be reviewed annually by the Board of Directors) and bonuses to be granted at the discretion of the Board of Directors. In addition, we will grant stock options to Mr. Reinharz under the following conditions:
Award #1 Mr. Reinharz shall be granted an award of 10,000,000 million shares/options/warrants if Objective #1 is achieved. Objective #1: the price per share of our common stock has increased in value to an average of $0.30 for ten (10) days in a thirty-day trading period. For example, pursuant to our Stock Plan, if one is adopted, Mr. Reinharz may elect to exercise Award #1 on a cash or cashless basis at an exercise price of $0.15 per share/option/warrant.
Award #2 Mr. Reinharz shall be granted an award of 30,000,000 million shares/options/warrants if Objective #2 is achieved. Objective #2: the price per share of our Company’s common stock has increased in value to an average of $0.50 for ten (10) days in a thirty-day trading period. For example, pursuant to our Company Stock Plan, if one is adopted, Mr. Reinharz may elect to exercise Award #2 on a cash or cashless basis at an exercise price of $0.25 per share/option/warrant.
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On July 12, 2021 the Company and CEO amended the April 9, 2021 Employment Agreement effective July 1, 2021 whereby the following objectives and awards were added to the two existing ones:
| Objective #3: | Sales in any fiscal quarter exceed the total sales in fiscal year 2021 for the first time. |
| Award #3: | Five hundred (500) shares of Series G preferred stock |
| Objective #4: | One hundred fifty (150) devices are deployed in the marketplace. |
| Award #4: | Two hundred fifty (250) shares of Series G preferred stock. |
| Objective #5: | Year-to-date sales at any point in fiscal year 2022 exceed One Million Dollars ($1,000,000). |
| Award #5: | Two hundred fifty (250) shares of Series G preferred stock. |
| Objective #6: | The price per share of common stock has increased to and maintains a price of Ten Cents ($0.10) or more for ten (10) days in a thirty (30) day period. |
| Award #6: | Two hundred fifty (250) shares of Series G preferred stock. |
| Objective #7: | The price per share of common stock has increased to and maintains a price of Twenty Cents ($0.20) or more for ten (10) days in a thirty(30) day period. |
| Award #7: | Five hundred (500) shares of Series G preferred stock. |
| Objective #8: | The RAD 3.0 products are launched into the marketplace by November 30, 2022 |
| Award #8: | Five hundred (500) shares of Series G preferred stock |
| Objective #9 | RAD receives an order for fifty (50) units from a single customer. |
| Award #9: | Five hundred (500) shares of Series G preferred stock. |
On January 31, 2024 the Company added the following Objective effective March 1, 2022:
| Objective # 10 | In any fiscal quarter, attrition , measured by loss of recurring monthly revenue does not exceed 10% |
| Award #10 | Two hundred fifty (250) shares of Series G preferred stock. |
The fair value of the first two awards was obtained through the use of the Monte Carlo method was $69,350 with a charge to stock- based compensation and a corresponding charge to paid in capital. The fair value of the remaining rewards was determined by calculating the vesting amounts of each reward and then determining for each reporting period the requisite service rendered and applying that against the cash redemption value of the number of shares of Series G issuable for each tier in the agreement. For the period ended January 31, 2022 that amount totaled $1,979,500 with a charge to stock-based compensation and a corresponding charge to incentive compensation plan payable. With the achievement of objectives 3,4,5 and 8 of the equity awards described above the CEO was granted 1,500 Series G Preferred shares which were redeemed in the reporting period for $1,500,000 in cash. As part of the grant, we are responsible for grossing up the award value and has accrued additional compensation for the estimated taxes to be paid by the executive.
On April 20,2021 an offer letter was agreed with Anthony Brenz for a base salary of $180,000, a discretionary quarterly bonus and future participation in the Employee Stock Option Plan. Employment commenced on April 26, 2021 and Mr. Brenz was appointed as our Chief Financial Officer on June 24, 2021. The base salary was amended to $190,000 on January 1, 2022.
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Outstanding Equity Awards at 2024 Fiscal Year-End
The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for Steven and Anthony Brenz, our sole executive officers outstanding as of February 29, 2024:
| OPTION AWARDS | STOCK AWARDS | |||||||||||||||||||||||||||||||||
| Name | Number of Securities Underlying Unexercised Options (#) Exercisable | Number of Securities Underlying Unexercised Options (#) Unexercisable | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | Option Exercise Price ($) | Option Expiration Date | Number of Shares or Units of Stock That Have Not Vested (#) | Market Value of Shares or Units of Stock That Have Not Vested ($) | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |||||||||||||||||||||||||
| Steven Reinharz | 0 | 10,000,000 | 10,000,000 | $ | 0.15 | April 9, 2024 | 0 | 0 | 2,500 | $ | 2,500,000 | |||||||||||||||||||||||
| Steven Reinharz | 0 | 30,000,000 | 30,000,000 | $ | 0.25 | April 9, 2024 | ||||||||||||||||||||||||||||
| Anthony Brenz | 0 | 0 | 4,500,000 | $ | 0.02 | Sept. 1, 2027 | 4,500,000 | $ | 12,825 | |||||||||||||||||||||||||
| Anthony Brenz | 0 | 0 | 10,000,000 | $ | 0.02 | Sept. 1, 2028 | 10,000,000 | $ | 28,500 | 0 | 0 | |||||||||||||||||||||||
On April 14, 2021, the Shareholders of Series E Preferred Stock and the Board of Directors (“Board”) approved and adopted the 2021 Incentive Stock Plan (the “2021 Plan”).
The purpose of the 2021 Plan is to promote our success by authorizing incentive awards to retain Directors, executives, selected Employees and Consultants, and reward participants for making major contributions to our success. The 2021 Plan authorizes the granting of stock options, restricted stock, restricted stock units, stock appreciation rights and stock awards. A total of five million (5,000,000) shares of common stock may be issued under the 2021 Plan. All awards under the 2021 Plan, whether vested or unvested, are subject to the terms of any recoupment, clawback or similar policy of the Company in effect from time to time, as well as any similar provisions of applicable law, which could in certain circumstances require repayment or forfeiture of awards or any shares of stock or other cash or property received with respect to the awards, including any value received from a disposition of the shares acquired upon payment of the awards. The 2021 Plan will be administered by the Board or any Committee authorized by the Board, if applicable, which will have the sole authority to, among other things: construe and interpret the 2021 Plan; make rules and regulations relating to the administration of the 2021 Plan; select participants; and establish the terms and conditions of awards, all in accordance with the terms of the 2021 Plan. The 2021 Plan will remain in effect until April 14, 2031, unless sooner terminated by the Board. Termination will not affect awards then outstanding.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
At May 7, 2024, we had 9,943,917,383 shares of Common Stock issued and outstanding. The following table sets forth information regarding the beneficial ownership of our Common Stock as of May 7, 2024, and reflects:
| ● | each of our executive officers; |
| ● | each of our directors; |
| ● | all of our directors and executive officers as a group; and |
| ● | each shareholder 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 shareholders. Beneficial ownership has been determined in accordance with Rule 13d-3(d)(1) under the Exchange Act. Based on the information furnished to us, the Company believes that each of the persons and entities named in the table below has sole voting and investment power with respect to all shares of Common Stock that he beneficially owns, subject to applicable community property laws, except as otherwise provided below.
| Name | Amount and Nature of Beneficial Ownership (1) | Percent of Common Stock (2) | ||||||
| Named Executive Officers and Directors: | ||||||||
| Steven Reinharz (3) | 33,182,377,292 | 74.99 | % | |||||
| Anthony Brenz | 0 | 0 | ||||||
| Mark Folmer | 0 | 0 | ||||||
| All executive officers and directors as a group (3 persons) | 33,182,277,292 | 74.99 | % | |||||
| 5% Shareholders: | ||||||||
| Steven Reinharz | 33,182,377,292 | 74.99 | % | |||||
| (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 proxy statement, (a) the numerator is the number of shares of Common Stock beneficially owned by the person, 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 May 7, 2024, 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 the shares. |
| (2) | Based on 9,943,917,383 shares of Common Stock outstanding as of May 7, 2024. |
| (3) | Mr. Reinharz holds (a) 2,450 shares of Series F Convertible Preferred Stock and (b) 3,350,000 shares of Series E Preferred Stock. If Mr. Reinharz converted the 2,450 shares of the Series F Convertible Preferred Stock, he would receive 33,182,377,292 shares of Common Stock, which is reported in the table as if the conversion has occurred. In addition, the outstanding 3,350,000 shares of Series E Preferred Stock held by Mr. Reinharz have a vote equal to twice the number of votes of all outstanding shares of Common Stock. As a result, Mr. Reinharz holds 2/3rds of the voting power of all shareholders at any time a corporate action requires a shareholder vote. |
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Related Persons
Except as set out below, since the beginning of our last two fiscal years, there have been no transactions, or currently proposed transactions, in which he was or is to be a participant and the amount involved exceeds $120,000, and in which any of the following people had or will have a direct or indirect material interest:
| ● | Any of our directors or executive officers; |
| ● | Any immediate family member of our directors or executive officers; and |
| ● | Any person who beneficially owns, directly or indirectly, shares carrying more than 5% of the voting rights attached to our outstanding shares of common stock; |
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Related Party Transactions
For the years ended February 29, 2024 and February 28, 2023, the Company made net repayments of $54,179 and $0, respectively, to its loan payable-related party. At February 29, 2024, the loan payable-related party was $257,438 and $206,516 at February 28, 2023. As of February 29, 2024, included in the balance due to the related party is $140,013 of deferred salary all of which bears interest at 12%. As of February 28, 2023, included in the balance due to the related party is $108,000 of deferred salary all of which bears interest at 12%. The accrued interest included at February 29, 2024 was $32,468 (February 28, 2023- $15,660).
During the year ended February 28, 2023 pursuant to the amended Employment Agreement with its Chief Executive Officer the Company accrued $1,521,000 as incentive compensation plan payable with a corresponding recognition of stock based compensation due to the expectation of additional awards being met. In January 2024 the Company added an Objective 10 which required the accrual of $2,000,000. There was also a net adjustment reduction of $479,000 for objectives accrued for but not met.
At February 28, 2023, the balance of incentive compensation plan payable was $979,000. This will be payable in Series G Preferred Shares which are redeemable at the Company’s option at $1,000 per share.
During the year ended February 29, 2024, the Company accrued $538,767 in deferred compensation for the CEO. This was in accordance with a December 2023 board action allowing for $ 1 million of discretionary compensation. The Company had already recorded $461,233 in bonus compensation. There was no deferred compensation for the year ended February 28, 2023, the Company recorded a bonus to the CEO of $280,908.
During the years ended February 29, 2024 and February 28, 2023, the Company was charged $2,810,839 and $3,578,981, respectively in consulting fees for research and development to a company partially owned by a principal shareholder included in research and development expenses. The principal shareholder received no compensation from this partially owned research and development company and the fees were spent on core development projects. As at both February 29, 2024 and February 28, 2023 the balance due to this company was $76,532.
PRINCIPAL ACCOUNTING FEES AND SERVICES
On October 31, 2019, our Board of Directors approved and ratified the engagement (“Engagement”) of LJ Soldinger & Associates LLC (“LJ Soldinger”) as our new independent registered public accounting firm.
The following table shows the fees that were billed for the audit and other services provided by LJ Soldinger for the fiscal years ended February 29, 2024 and February 28 2023.
| 2024 | ||||
| Audit Fees | $ | 422,540 | ||
| Audit-Related Fees | — | |||
| Tax Fees | — | |||
| All Other Fees | — | |||
| Total | $ | 422,540 | ||
| 2023 | ||||
| Audit Fees | $ | 298,000 | ||
| Audit-Related Fees | — | |||
| Tax Fees | — | |||
| All Other Fees | — | |||
| Total | $ | 298,000 | ||
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 LJ Soldinger described above were approved by our Board.
Our principal accountant did not engage any other persons or firms other than the principal accountant’s full-time, permanent employees.
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Indemnification and Limitation on Liability of Directors
Our Articles of Incorporation limit the liability of our directors to the fullest extent permitted by Nevada law. Nothing contained in the provisions will be construed to deprive any director of his right to all defenses ordinarily available to the director nor will anything herein be construed to deprive any director of any right he may have for contribution from any other director or other person.
At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Committees of the Board
We do not currently have a standing audit, nominating, or compensation committee of the Board of Directors, or any committee performing similar functions. Our Board of Directors performs the functions of nominating and compensation committees
Meetings of the Board
During its fiscal year ended February 29, 2024, the Board, consisting of one member did not hold meetings but corporate action approvals were all approved via Unanimous Board Resolutions.
Code of Business Conduct and Ethics
We have adopted a written code of business conduct and ethics (the “Code of Ethics”). The Code of Ethics is intended to document the principles of conduct and ethics to be followed by all of our directors, officers and employees, including our principal executive officer, principal financial officer and principal accounting officer or controller, or persons performing similar functions. Its purpose is to promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest.
Indemnification and Limitation on Liability of Directors
Our Articles of Incorporation limit the liability of our directors to the fullest extent permitted by Nevada law. Nothing contained in the provisions will be construed to deprive any director of his right to all defenses ordinarily available to the director nor will anything herein be construed to deprive any director of any right he may have for contribution from any other director or other person.
At present, there is no pending litigation or proceeding involving any of our directors, officers, employees or agents where indemnification will be required or permitted. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
DESCRIPTION OF OUR CAPITAL STOCK
Our Articles of Incorporation, as amended, authorizes us to issue up to 12,500,000,000 shares of common stock, $0.00001 par value per share, and 20,000,000 shares of preferred stock, $0.001 par value per share. There is only one class of common stock. There are four classes of preferred stock. See “—Preferred Stock,” below. Our board of directors may establish the rights and preferences of additional series of preferred stock from time to time.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Transhare, Bayside Center 1, 17755 North US Highway 19, Suite 140, Clearwater, Florida 33764, Phone: (303) 662-1112.
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Common Stock
Rights of Shareholders
All shares of our common stock that we offer will be fully paid and nonassessable upon issuance. Holders of our common stock are entitled to one vote per share of common stock on all matters submitted to a vote of shareholders. They do not have cumulative voting rights. Electing a director requires a plurality of the votes cast by shareholders that are entitled to vote in the election. However, it should be noted that the Series E Convertible Preferred Stock has voting rights equal to twice the number of votes of all outstanding shares of capital stock; that is, the holders of Series E Convertible Preferred Stock will always have 2/3rds of our voting power. Holders of common stock are entitled to receive proportionately any dividends that may be declared by our Board of Directors, subject to any preferential dividend rights of any series of preferred stock that we may designate and issue in the future.
If we are liquidated or dissolved, the holders of common stock are entitled to receive a proportionate share of our net assets that are available for distribution to shareholders after the payment of all our debts and other liabilities and subject to the senior rights of the holders of Series F Convertible Preferred Stock and Series G Preferred Stock. Holders of common stock have no preemptive, subscription, redemption or conversion rights. There are no redemption or sinking fund provisions applicable to the common stock. The rights, preferences and privileges of holders of common stock are subject to and may be adversely affected by the rights of the holders of shares of any series of preferred stock that we may designate and issue in the future. See “—Preferred Stock” below.
Nevada Law
Nevada law contains provisions that govern an “acquisition of controlling interest” in a Nevada corporation. The control share provisions generally provide that any person or entity that acquires 20% or more of the outstanding voting shares of a publicly held Nevada corporation in the secondary public or private market may be denied voting rights with respect to the acquired shares, unless a majority of the disinterested shareholders of the corporation elects to restore those voting rights in whole or in part. However, our securities are not subject to these control share provisions because our articles of incorporation, as permitted by Nevada law, specifically exempt us from the control share provisions.
In addition, Nevada law contains a provision that prevents an “ “interested stockholder” and a resident domestic Nevada corporation from entering into a business “combination,” unless certain conditions are met. Nevertheless, our articles of incorporation, as permitted by Nevada law, specifically exempt us from these “interested stockholder” provisions.
Preferred Stock
We have four series of preferred stock, none of which have voting rights on any matters other than those directly affecting the respective series:
Series B Convertible, Redeemable Preferred Stock
The board of directors has designated 5,000 shares of Series B Convertible, Redeemable Preferred Stock with a par value of $0.001 per share. As of the date of this report, there are no shares of Series B Preferred Stock outstanding. The Series B Convertible Preferred Stock are redeemable at $1,200 per share, rank in priority to common stock and common stock equivalents upon liquidation of the Company, have voting rights on a converted basis and receives quarterly dividends of 8%. Each holder may, at any time and from time to time convert all, but not less than all, of their shares of Series B Convertible, Redeemable Preferred Stock into a number of fully paid and nonassessable shares of common stock determined by dividing the redemption value by the Conversion Price. The Conversion price is equal to the lower of (1) a fixed price equaling the closing bid price of the Common Stock on the trading day immediately preceding the date of the acquisition of the shares and (2) the lowest traded price of the Common Stock during the ten (10) calendar days immediately preceding, but not including, the Conversion Date. Following an event of default,” as defined in the Purchase Agreement, the Conversion price shall equal the lower of: (a) the then applicable Conversion Price; or (b) a price per share equaling eighty five percent (85%) of the lowest traded price for the Company’s common stock during the fifteen (15) Trading Days immediately preceding, but not including, the Conversion Date. Each share of Preferred Stock shall be entitled to receive, and the Corporation shall pay, cumulative dividends of eight percent (8%) per annum, payable quarterly, beginning on the Original Issuance Date and ending on the date that such share of Preferred Share has been converted or redeemed. Dividends may be paid in cash or in shares of Preferred Stock at the discretion of the Company. Any dividends that are not paid a shall continue to accrue and shall entail a late fee, which must be paid in cash, at the rate of 14% per annum or the lesser rate permitted by applicable law which shall accrue and compound daily from the dividend payment date through and including the date of actual payment in full. On the thirtieth day following the issue date of this Preferred Stock the Company shall have the obligation to redeem one-third of the Preferred Stock outstanding for a redemption price equal to the redemption value of each such share of Preferred Stock, plus any accrued but unpaid dividends, plus all other amounts due to the Holder including, but not limited to Late Fees, liquidated damages and the legal fees and expenses of the Holder’s counsel. On the sixtieth (60th) calendar day following the date Preferred Stock is issued, the Corporation shall have the obligation to redeem one-half of the Preferred Stock then outstanding for the redemption price. On the ninetieth (90th) calendar day following the date Preferred Stock is issued, the Corporation shall have the obligation to redeem all of the Preferred Stock then outstanding for the redemption price. From the date of issuance until the date no shares of Series B Preferred Stock are issued and outstanding, unless Holders of at least 75% in Stated Value of the then outstanding shares of Preferred Stock shall have otherwise given prior written consent, the Corporation shall not, and shall not permit any of the Subsidiaries to, directly or indirectly: (a) other than Permitted Indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, including but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom; (b) other than Permitted Liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom; (c) amend its charter documents, including, without limitation, its articles of incorporation and bylaws, in any manner that materially and adversely affects any rights of the Holder; (d) repay, repurchase or offer to repay, repurchase or otherwise acquire of any shares of its Common Stock, Common Stock Equivalents or Junior Securities, other than as to the Conversion Shares as permitted or required under the Transaction Documents: (e) pay cash dividends or distributions on Junior Securities of the Corporation; f) enter into any transaction with any Affiliate of the Corporation which would be required to be disclosed in any public filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Corporation (even if less than a quorum otherwise required for board approval); or(g) enter into any agreement with respect to any of the foregoing.
Series E Convertible Preferred Stock: There are 3,350,000 shares of Series E Convertible Preferred Stock (“Series E Preferred Shares”) authorized, issued and outstanding. Despite its title, the Series E Preferred Shares have no conversion rights. Moreover, they have no dividend rights, no preemptive rights, no redemption rights, and no liquidation rights. As noted above, the Series E Preferred Shares hold voting rights equal to twice the number of votes of all outstanding shares of capital stock; that is, the holders of Series E Preferred Shares will always have 2/3rds of our voting power. The Series E Preferred Shares vote together with the common stock and not as a separate class. All of the Series E Preferred Shares are held by Steven Reinharz.
The Series E Preferred Shares must unanimously approve any changes to increase the authorized number of shares or the rights, preferences, and privileges of the Series E Preferred Shares. In addition, the Series E Preferred Shares must unanimously approve the following actions :
| ● | alteration of or change to the rights, preferences or privileges of any of our capital stock that would adversely affect the Series E Preferred Shares; |
| ● | create or designate any series or class of shares; |
| ● | issue any shares of any series of preferred stock; |
| ● | increase the authorized number of shares of any series or class of our stock; |
| 33 |
| ● | amend, repeal or modify our bylaws |
| ● | sell or otherwise dispose of any of our assets not in the ordinary course of business; |
| ● | elect members of the Board of Directors; |
| ● | incur debt not in the ordinary course of business; or |
| ● | effect or undergo any change of our control. |
Series F Convertible Preferred Stock: There are 4,350 shares of Series F Convertible Preferred Stock (“Series F Preferred Shares”) authorized, of which 2,532 Shares are issued and outstanding. The Series F Preferred Shares have no dividend rights, no preemptive rights, and, unless and until they are converted into common stock, no voting rights (other than as to changes to any class or series of our capital stock that could adversely affect the Series F Preferred Shares or as required by Nevada law). The Series F Preferred Shares have liquidation rights senior to those of the common stock, the Series E Preferred Shares and Series G Preferred Shares. Steven Reinharz owns 2,450 Series F Preferred Shares, and the remaining 82 Series F Preferred Shares are held by two other persons who are not employed by us We have also issued a “Warrant to Purchase Stock,” which gave the holder of the Warrant the right to purchase 367 Series F Preferred Shares at any time. After prior exercises, the holder currently holds the right to purchase 329 Series F Preferred Shares.
After August 23, 2023, each holder of Series F Preferred Shares has the right to convert all, but not less than all, of the holder’s Series F Preferred Shares into shares of common stock that would be a multiple of the number of then-outstanding shares of common stock. At that time, there would be a substantial dilution of our common stock.
Series G Preferred Stock: There are 100,000 shares of Series G Preferred Stock (“Series G Preferred Shares”) authorized but no shares have been issued. The Series G Preferred Shares have no dividend rights, no voting rights, and no preemptive rights. The Series G shares have liquidation rights senior to those of the common stock but junior to those of the Series F Preferred Shares. At any time, we may at our option, redeem any or all of the outstanding Series G Preferred Shares at $1,000 per share.
DESCRIPTION OF WARRANTS
We may issue warrants to purchase common stock. We may offer warrants separately or together with one or more additional warrants or common stock, as described in the related prospectus supplement. If we issue warrants as part of a unit, the accompanying prospectus supplement will specify whether those warrants may be separated from the common stock in the unit before the expiration date of the warrants. The terms of any warrants offered under a prospectus supplement may differ from the terms described below. We urge you to read the related prospectus supplement and any related free writing prospectus as well as the complete warrant agreements and warranty certificates that contain the terms of the warrants. Each related prospectus supplement will describe the terms of any warrants being offered, including but not limited to the following:
| ● | the specific designation and total number of warrants and the offering price at which the warrants will be issued; |
| ● | the date on which the right to exercise the warrants will begin and will end, or if the warrants are not continuously exercisable, the specific dates or periods in which you may exercise the warrants; |
| ● | whether the warrants will be sold separately or with common stock as parts of units; |
| ● | if the warrants are issued as part of a unit, the date, if any, on which the common stock will be separately transferable; |
| ● | a description of the common stock purchasable upon exercise of the warrants; |
| ● | the number of shares of common stock purchasable upon exercise of a warrant and the price at which those shares may be purchased; |
| ● | if applicable, the minimum or maximum amount of warrants that may be exercised at any one time; |
| ● | any redemption or call provisions of the warrants; |
| ● | if any, the anti-dilution provisions of, and other provisions for changes to or adjustment in the exercise price of, the warrants; |
| 34 |
| ● | information with respect to book-entry procedures, if any; |
| ● | the identity of the warrant agent for the warrants; |
| ● | any additional terms of the warrants, including terms, procedures and limitations relating to the exchange or exercise of the warrants; and |
| ● | any applicable material U.S. federal income tax consequences. |
It should be noted that holders of warrants will not be entitled to:
| ● | vote, consent or receive dividends; |
| ● | receive notice of shareholders with respect to any meeting of shareholders on any matter; and |
| ● | exercise any rights as shareholders of the Company. |
Dividend Policy
To date we have never declared a dividend for our common stock. We currently intend to retain future earnings, if any, to finance the expansion of our business and for general corporate purposes. We cannot assure you that we will distribute any cash in the future. Our cash distribution policy is within the discretion of our Board and will depend upon various factors, including our results of operations, financial condition, capital requirements and investment opportunities.
LEGAL MATTERS
Certain legal matters with respect to the validity of the securities being offered by this prospectus will be passed upon Frederick M. Lehrer, P. A.
EXPERTS
The audited consolidated financial statements for AITX, as of February 28, 2024 and 2023 and for the years then ended included in this prospectus and elsewhere in the registration statement have been so included in reliance upon the report, which contains an explanatory paragraph describing the conditions which raise substantial doubt about the ability of the Company to continue as a going concern, of L J Soldinger Associates, LLC, independent registered public accounting firm, upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the shares of common stock offered by this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all the information set forth in the registration statement, some of which is contained in exhibits to the registration statement as permitted by the rules and regulations of the SEC. For further information with respect to us and our common stock, we refer you to the registration statement, including the exhibits filed as a part of the registration statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete.
We file reports, proxy statements and other information with the SEC. The SEC maintains a website that contains reports, proxy and information statements and other information about issuers, such as us, who file electronically with the SEC. The address of that website is http://www.sec.gov. You may also request a copy of those filings, excluding exhibits, from us at no cost. These requests should be addressed to us at: 10800 Galaxie Avenue, Ferndale, Michigan 48220. Our website address is www.aitx.ai The information on, or accessible through, our website is not part of, and is not incorporated into, this prospectus supplement or the accompanying prospectus and should not be considered part of this prospectus.
| 35 |
Disclosure of Commission Position of Indemnification for Securities Act Liabilities
Nevada Revised Statutes (“NRS”) Sections 78.7502 and 78.751 provide us with the power to indemnify any of our directors and officers. The director or officer must have conducted himself/herself in good faith and reasonably believe that his/her conduct was in, or not opposed to, our best interests. In a criminal action, the director, officer, employee or agent must not have had reasonable cause to believe his/her conduct was unlawful. Under NRS Section 78.751, advances for expenses may be made by agreement if the director or officer affirms in writing that he/she believes he/she has met the standards and will personally repay the expenses if it is determined such officer or director did not meet the standards.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted for our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
Our Amended Bylaws provides that the Company shall indemnify its directors and officers from and against any liability arising out of their service as a director or officer of the Corporation or any subsidiary or affiliate of which they serve as an officer or director at the request of the Corporation to the fullest extent not prohibited by NRS Chapter 78.
| 36 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders 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. and its subsidiaries (the “Company”) as of February 29, 2024 and February 28, 2023, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended February 29, 2024, 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 29, 2024, and February 28, 2023, and the results of its operations and its cash flows for each of the years in the two-year period ended February 29, 2024, in conformity with accounting principles generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company had a net loss of approximately $20.7 million, an accumulated deficit of approximately $133.0 million and stockholders’ deficit of approximately $40.2 million as of and for the year ended February 29, 2024, which raises substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. 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 audits. 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 audits 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 audits, 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 audits 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 audits 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 audits provide a reasonable basis for our opinion.
Critical Audit Matters
Critical audit matters are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. We determined that there were no critical audit matters.
/s/ L J Soldinger Associates, LLC
Deer Park, Illinois
May 9, 2024
We have served as the Company’s auditor since 2019.
PCAOB Audit ID: 318
| F-2 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
| February 29, 2024 | February 28, 2023 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Accounts receivable, net | ||||||||
| Device parts inventory, net | ||||||||
| Prepaid expenses and deposits | ||||||||
| Total current assets | ||||||||
| Operating lease asset | ||||||||
| Revenue earning devices, net of accumulated depreciation of $ | ||||||||
| Fixed assets, net of accumulated depreciation of $ | ||||||||
| Trademarks | ||||||||
| Investment at cost | ||||||||
| Security deposit | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Advances payable- related party | ||||||||
| Customer deposits | ||||||||
| Current operating lease liability | ||||||||
| Current portion of deferred variable payment obligation | ||||||||
| Loan payable - related party | ||||||||
| Deferred compensation for CEO | ||||||||
| Current portion of loans payable, net of discount of $ | ||||||||
| Vehicle loan - current portion | ||||||||
| Current portion of accrued interest payable | ||||||||
| Total current liabilities | ||||||||
| Non-current operating lease liability | ||||||||
| Loans payable, net of discount of $ | ||||||||
| Deferred variable payment obligation | ||||||||
| Incentive compensation plan payable | ||||||||
| Accrued interest payable | ||||||||
| Total liabilities | ||||||||
| Commitments and Contingencies | ||||||||
| Stockholders’ deficit: | ||||||||
| Preferred Stock, undesignated; shares authorized; shares issued and outstanding at February 29, 2024 and February 28, 2023, respectively | ||||||||
| Series B Convertible, Redeemable Preferred Stock. $ par value; | ||||||||
| Series G Redeemable Preferred Stock. $ par value; shares authorized, shares issued and outstanding at February 29, 2024 and February 28, 2023, respectively | ||||||||
| Series E Preferred Stock, $ par value; shares authorized; and shares issued and outstanding, respectively | ||||||||
| Series F Convertible Preferred Stock, $ par value; shares authorized; and shares issued and outstanding, respectively | ||||||||
| Preferred Stock value | ||||||||
| Common Stock, $ par value; shares authorized and shares issued, issuable and outstanding, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Preferred stock to be issued | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-3 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended February 29, 2024 | Year Ended February 28, 2023 | |||||||
| Revenues | $ | $ | ||||||
| Cost of Goods Sold | ||||||||
| Gross Profit | ||||||||
| Operating expenses: | ||||||||
| Research and development (note 9) | ||||||||
| General and administrative | ||||||||
| Depreciation and amortization | ||||||||
| Impairment on revenue earning devices | ||||||||
| Operating lease cost and rent | ||||||||
| (Gain) loss on disposal of fixed assets | ( | ) | ||||||
| Total operating expenses | ||||||||
| Loss from operations | ( | ) | ( | ) | ||||
| Other income (expense), net: | ||||||||
| Change in fair value of derivative liabilities | ||||||||
| Interest expense | ( | ) | ( | ) | ||||
| Gain (loss) on settlement of debt | ||||||||
| Total other income (expense), net | ( | ) | ( | ) | ||||
| Net Loss | $ | ( | ) | $ | ( | ) | ||
| Net loss per share - basic | $ | ( | ) | $ | ( | ) | ||
| Net loss per share - diluted | $ | ( | ) | $ | ( | ) | ||
| Weighted average common share outstanding – basic and diluted | ||||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-4 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
FOR THE YEARS ENDED FEBRUARY 29, 2024 AND FEBRUARY 28, 2023
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||
| Series E | Series F | Series G | Additional | Total | ||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-In | Accumulated | Shareholders’ | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at February 28, 2022 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||
| Issuance of shares net of $ | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Cashless exercise of | — | — | — | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Cashless exercise of warrants | — | — | — | ( | ) | |||||||||||||||||||||||||||||||||||||||
| Penalty shares issued pursuant to a share purchase agreement | ( | ) | ||||||||||||||||||||||||||||||||||||||||||
| Relative fair value of Series F warrants issued with debt | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Relative fair value of warrants issued with debt | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Fair value of | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Shares issued for services | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Cancelled shares | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||||||||||||||
| Stock based compensation - employee stock option plan | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Rounding | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at February 28, 2023 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||
| Series E | Series F | Series G | Additional | Total | ||||||||||||||||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-In | Accumulated | Shareholders’ | ||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||||||||||||||||
| Balance at February 28, 2023 | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||
| Balance | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||||
| Issuance of shares net of $ | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Issuance of shares, net of issuance costs | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Relative fair value of Series F warrants issued with debt | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Shares issued for services | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Stock based compensation - employee stock option plan | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||||||
| Balance at February 29, 2024 | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||
| Balance | $ | $ | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||||||||||||||||||||||||
| F-5 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended February 29, 2024 | Year Ended February 28, 2023 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Impairment on revenue earning devices | ||||||||
| Inventory provision | ||||||||
| (Gain) loss on disposal of fixed assets | ( | ) | ||||||
| Bad debts expense | ||||||||
| Reduction of right of use asset | ||||||||
| Accretion of lease liability | ||||||||
| Stock based compensation | ||||||||
| Change in fair value of derivative liabilities | ( | ) | ||||||
| Amortization of debt discounts | ||||||||
| (Gain) loss on settlement of debt | ( | ) | ( | ) | ||||
| Increase (decrease) in related party accrued payroll and interest | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ||||||
| Prepaid expenses | ( | ) | ( | ) | ||||
| Device parts inventory | ( | ) | ( | ) | ||||
| Accounts payable and accrued expenses | ||||||||
| Accrued expense, related party | ||||||||
| Customer deposits | ( | ) | ||||||
| Operating lease liability payments | ( | ) | ( | ) | ||||
| Current portion of deferred variable payment obligations for Payments | ||||||||
| Accrued interest payable | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of fixed assets | ( | ) | ( | ) | ||||
| Purchase of investment | ( | ) | ||||||
| Reimbursement of security deposit | ||||||||
| Proceeds on disposal of fixed assets | ||||||||
| Net cash used in investing activities | ( | ) | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Share proceeds net of issuance costs | ||||||||
| Proceeds from convertible notes payable | ||||||||
| Repayment of convertible debt | ( | ) | ||||||
| Net borrowings loan payable-related party | ( | ) | ||||||
| Proceeds from loans payable | ||||||||
| Repayment of loans payable | ( | ) | ( | ) | ||||
| Net cash provided by financing activities | ||||||||
| Net change in cash | ( | ) | ( | ) | ||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of cash and non-cash transactions: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for income taxes | $ | $ | ||||||
| Noncash investing and financing activities: | ||||||||
| Right of use asset for lease liability | $ | $ | ||||||
| Transfer from device parts inventory to fixed assets | $ | $ | ||||||
| Proceeds of fixed asset disposition to loan payable , related party | $ | $ | ||||||
| Shares issued for services | $ | $ | ||||||
| Deferred compensation | $ | $ | ||||||
| Discount applied to face value of loans | $ | $ | ||||||
| Series F warrants issued along with debt | $ | $ | ||||||
| Exchange of common share warrants for debt | $ | $ | ||||||
| Refund on abandoned trademarks | $ | $ | ||||||
| Penalty shares pursuant to a share purchase agreement | $ | $ | ||||||
| Exercise of warrants | $ | $ | ||||||
The accompanying notes are an integral part of these consolidated financial statements.
| F-6 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION AND GOING CONCERN
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 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 shares of AITX Series E Preferred Stock and 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.
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 29, 2024, the Company had negative cash flow from operating activities of $
The Company does not have the resources at this time to repay all 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. At the same time management points to its successful history with maintaining Company operations and reminds all with reasonable confidence this will continue. Management has plans to address the Company’s financial situation as follows:
Management
is committed to raise either non-dilutive funds or minimally dilutive funds. There is no assurance that these funds will be able to be
raised nor can we provide assurance that these possible raises may not have dilutive effects. In March 2023, the Company entered into
an equity financing agreement whereby an investor will purchase up to $
| F-7 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
2. 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 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., Robotic Assistance Devices Group , Inc, Robotic Assistance Devices Mobile , Inc. , On the Move Experience, LLC and OMV Transports, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates
In order to prepare financial statements in conformity with accounting principals generally accepted in the United States, management must make estimates , judgements and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from resolution currently anticipated by management and on which the financial statements are based. The most significant estimates included in these consolidated financial statements are those associated with the assumptions used to value equity instruments used in debt settlements, amendments and extensions.
Reclassifications
Certain amounts in the Company’s consolidated financial statements for prior periods have been reclassified to conform to the current period presentation. These reclassifications have not changed the results of operations of prior periods.
Concentrations
Loans payable
At
February 29, 2024 there were $
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 credit losses. In determining collectability,
historical trends are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances. There
was an allowance of $
Device Parts Inventory
Device
parts inventory is stated at the lower of cost or net realizable value using the weighted average cost method. The Company records a
valuation reserve for obsolete and slow-moving inventory, relying principally on specific identification of such inventory. The Company
uses these device parts in the assembly of revenue earning devices (and demo devices) as well as research and development. Depending
on use, the Company will transfer the parts to the corresponding asset or expense if used in research and development. A charge to income
is taken when factors that would result in a need for an increase in the valuation, such as excess or obsolete inventory, are noted.
At February 29, 2024 and at February 28, 2023 there was a valuation reserve of $
| F-8 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Revenue Earning Devices
Revenue
earning devices are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of
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 to
SCHEDULE OF FIXED ASSETS STATED AT COST
| Computer equipment | ||
| Furniture and fixtures | ||
| Office equipment | ||
| Warehouse equipment | ||
| Demo Devices | ||
| Vehicles | ||
| Leasehold improvements |
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 29, 2024 and February 28, 2023, the Company had
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.
| F-9 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Sales of Future Revenues
The Company has entered into transactions, as more fully described in footnote 10, in which it has received funding from investors in exchange for which it will make payments to those investors based on the level of sales of certain revenue categories, generally based on a percentage of sales for those certain revenues. The Company determines whether these agreements constitute sales of future revenues or are in substance debt based on the facts and circumstances of each agreement, with the following primary criteria determinative of whether the agreement constitutes a sale of future revenues or debt:
| ● | Does the agreement purport, in substance, to be a sale | |
| ● | Does the Company have continuing involvement in the generation of cash flows due the investor | |
| ● | Is the transaction cancellable by either party through payment of a lump sum or other transfer of assets | |
| ● | Is the investors rate of return implicitly limited by the terms of the agreement | |
| ● | Does the Company’s revenue for a reporting period underlying the agreement have only a minimal impact on the investor’s rate of return | |
| ● | Does the investor have recourse relating to payments due |
In the event a transaction is determined to be a sale of future revenues, it is recorded as deferred revenue and amortized using the sum-of-the-revenue method. In the event a transaction is determined to be debt, it is recorded as debt and amortized using the effective interest method. As of the date of these financial statements, the Company has determined that all such agreements are debt.
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.. For the year ended February 29, 2024 , three customers accounted for
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized when items of income and expense are recognized in the financial statements in different periods than when recognized in the tax return. Deferred tax assets arise when expenses are recognized in the financial statements before the tax returns or when income items are recognized in the tax return prior to the financial statements. Deferred tax assets also arise when operating losses or tax credits are available to offset tax payments due in future years. Deferred tax liabilities arise when income items are recognized in the financial statements before the tax returns or when expenses are recognized in the tax return prior to the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
On
December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. ASC 740, Accounting for Income Taxes requires
companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects
of changes in tax laws in the period in which the new legislation is enacted.
Leases
Lease agreements are evaluated to determine if they are sales/finance leases meeting any of the following criteria at inception: (a) transfer of ownership of the underlying asset; (b) purchase option that is reasonably certain of being exercised; (c) the lease term is greater than a major part of the remaining estimated economic life of the underlying asset; or (d) if the present value of the sum of lease payments and any residual value guaranteed by the lessee that has not already been included in lease payments in accordance with ASC 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset.
| F-10 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
If at its inception, a lease meets any of the four lease criteria above, the lease is classified by the Company as a sales/finance; and if none of the four criteria are met, the lease is classified by the Company as an operating lease.
Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in liabilities.
Distinguishing Liabilities from Equity
The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.
Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.
Our CEO and Chairman holds sufficient shares of the Company’s voting stock that give sufficient voting rights under the articles of incorporation and bylaws of the Company such that the CEO and Chairman can at any time unilaterally vote to increase the number of authorized shares of common stock of the Company without the need to call a general meeting of common shareholders of the Company.
Initial Measurement
The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.
Subsequent Measurement – Financial Instruments Classified as Liabilities
The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other income (expenses).
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles.
ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).
| F-11 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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:
SCHEDULE OF LIABILITIES MEASURED AT FAIR VALUE
| Amount at | Fair Value Measurement Using | |||||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||
| February 29, 2024 | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Incentive compensation plan payable – revaluation of equity awards payable in Series G shares | $ | $ | $ | $ | ||||||||||||
| February 28, 2023 | ||||||||||||||||
| Liabilities | ||||||||||||||||
| Incentive compensation plan payable – revaluation of equity awards payable in Series G shares | $ | $ | $ | $ | ||||||||||||
The Company recorded stock based compensation of $ and $ for the years ended February 29, 2024 and February 28, 2023 with corresponding adjustments to incentive compensation plan payable.
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.
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.
| F-12 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Recently Issued Accounting Pronouncements
Recently Issued Accounting Standards Not Yet Adopted
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments. The amendments in ASU 2020-06 are effective for public entities, excluding smaller reporting companies as defined, for fiscal years beginning after December 15, 2021. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. A reporting entity is not permitted to adopt the guidance in an interim period, other than the first interim period of its fiscal year. Adoption of the standard requires using either a modified retrospective or a full retrospective approach. Management is currently evaluating the effect of these provisions on the Company’s financial position and results of operations
3. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue is earned primarily from two sources: 1) direct sales of goods or services and 2) short-term rentals. Direct sales of goods or services are accounted for under Topic 606, and short-term rentals are accounted for under Topic 842 which was adopted. On March 1, 2019.
As disclosed in the revenue recognition section of Note 2 – Accounting Polices, the Company adopted Topic 606 in accordance with the effective date on March 1, 2018. Note 2 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.
| F-13 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Upon adoption of Topic 842, also referred to above in Note 2, the Company accounts 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 for periods greater than one year. To date none of the lease agreements entered into have been for periods longer than one year or greater, and the Company has availed itself of the practical expedient to exclude such leases from ASC 842 accounting and instead has accounted for these leases under ASC 606.
The following table presents revenues from contracts with customers disaggregated by product/service:
SCHEDULE OF REVENUES FROM CONTRACTS WITH CUSTOMERS
| Year Ended February 29, 2024 | Year Ended February 28, 2023 | |||||||
| Device rental activities | $ | $ | ||||||
| Direct sales of goods and services | ||||||||
| $ | $ | |||||||
4. LEASES
We
lease certain warehouses, and office space. Leases with an initial term of
There is no lease renewal. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Below is a summary of our lease assets and liabilities at February 29, 2024 and February 28, 2023.
SCHEDULE OF LEASE ASSETS AND LIABILITIES
| Leases | Classification | February 29, 2024 | February 28, 2023 | |||||||
| Assets | ||||||||||
| Operating | Operating Lease Assets | $ | $ | |||||||
| Liabilities | ||||||||||
| Current | ||||||||||
| Operating | Current Operating Lease Liability | $ | $ | |||||||
| Noncurrent | ||||||||||
| Operating | Noncurrent Operating Lease Liabilities | |||||||||
| Total lease liabilities | $ | $ | ||||||||
Note: As most of our leases do not provide an implicit rate, we use our incremental borrowing rate of 10% which for the leases noted above was based on the information available at commencement date in determining the present value of lease payments. We compare against loans we obtain to acquire physical assets and not loans we obtain for financing. The loans we obtain for financing are generally at significantly higher rates and we believe that physical space or vehicle rental agreements are in line with physical asset financing agreements. CAM charges were not included in operating lease expense and were expensed in general and administrative expenses as incurred.
Operating
lease cost and rent was $
| F-14 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT
On
December 23, 2022 the Company entered into a Simple Agreement for Future Equity (SAFE) contract to invest $
6. REVENUE EARNING ROBOTS
Revenue earning robots consisted of the following:
REVENUE EARNING ROBOTS CONSISTED OF THE FOLLOWING
| February 29, 2024 | February 28, 2023 | |||||||
| Revenue earning devices | $ | $ | ||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Total | $ | $ | ||||||
During
the year ended February 29, 2024, the Company made total additions to revenue earning devices of $
Depreciation
expense for these devices was $
7. FIXED ASSETS
Fixed assets consisted of the following:
SCHEDULE OF FIXED ASSETS
| February 29, 2024 | February 28, 2023 | |||||||
| Automobile | $ | $ | ||||||
| Demo devices | ||||||||
| Tooling | ||||||||
| Machinery and equipment | ||||||||
| Computer equipment | ||||||||
| Office equipment | ||||||||
| Furniture and fixtures | ||||||||
| Warehouse equipment | ||||||||
| Leasehold improvements | ||||||||
| Fixed assets gross | ||||||||
| Less: Accumulated depreciation | ( | ) | ( | ) | ||||
| Fixed assets, net of accumulated depreciation | $ | $ | ||||||
During
the year ended February 29, 2024, the Company made additions to fixed assets of $
During
the year ended February 28, 2023, the Company made additions to fixed assets of $
Depreciation
expense was $
| F-15 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
8. DEFERRED VARIABLE PAYMENT OBLIGATION
On
February 1, 2019 the Company entered into an agreement with an investor whereby the investor would pay up to $
On May 9, 2019 the Company entered into two similar arrangements with two investors:
| (1) | The
investor would pay up to $ | |
| (2) | The
investor would pay up to $ |
In
the event that at least 10% of the assets of the Company are sold by the Company, the investors would be entitled to the fair market
value (FMV) of all future Payments associated with the assets sold as determined by an independent valuator to be chosen by the investors.
The FMV cannot exceed 30% of the total asset disposition price defined as the total price paid for the assets plus all future Payments
associated with the assets sold. In the event that the common or preferred shares are sold by the Company to a third party as to effect
a change in control, then the investors must be paid
On
November 18, 2019 the Company entered into another similar arrangement with the (February 1, 2019) investor above whereby the investor
would advance up to $
On
December 30, 2019 the Company entered into another similar arrangement with a new investor whereby the investor would advance up to $
On
April 22, 2020 the Company entered into another similar arrangement with the (first May 9, 2019) investor above whereby the investor
would advance up to $
On
July 1, 2020 the Company entered into a similar agreement with the first investor whereby the investor would pay up to $800,000 in exchange
for a perpetual
On
August 27, 2020 the Company and the first investor referred to above consolidated the three separate agreements of February 1, 2019 for
$
| F-16 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
In
summary of all agreements mentioned above if in the event that at least
The
Payments will first become payable on June 30, 2019 (unless otherwise indicated) based on the quarterly Revenues for the quarter ended
May 31, 2019 and will accrue every quarter thereafter. As of February 29, 2024, the Company has accrued approximately $
On
March 1, 2021 the first investor referred to above whose aggregate investment is $
| 1) | The
rate payment was reduced from | |
| 2) | The
asset disposition % (see below) was reduced from |
In
consideration for the above changes, the investor received Series F Convertible Preferred Stock and a warrant to purchase
The
Company retains total involvement in the generation of cash flows from these revenue streams that form the basis of the payments to be
made to the investors under this agreement. Because of this, the Company has determined that the agreements constitute debt agreements.
As of February 29, 2024, and February 28, 2023, the long-term balances other than Payments already owed is the cash received of $
For
both the years ended February 29, 2024 and February 28, 2023, the Company has received $
| F-17 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
9. RELATED PARTY TRANSACTIONS
For
the years ended February 29, 2024 and February 28, 2023, the Company made net repayments of $
During
the year ended February 28, 2023 pursuant to the amended Employment Agreement with its Chief Executive Officer the Company accrued $
as incentive compensation plan payable with a corresponding recognition of stock based compensation due to the expectation of additional
awards being met. In January 2024 the Company added an Objective 10 which required the accrual of $. There was also a net adjustment
reduction of $
At February 28, 2023, the balance of incentive compensation plan payable was $. This will be payable in Series G Preferred Shares which are redeemable at the Company’s option at $ per share.
During
the year ended February 29, 2024, the Company accrued $
During
the years ended February 29, 2024 and February 28, 2023, the Company was charged $
10. OTHER DEBT – VEHICLE LOANS
In
December 2016, RAD entered into a vehicle loan for $
| F-18 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
11. LOANS PAYABLE
Loans payable at February 29, 2024 consisted of the following:
SCHEDULE OF LOANS PAYABLE
| Annual | ||||||||||||||
| Date | Maturity | Description | Principal | Interest Rate | ||||||||||
| Promissory note | (1)* | $ | % | |||||||||||
| Promissory note | (2) | % | ||||||||||||
| Promissory note | (3) | % | ||||||||||||
| Promissory note | (4) | % | ||||||||||||
| Promissory note | (5)* | % | ||||||||||||
| Promissory note | (6) | % | ||||||||||||
| Promissory note | (7) | % | ||||||||||||
| Promissory note | (8) | % | ||||||||||||
| Promissory note | (9) | % | ||||||||||||
| Promissory note | (10) | % | ||||||||||||
| Promissory note | (11) | % | ||||||||||||
| Promissory note | (12) | % | ||||||||||||
| Promissory note | (13) | % | ||||||||||||
| Promissory note | (14) | % | ||||||||||||
| Promissory note | (15) | % | ||||||||||||
| Promissory note | (16) | % | ||||||||||||
| Promissory note | (17) | % | ||||||||||||
| Promissory note | (18) | % | ||||||||||||
| Promissory note | (19) | % | ||||||||||||
| Promissory note | (20) | % | ||||||||||||
| Promissory note | (20) | % | ||||||||||||
| Promissory note | (20) | % | ||||||||||||
| Promissory note | (20) | % | ||||||||||||
| Promissory note | (20) | % | ||||||||||||
| Promissory note | (20) | % | ||||||||||||
| Promissory note | (20) | % | ||||||||||||
| Promissory note | (20) | % | ||||||||||||
| Promissory note | (20) | % | ||||||||||||
| Promissory note | (20) | % | ||||||||||||
| Purchase Agreement | (21) | % | ||||||||||||
| $ | ||||||||||||||
| Less: current portion of loans payable | ( | ) | ||||||||||||
| Less: discount on non-current loans payable | ( | ) | ||||||||||||
| Non-current loans payable, net of discount | $ | |||||||||||||
| Current portion of loans payable | $ | |||||||||||||
| Less: discount on current portion of loans payable | ( | ) | ||||||||||||
| Current portion of loans payable, net of discount | $ | |||||||||||||
| F-19 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| (1) | |
| (2) | |
| (3) | |
| (4) | |
| (5) | |
| (6) | |
| (7) | |
| (8) | |
| (9) |
| F-20 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| (10) | |
| (11) | |
| (12) | |
| (13) | |
| (14) | |
| (15) |
| F-21 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
| (16) | |
| (17) | |
| (18) | |
| (19) | |
| (20) |
October
28, 2022, $
November
9, 2022, $
November
10, 2022, $
November
15, 2022, $
January
11, 2023, $
February
6, 2023, $
April
5, 2023, $
| F-22 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
April
20, 2023, $
May
11, 2023, $
October
27 2023, $
| (21) |
12. STOCKHOLDERS’ DEFICIT
Preferred Stock: The Company is authorized to issue up to shares of $ 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 B Convertible, Redeemable Preferred Stock
The
board of directors has designated shares of Series B Convertible, Redeemable Preferred Stock with a par value of $ per share.
As of the date of this report, there are no shares of Series B Preferred Stock outstanding. The Series B Convertible Preferred Stock
are redeemable at $
| F-23 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Series E Preferred Stock
The board of directors has designated shares of Series E Preferred Stock. As of the date of this report, there are shares of Series E Preferred Stock outstanding. The Series E Preferred Stock ranks subordinate to the Company’s common stock as to distributions of assets upon liquidation, dissolution or winding up of the Corporation. 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 equity instruments with voting rights. 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 shares of Series F Convertible Preferred Stock with a par value of $per share. As of the date of this report, there are 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. Each holder may, at any time and from time to 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 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 shares of Series G Preferred Stock. As of the date of this report, there are shares of Series G Preferred Stock outstanding. The series G shares are redeemable at $ per share The Series G preferred stock does not have voting rights, does not have rights upon liquidation of the Company and does not receive dividends.
Summary of Preferred Stock Activity
| F-24 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Series B Convertible, Redeemable Preferred Stock
On April 27, 2024, in connection with a Share Purchase Agreement the Company created a new class Of Series B Convertible Redeemable with authorized shares.
Series F Convertible Preferred Stock
Each holder of Series F Convertible Preferred Shares may, at any time and from time to time convert all, but not less than all, of their shares 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.
On August 23, 2021, the Company filed amended Series F preferred shares such that Series F preferred shares are not convertible into common stock by a holder until (A) August 23, 2023 or (B) the date on which such a conversion may be required for the purpose of (i) uplisting the Company to a new stock exchange, or (ii) selling more than 50% of the Company’s assets. On April 30, 2024 the Company increased authorized to Series F Preferred Shares.
Summary or Preferred Stock Activity
During the year ended February 29, 2024 Series F shareholders had the following activity:
| — | A total of Series F Preferred Stock Warrants issued along with debt to a lender. |
During the year ended February 28, 2023 Series F shareholders had the following activity:
| — | Series F Preferred Share and a total of Series F Preferred Stock Warrants issued along with debt to a lender. |
Unissued Series F Preferred Stock
At
both February 29, 2024 and February 28, 2023 there remains issuable Series F preferred stock at a value of $
On
October 28, 2022 as part of a $
Summary of Preferred Stock Warrant Activity
SUMMARY OF PREFERRED STOCK WARRANT ACTIVITY
| Number of Series F Preferred Warrants | Weighted Average Exercise Price | Weighted Average Remaining Years | ||||||||||
| Outstanding at March 1, 2023 | $ | |||||||||||
| Issued | $ | |||||||||||
| Exercised | — | |||||||||||
| Forfeited and cancelled | — | |||||||||||
| Outstanding at February 29, 2024 | $ | |||||||||||
| F-25 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Summary of Common Stock Activity
The Company increased authorized common shares from to on July 8, 2022, from to on March 19, 2023 from to on August 30, 2023, and from to on March 22, 2024.
Summary of Common Stock Activity
During the year ended, February 29, 2024, common shareholders had the following activity:
| — | the
Company issued common shares with gross proceeds of $ | |
| — | the
Company issued common shares for services with a fair value of $ |
During the year ended, February 28, 2023, common shareholders had the following activity:
| — | the
Company issued common shares with gross proceeds of $ | |
| — | the Company issued common shares as penalty to an investor pursuant to a share purchase agreement. | |
| — | the
Company issued | |
| — | the
Company cancelled shares as a result of an SEC enforcement action against a lender and issued shares for $ |
SUMMARY OF COMMON SHARES ISSUED, ISSUABLE AND OUTSTANDING
| Common shares | February 29, 2024 | February 28, 2023 | ||||||
| Issued | ||||||||
| Issuable | ||||||||
| Issued, issuable and outstanding | ||||||||
| F-26 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Summary of Warrant and Stock Option Activity
SUMMARY OF WARRANT AND STOCK OPTION ACTIVITY
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Years | ||||||||||
| Outstanding at February 29, 2022 | $ | |||||||||||
| Adjusted(1) | ||||||||||||
| Issued | ||||||||||||
| Exercised | ( | ) | ( | ) | ||||||||
| Forfeited and cancelled | ( | ) | ( | ) | ||||||||
| Outstanding at February 28, 2023 | $ | |||||||||||
| Issued | ||||||||||||
| Exercised | ||||||||||||
| Forfeited and cancelled | ( | ) | ( | ) | ||||||||
| Outstanding at February 29, 2024 | $ | |||||||||||
| (1) |
For the years ended February 29, 2024 and February 28, 2023, the Company recorded a total of $ and $, respectively on stock-based payments for warrants with a corresponding adjustment to additional paid-in capital.
For the years ended February 29, 2024 and February 28, 2022 the Company recorded a total of $ and $ respectively, to stock-based compensation for options and shares with a corresponding adjustment to additional paid-in capital. In addition the Company recorded other stock based compensation of ($) and $, respectively with a corresponding adjustment to incentive compensation plan payable, payable in Series G Preferred shares which have not yet been issued.
During the year ended February 29, 2024 warrant holders had the following activity:
| — | On January 27, 2024 warrants to acquire shares expired. |
During the year ended February 28, 2023 warrant holders had the following activity:
| — | On
August 30, 2022 a warrant holder exchanged warrants for a promissory note of $ | |
| — | On
August 9, 2022 as part of a debt issuance the Company issued two |
| Strike price | $ | - $ | ||
| Fair value of Company’s common stock | $ | |||
| Dividend yield | | % | ||
| Expected volatility | ||||
| Risk free interest rate | % | |||
| Expected term (years) |
| — | Cashless exercise of warrants for common shares |
| F-27 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Summary of Common Stock Option Activity
Summary of CEO Compensation Grant
On April 9, 2021 the Company entered into an Employment Agreement with Chief Executive Officer, Steven Reinharz with a three- year term under the following terms whereby stock option awards will be granted if certain conditions are met:
| — | A stock option award (option 1) will be granted to the employee to purchase shares at an exercise price of $ $ per share if the trading share price of the Company reaches an average of $ per share for ten days over a 30 day trading period. | |
| — | A stock option award (option 2) will be granted to the employee to purchase shares at an exercise price of $ $ per share if the trading share price of the Company reaches an average of $ per share for ten days over a 30 day trading period. |
| Objective #3: | Sales in any fiscal quarter exceed the total sales in fiscal year 2021 for the first time. | |
| Award #3: | Five hundred (500) shares of Series G preferred stock. | |
| Objective #4: | One hundred fifty (150) devices are deployed in the marketplace. | |
| Award #4: | Two hundred fifty (250) shares of Series G preferred stock. | |
| Objective #5: | Year-to-date sales at any point in fiscal year 2022 exceed One Million Dollars ($1,000,000). | |
| Award #5: | Two hundred fifty (250) shares of Series G preferred stock. | |
| Objective #6: | The price per share of common stock has increased to and maintains a price of Ten Cents ($0.10) or more for ten (10) days in a thirty (30) day period. | |
| Award #6: | Two hundred fifty (250) shares of Series G preferred stock. | |
| Objective #7: | The price per share of common stock has increased to and maintains a price of Twenty Cents ($0.20) or more for ten (10) days in a thirty (30) day period. | |
| Award #7: | Five hundred (500) shares of Series G preferred stock. | |
| Objective #8: | The RAD 3.0 products are launched into the marketplace by November 30, 2021. | |
| Award #8: | Five hundred (500) shares of Series G preferred stock. | |
| Objective #9: | RAD receives an order for fifty (50) units from a single customer. | |
| Award #9: | Five hundred (500) shares of Series G preferred stock. |
On January 31, 2024 the Company added the following Objective effective Martch 1, 2022:
| Objective # 10 | In any fiscal quarter, attrition , measured by loss of recurring monthly revenue does not exceed 10% | |
| Award #10 | Two hundred fifty (250) shares of Series G preferred stock. |
The fair value of the first two awards was obtained through the use of the Monte Carlo method was $ with a charge to stock- based compensation and a corresponding charge to paid in capital. The fair value of the remaining rewards was determined by calculating the vesting amounts of each reward and then determining for each reporting period the requisite service rendered and applying that against the cash redemption value of the number of shares of Series G issuable for each tier in the agreement. For the period ended February 29, 2024 that amount totaled $ with a charge to stock-based compensation and a corresponding charge to incentive compensation plan payable. For the period ended February 28, 2023 that amount totaled $ with a charge to stock-based compensation and a corresponding charge to incentive compensation plan payable.
| F-28 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
On April 14, 2021, the Shareholders of Series E Preferred Stock and the Board of Directors of our Company (“Board”) approved and adopted the 2021 Incentive Stock Plan (the “2021 Plan”).
The purpose of the 2021 Plan is to promote the success of the Company by authorizing incentive awards to retain Directors, executives, selected Employees and Consultants, and reward participants for making major contributions to the success of the Company. The 2021 Plan authorizes the granting of stock options, restricted stock, restricted stock units, stock appreciation rights and stock awards. A total of two hundred million () shares of common stock may be issued under the 2021 Plan. All awards under the 2021 Plan, whether vested or unvested, are subject to the terms of any recoupment, clawback or similar policy of the Company in effect from time to time, as well as any similar provisions of applicable law, which could in certain circumstances require repayment or forfeiture of awards or any shares of stock or other cash or property received with respect to the awards, including any value received from a disposition of the shares acquired upon payment of the awards. The 2021 Plan will be administered by the Board or any Committee authorized by the Board, if applicable, which will have the sole authority to, among other things: construe and interpret the 2021 Plan; make rules and regulations relating to the administration of the 2021 Plan; select participants; and establish the terms and conditions of awards, all in accordance with the terms of the 2021 Plan. The 2021 Plan will remain in effect until April 14, 2031, unless sooner terminated by the Board. Termination will not affect awards then outstanding.
During the year ended February 29, 2024 the Company had the following common stock option activity:
| — | On September 1, 2023, using the Black-Scholes model with assumptions described below: |
SCHEDULE OF COMMON STOCK OPTION ACTIVITY ASSUMPTIONS
| Strike price | $ | |||
| Fair value of Company’s common stock | $ | |||
| Dividend yield | % | |||
| Expected volatility | ||||
| Risk free interest rate | % | |||
| Expected term (years) |
The Company recorded $ in stock-based compensation on the 2023 plan which represents the current expense over the vesting period. In addition the company recorded $ tock based compensation on the 2022 options , so for the year ended February 29, 2024 the Company recorded a total of $ in stock based compensation with a corresponding increase in paid up capital.
| — | On the original 2021 plan, options to purchase shares were forfeited due to employee terminations |
During the year ended February 28, 2023 the Company had the following common stock option activity:
| — | On September 1, 2022, using the Black-Scholes model with assumptions described below: |
SCHEDULE OF COMMON STOCK OPTION ACTIVITY ASSUMPTIONS
| Strike price | $ | |||
| Fair value of Company’s common stock | $ | |||
| Dividend yield | % | |||
| Expected volatility | ||||
| Risk free interest rate | % | |||
| Expected term (years) |
The Company recorded $ in stock-based compensation which represents the current expense over the vesting period.
| — | Options to purchase shares were forfeited due to employee terminations |
| F-29 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF COMMON STOCK OPTION ACTIVITY
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Years | ||||||||||
| Outstanding at March 1, 2022 | $ | |||||||||||
| Issued | $ | |||||||||||
| Exercised | ||||||||||||
| Forfeited, extinguished and cancelled | ( | ) | $ | ( | ) | |||||||
| Outstanding at February 28, 2023 | $ | |||||||||||
| Number of Options | Weighted Average Exercise Price | Weighted Average Remaining Years | ||||||||||
| Outstanding at March 1, 2023 | $ | |||||||||||
| Issued | $ | |||||||||||
| Exercised | ||||||||||||
| Forfeited, extinguished and cancelled | ( | ) | $ | ( | ) | |||||||
| Outstanding at February 29, 2024 | $ | |||||||||||
13. 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.
The related legal costs are expensed as incurred.
Operating Lease
On
March 10, 2021,
The
Company’s leases are accounted for as operating leases. Rent expense and operating lease cost are recorded over the lease terms
on a straight-line basis. Rent expense and operating lease cost was $
| F-30 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE OF MATURITY OF OPERATING LEASE LIABILITIES
| Maturity of Lease Liabilities | Operating Leases | |||
| February 28, 2025 | $ | |||
| 2025 | $ | |||
| February 28, 2026 | ||||
| 2026 | ||||
| February 28, 2027 | ||||
| 2027 | ||||
| February 29, 2028 | ||||
| 2028 | ||||
| February 28, 2029 | ||||
| 2029 | ||||
| February 28, 2030 and after | ||||
| 2030 and after | ||||
| Total lease payments | ||||
| Less: Interest | ( | ) | ||
| Present value of lease liabilities | $ | |||
SCHEDULE OF NET INCOME (LOSS) PER COMMON SHARE
| For the Year Ended | ||||||||
| February 29, | February 28, | |||||||
| 2024 | 2023 | |||||||
| Numerator: | ||||||||
| Net income (loss) available to common shareholders | $ | ( | ) | $ | ( | ) | ||
| Effect of common stock equivalents | ||||||||
| Add: interest expense on convertible debt | ||||||||
| Add (less) loss (gain) on change of derivative liabilities | ( | ) | ||||||
| Net income (loss) adjusted for common stock equivalents | ( | ) | ( | ) | ||||
| Denominator: | ||||||||
| Weighted average shares - basic | ||||||||
| Net income (loss) per share – basic | $ | ( | ) | $ | ( | ) | ||
| Denominator: | ||||||||
| Weighted average shares – diluted | ||||||||
| Net income (loss) per share – diluted | $ | ( | ) | $ | ( | ) | ||
SCHEDULE OF ANTI-DILUTIVE SHARES OF COMMON STOCK EQUIVALENTS
| For the Year Ended | ||||||||
| February 29, | February 28, | |||||||
| 2024 | 2023 | |||||||
| Convertible Class F Preferred Shares* | ||||||||
| Stock options and warrants | ||||||||
| Total | ||||||||
| * |
| For the Year Ended | ||||||||
| February 29 and February 28 | ||||||||
| 2024 | 2023 | |||||||
| Convertible Series F Preferred Shares | ||||||||
| Anti-dilutive shares of common stock | ||||||||
| F-31 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
15. INCOME TAXES
The Company has adopted ASC 740-10, “Income Taxes”, which requires the use of the liability method in the computation of income tax expense and the current and deferred income taxes payable (deferred tax liability) or benefit (deferred tax asset). Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The income tax expense (benefit) consisted of the following for the fiscal years ended February 29, 2024 and February 28, 2023:
SCHEDULE OF INCOME TAX EXPENSES (BENEFIT)
| February 29, 2024 | February 28, 2023 | |||||||
| Total current | $ | $ | ||||||
| Total deferred | ||||||||
| Total | $ | $ | ||||||
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.
The following is a reconciliation of the expected statutory federal income tax provision to the actual income tax benefit for the fiscal years ended February 29, 2024 and February 28, 2023:
SCHEDULE OF EXPECTED STATUTORY FEDERAL INCOME TAX PROVISION
| February 29, 2024 | ||||
| Federal statutory rate | $ | ( | ) | |
| State income tax benefit, net of federal benefit | ( | ) | ||
| Non deductible interest | ||||
| Non deductible stock based compensation | ||||
| Change in valuation allowance | ||||
| Total | $ | |||
| February 28, 2023 | ||||
| Federal statutory rate | $ | ( | ) | |
| State income tax benefit, net of federal benefit | ( | ) | ||
| Non deductible interest | ||||
| Non deductible stock based compensation | ||||
| Change in valuation allowance | ||||
| Total | $ | |||
For
the years ended February 29, 2024 and February 28, 2023, the expected tax benefit, temporary timing differences and long-term timing
differences are calculated at the
| F-32 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Significant components of the Company’s deferred tax assets and liabilities were as follows for the fiscal years February 29, 2024 and February 28, 2023:
SCHEDULE OF COMPONENTS OF DEFERRED TAX ASSETS AND LIABILITIES
| February 29, 2024 | February 28, 2023 | |||||||
| Deferred tax assets: | ||||||||
| Net operating loss carryforwards | $ | $ | ||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | ||||||||
| Deferred revenue | ||||||||
| Total deferred tax liabilities | ||||||||
| Net deferred tax assets: | ||||||||
| Less valuation allowance | ( | ) | ( | ) | ||||
| Net deferred tax assets (liabilities) | $ | $ | ||||||
The
Company has incurred losses since inception, therefore, the Company has no federal tax liability. Additionally there are limitations
imposed by certain transactions which are deemed to be ownership changes which occurred in the Company on August 28, 2017. The net deferred
tax asset generated by the loss carryforward has been fully reserved. The cumulative net operating loss carryforward was approximately
$
Although the Company has tax loss carry-forwards, there is uncertainty as to utilization prior to their expiration. Accordingly, the future income tax asset amounts have been fully reserved by a valuation allowance.
The Company has maintained a full valuation allowance against its deferred tax assets at February 29, 2024 and February 28, 2023. A valuation allowance is required to be recorded when it is more likely than not that some portion or all of the net deferred tax assets will not be realized. Since the Company cannot be assured of realizing the net deferred tax asset, a full valuation allowance has been provided.
The Company does not have any uncertain tax positions at February 29, 2024 and February 28, 2023 that would affect its effective tax rate. The Company does not anticipate a significant change in the amount of unrecognized tax benefits over the next twelve months. Because the Company is in a loss carryforward position, the Company is generally subject to US federal and state income tax examinations by tax authorities for all years for which a loss carryforward is available. If and when applicable, the Company will recognize interest and penalties as part of income tax expense.
The Company’s tax returns for the years ended February 28, 2023, and February 28, 2022, and February 29, 2021 are open for examination under Federal statute of limitations.
| F-33 |
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
16. SUBSEQUENT EVENTS
Subsequent to February 29, 2024 through to May 9, 2024,
— the Company issued common shares pursuant to a share purchase agreement for gross proceeds of $, issuance costs of $ and cash proceeds of $.
— on March 12 ,2024 the shareholders approved an increase to its authorized common stock by shares for shares to shares.
—
On March 8, 2024, the Company entered into an agreement where the lender will buy pay the Company $
—
On April 29, 2024 , the Company entered into a Securities Purchase Agreement for Series B Convertible , Redeemable Preferred Shares.
The Company will receive $
| F-34 |
PROSPECTUS
Up to 2,500,000,000 Shares of Common Stock
May 9, 2024
- Prospectus Cover Page -
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated costs and expenses to be incurred in connection with the issuance and distribution of the securities registered under this Registration Statement. All amounts are estimates except the SEC registration fee.
| Accounting fees and expenses | $ | 15,000 | ||
| Total | $ | 15,000 |
We are paying all expenses of the offering listed above. No portion of these expenses will be borne by the Selling Stockholder. The Selling Stockholder, however, will pay any other expenses incurred in selling their common stock, including any brokerage commissions or costs of sale.
Item 14. Indemnification of Directors and Officers
Our Bylaws provide that the Company shall indemnify its directors and officers from and against any liability arising out of their service as a director or officer of the Corporation or any subsidiary or affiliate of which they serve as an officer or director at the request of the Corporation to the fullest extent not prohibited by NRS Chapter 78. The effect of this provision of our bylaws is to eliminate our right and our stockholders (through stockholders’ derivative suits on behalf of our company) to recover damages against a director or officer for breach of the fiduciary duty of care as a director or officer (including breaches resulting from negligent or grossly negligent behavior), except under certain situations defined by statute. We believe that the indemnification provisions in our bylaws are necessary to attract and retain qualified persons as directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
Item 15. Recent Sales of Unregistered Securities
None.
Item 16. Exhibits and Financial Statements
(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 F-1 and included on pages F-2 through F-34.
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.
| II-1 |
* Filed or furnished herewith
Item 16. Undertakings.
The undersigned registrant hereby undertakes
1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
| i. | To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; |
| II-2 |
| ii. | To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement; | |
| iii. | To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement; |
2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
4. That, for the purpose of determining liability of the registrant under the Securities Act of 1933 to any purchaser in the initial distribution of the securities:
The undersigned registrant undertakes that in a primary offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
| i. | Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424; | |
| ii. | Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant; | |
| iii. | The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and | |
| iv. | Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser. |
5. That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser: Each Prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than Prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or Prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or Prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or Prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, the registrant has been advised that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director, officer or controlling person of the corporation in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question of whether such indemnification by it is against public policy as expressed in the Securities Act, and will be governed by the final adjudication of such issue.
| II-3 |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized in Ferndale, Michigan on May 9, 2024.
| Artificial Intelligence Technology Solutions, Inc. | ||
| By: | /s/ Steven Reinharz | |
| Steven Reinharz | ||
| Chief Executive Officer, Director (Principal Executive Officer) | ||
Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the dates stated.
| Signature | Title | Date | ||
| /s/ Steven Reinharz | Chief Executive Officer/Director | May 9, 2024 | ||
| Steven Reinharz | ||||
| /s/ Anthony Brenz | Chief Financial Officer | May 9, 2024 | ||
| Anthony Brenz |
| II-4 |
Exhibit 5.1
Frederick M. Lehrer, P. A.
2108 Emil Jahna Road
Clermont, Florida 34711
(561) 706-7646
flehrer@securitiesattorney1.com
May 9, 2024
Artificial Intelligence Technology Solutions, Inc.
Attn: Board of Directors
| Re: | Artificial Intelligence Technology Solutions, Inc. |
| Registration Statement on Form S-1/A |
Board of Directors:
You have requested my opinion, as counsel, with respect to certain matters in connection with the filing by Artificial Intelligence Technology Solutions, Inc. , a Nevada corporation (the “Registrant”), of a Registration Statement on Form S-1 (the “Registration Statement”) with the Securities and Exchange Commission (the “SEC”) under the Securities Act of 1933, as amended (the “Act”), including a related prospectus filed with the Registration Statement (the “Prospectus”), covering the resale by Selling Stockholder GHS Investments LLC (“GHS”) of ( ) Common Stock Shares, par value $0.00001 (the “Shares”) to be sold by the Selling Stockholder, GHS.
For the purpose of rendering my opinion herein, I have reviewed: (i) the revised statutes of the State of Nevada to the extent I deem relevant to the matters opined upon herein; (ii) copies of the Company’s Articles of Incorporation and amendments thereto; (iii) the Company’s Bylaws, as currently in effect as of the date hereof; (iv) selected proceedings of the Company’s Board of Directors and certificates of the Company’s officers; and (v) such other documents as I have deemed necessary and relevant to the matter opined upon herein.
I have assumed the genuineness of all signatures, the conformity to authentic original documents of the copies of all such documents submitted to me as certified, conformed, and photocopied, including the quoted, extracted, excerpted, and reprocessed text of such documents. I have not been engaged to examine, nor have I examined, the Registration Statement for the purpose of determining the accuracy or completeness of the information included therein or the compliance and conformity thereof with the rules and regulations of the SEC or the requirements of Form S-1, and I express no opinion with respect thereto.
My opinion is limited to matters of the Nevada Revised Statutes and I do not express an opinion on the federal law of the United States of America or the law of any state or jurisdiction therein other than the State of Nevada, as specified herein.
On the basis of the foregoing, and in reliance thereon, I am of the opinion that the Shares being offered pursuant to the Registration Statement will be, when issued and in the manner described in the Registration Statement, validly issued, fully paid and non-assessable Shares.
I consent to the use of my opinion as an exhibit to the registration statement and to the reference thereto under the heading “Interests of Named Experts and Counsel” in the prospectus contained in the registration statement.
In giving the foregoing consents, I do not thereby admit that my firm comes within the category of persons or entities whose consent is required under Section 7 of the Act or the rules and regulations of the SEC promulgated thereunder.
Sincerely,
Frederick M. Lehrer, P. A.
| By: | /s/ Frederick M. Lehrer, Esq. | |
| Frederick M. Lehrer, Esq. |
Exhibit 10.5
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (this “Agreement”) is dated as of April 29, 2024, between ARTIFICAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC., a Nevada corporation (the “Company”), and the purchaser identified on the signature page hereto (including its successors and assigns, the “Purchaser”).
WHEREAS, subject to the terms and conditions set forth in this Agreement and pursuant to Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”), and Rule 506 promulgated thereunder, the Company desires to issue and sell to the Purchaser, and the Purchaser desires to purchase from the Company, securities of the Company as more fully described in this Agreement.
NOW, THEREFORE, IN CONSIDERATION of the mutual covenants contained in this Agreement, and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, the Company and the Purchaser agree as follows:
ARTICLE I.
DEFINITIONS
1.1 Definitions. In addition to the terms defined elsewhere in this Agreement: (a) capitalized terms that are not otherwise defined herein have the meanings given to such terms in the Certificate of Designation (as defined herein), and (b) the following terms have the meanings set forth in this Section 1.1:
“Acquiring Person” shall have the meaning ascribed to such term in Section 4.5.
“Action” shall have the meaning ascribed to such term in Section 3.1(j).
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 under the Securities Act.
“Board of Directors” means the board of directors of the Company.
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.
“Certificate of Designation” means the Certificate of Designation to be filed prior to the Closing by the Company with the Secretary of State of the State of Nevada, in the form of Exhibit A attached hereto.
“Closing Date” means the Trading Day on which all of the Transaction Documents have been executed and delivered by the applicable parties thereto in connection with the Closing, and, to the extent applicable, all conditions precedent to (i) the Purchaser’s obligations to pay the Subscription Amount as to such Closing and (ii) the Company’s obligations to deliver the Securities as to such Closing, in each case, have been satisfied or waived.
“Closing” means the closing of the purchase and sale of the Securities pursuant to Section 2.1(a), which shall occur on the Closing Date. The Closing will be for the purchase of three hundred (300) shares of Preferred Stock of the Company for the aggregate purchase price of $300,000.
“Commission” means the United States Securities and Exchange Commission.
“Commitment Shares” means twenty (20) Preferred Shares issued at Closing.
“Common Stock” means the common stock of the Company, par value $0.00001 per share, and any other class of securities into which such securities may hereafter be reclassified or changed.
“Common Stock Equivalents” means any securities of the Company or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, right, option, warrant or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Company Counsel” means Frederick M. Lehrer, Esquire.
“Conversion Shares” means the Common Stock issuable upon conversion of the Preferred Stock.
“Disclosure Schedules” shall have the meaning ascribed to such term in Section 3.1.
“Dividend” means eight percent (8%) per annum of the stated value of any Preferred Stock, paid quarterly by the Company, and at the Company’s discretion, in cash or in Preferred Stock.
“Evaluation Date” shall have the meaning ascribed to such term in Section 3.1(r).
“Event of Default” means any of the following events: (i) the suspension, cessation from trading or delisting of the Company’s Common Stock on the Principal Market for a period of two (2) consecutive trading days or more; (ii) the failure by the Company to timely comply with the reporting requirements of the Exchange Act (including applicable extension periods or such delays which are consented to by the Purchaser); (iii) the failure for any reason by the Company to issue Commitment Shares, Dividends, or Conversion Shares to the Purchaser within the required time periods; (iv) the Company breaches any representation, warranty, covenant or other term of condition contained in the definitive agreements between the parties; (v) the Company files for Bankruptcy or receivership or any money judgment writ, liquidation or a similar process is entered by or filed against the Company for more than $50,000 and remains unvacated, unbonded or unstayed for a period of twenty (20) calendar days; (vi) any cessation of operations by the Company or failure by the Company to maintain any assets, intellectual, personal or real property or other assets which are necessary to conduct its business (vii) the Company shall lose the “bid” price for its Common stock on the Principal Market; (viii) if at any time the Common Stock is no longer DWAC eligible; or (ix) the Registration Statement registering the resale of the Conversion Shares ceases to be effective for any reason.
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“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“FCPA” means the Foreign Corrupt Practices Act of 1977, as amended.
“GAAP” means generally accepted accounting principles in the U.S.
“Intellectual Property Rights” shall have the meaning ascribed to such term in Section 3.1(o).
“Liens” means a lien, charge, pledge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.
“Material Adverse Effect” shall have the meaning assigned to such term in Section 3.1(b).
“Material Permits” shall have the meaning ascribed to such term in Section 3.1(m).
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Preferred Stock” means up to three hundred and twenty (320) shares of the Company’s Series [ ] Preferred Stock (including the Commitment Shares) issued hereunder having the rights, preferences and privileges set forth in the Certificate of Designation, in the form of Exhibit A hereto.
“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.
“Purchaser Party” shall have the meaning ascribed to such term in Section 4.7.
“Registration Statement” means any Registration Statement under which the shares of the Company’s common stock is registered. The Company shall use its best efforts to file a registration statement registering the resale of the Securities within ten (10) calendar days from the Closing.
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“Required Approvals” shall have the meaning ascribed to such term in Section 3.1(e).
“Rule 144” means Rule 144 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.
“Rule 424” means Rule 424 promulgated by the Commission pursuant to the Securities Act, as such Rule may be amended or interpreted from time to time, or any similar rule or regulation hereafter adopted by the Commission having substantially the same purpose and effect as such Rule.
“SEC Reports” shall have the meaning ascribed to such term in Section 3.1(g).
“Securities” means the Preferred Stock and the Conversion Shares.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Short Sales” means all “short sales” as defined in Rule 200 of Regulation SHO under the Exchange Act (but shall not be deemed to include the location and/or reservation of borrowable shares of Common Stock).
“Stated Value” means $1,200 per share of Series __ Preferred Stock.
“Subscription Amount” shall mean the aggregate amount to be paid for the Preferred Stock purchased hereunder as specified on the signature page under the heading “Subscription Amount,” in United States dollars and in immediately available funds.
“Subsidiary” means any subsidiary of the Company as set forth on Schedule 3.1(a) and shall, where applicable, also include any direct or indirect subsidiary of the Company formed or acquired after the date hereof.
“Trading Day” means a day on which the principal Trading Market is open for trading.
“Trading Market” means any of the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the NYSE MKT, the Nasdaq Capital Market, the Nasdaq Global Market, the Nasdaq Global Select Market, the New York Stock Exchange, the OTCQB or the OTC Markets (or any successors to any of the foregoing).
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“Transaction Documents” means this Agreement, the Certificate of Designation, all exhibits and schedules thereto and hereto and any other documents or agreements executed in connection with the transactions contemplated hereunder.
“Transfer Agent” means Transhare, the current transfer agent of the Company, with a mailing address of Bayside Center 1, 17755 North US Highway 19, Suite 140, Clearwater, Florida 33764 and any successor transfer agent of the Company.
ARTICLE II.
PURCHASE AND SALE
2.1 (a) Closing. (i) Upon the execution of this Agreement, the Company agrees to sell, and the Purchaser agrees to purchase, three hundred (300) shares of Preferred Stock of the Company at a price of $1,000 per share. The Purchaser shall deliver to the Company, via wire transfer immediately available funds equal to the Purchaser’s Subscription Amount as set forth on the signature page hereto executed by the Purchaser, and the Company shall deliver to the Purchaser such number of shares of the Preferred Stock purchased, as determined pursuant to Section 2.2(a) and the Purchaser shall deliver the other items set forth in Section 2.2 deliverable at the Closing. Upon satisfaction of the covenants and conditions set forth in Sections 2.2 and 2.3, the Closing shall occur at the offices of Pryor Cashman LLP, counsel to the Purchaser, or such other location as the parties shall mutually agree. The Company shall use its best efforts to file a registration statement registering the resale of the Securities within ten (10) calendar days from the Closing.
(b) Deliveries.
(a) On or prior to the applicable Closing Date (or as otherwise indicated below), the Company shall deliver or cause to be delivered to the Purchaser the following:
(i) At the Closing, this Agreement duly executed by the Company;
(ii) At the Closing, a certificate evidencing the Commitment Shares;
(iii) At the Closing, a certificate evidencing three hundred (300) shares of Preferred Stock; and
(iv) An irrevocable letter of instruction to the Company’s Transfer Agent, instructing the Transfer Agent to maintain for the benefit of the Purchaser, _________(____) shares of its common stock and at all times thereafter three times (3x) the number of common shares needed to by the Purchaser to convert and/or exercise all shares of Preferred Stock and Preferred Stock held by the Purchaser. The reserve amount shall be increased from time to time to ensure appropriate coverage for Securities issued or issuable to Purchaser.
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(b) On or prior to the applicable Closing Date, the Purchaser shall deliver or cause to be delivered to the Company, as applicable, the following:
(i) This Agreement duly executed by the Purchaser; and
(ii) the Purchaser’s Subscription Amount by wire transfer to the account specified in writing by the Company together with the subscription form attached as an Exhibit below.
2.2 Closing Conditions.
(a) The obligations of the Company hereunder in connection with the Closing are subject to the following conditions being met:
(i) the accuracy in all material respects on the applicable Closing Date of the representations and warranties of the Purchaser contained herein (unless as of a specific date therein in which case they shall be accurate as of such date);
(ii) all obligations, covenants and agreements of the Purchaser required to be performed at or prior to the applicable Closing Date shall have been performed; and
(iii) the delivery by the Purchaser of the items set forth in Section 2.2(b) of this Agreement.
(b) The obligations of the Purchaser hereunder in connection with a Closing are subject to the following conditions being met:
(i) the accuracy in all material respects when made and on the applicable Closing Date of the representations and warranties of the Company contained herein (unless as of a specific date therein);
(ii) all obligations, covenants and agreements of the Company required to be performed at or prior to the applicable Closing Date shall have been performed;
(iii) the delivery by the Company of the items set forth in Section 2.2(a) of this Agreement;
(iv) there shall have been no Material Adverse Effect with respect to the Company since the date hereof; and
(v) from the date hereof to the applicable Closing Date, trading in the Common Stock shall not have been suspended by the Commission or the Company’s principal Trading Market and, at any time prior to the applicable Closing Date, trading in securities shall not have been suspended or limited, or minimum prices shall not have been established on securities whose trades are reported by such service, or on any Trading Market, nor shall a banking moratorium have been declared either by the United States or New York State authorities nor shall there have occurred any material outbreak or escalation of hostilities or other national or international calamity of such magnitude in its effect on, or any material adverse change in, any financial market which, in each case, in the reasonable judgment of the Purchaser, makes it impracticable or inadvisable to purchase the Securities at a Closing.
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ARTICLE III.
REPRESENTATIONS AND WARRANTIES
3.1 Representations and Warranties of the Company. Except as set forth in the Disclosure Schedules, which Disclosure Schedules shall be deemed a part hereof and shall qualify any representation or otherwise made herein to the extent of the disclosure contained in the corresponding section of the Disclosure Schedules, the Company hereby makes the following representations and warranties to the Purchaser:
(a) Subsidiaries. All of the direct and indirect subsidiaries of the Company are set forth on Schedule 3.1(a). The Company owns, directly or indirectly, all of the capital stock or other equity interests of each Subsidiary, and all of the issued and outstanding shares of capital stock of each Subsidiary are validly issued and are fully paid, non-assessable and free of preemptive and similar rights to subscribe for or purchase securities. If the Company has no subsidiaries, all other references to the Subsidiaries or any of them in the Transaction Documents shall be disregarded.
(b) Organization and Qualification. The Company and each of the Subsidiaries is an entity duly incorporated or otherwise organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. Neither the Company nor any Subsidiary is in violation nor default of any of the provisions of its respective certificate or articles of incorporation, bylaws or other organizational or charter documents. Each of the Company and the Subsidiaries is duly qualified to conduct business and is in good standing as a foreign corporation or other entity in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in: (i) a material adverse effect on the legality, validity or enforceability of any Transaction Document, (ii) a material adverse effect on the results of operations, assets, business, prospects or condition (financial or otherwise) of the Company and the Subsidiaries, taken as a whole, or (iii) a material adverse effect on the Company’s ability to perform in any material respect on a timely basis its obligations under any Transaction Document (any of (i), (ii) or (iii), a “Material Adverse Effect”) and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.
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(c) Authorization; Enforcement. The Company has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and each of the other Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this Agreement and each of the other Transaction Documents by the Company and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Company and no further action is required by the Company, the Board of Directors or the Company’s stockholders in connection herewith or therewith other than in connection with the Required Approvals. This Agreement and each other Transaction Document to which it is a party has been (or upon delivery will have been) duly executed by the Company and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Company enforceable against the Company in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
(d) No Conflicts. The execution, delivery and performance by the Company of this Agreement and the other Transaction Documents to which it is a party, the issuance and sale of the Securities and the consummation by it of the transactions contemplated hereby and thereby do not and will not: (i) conflict with or violate any provision of the Company’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Company or any Subsidiary, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Company or Subsidiary debt or otherwise) or other understanding to which the Company or any Subsidiary is a party or by which any property or asset of the Company or any Subsidiary is bound or affected, or (iii) subject to the Required Approvals, conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Company or a Subsidiary is subject (including federal and state securities laws and regulations), or by which any property or asset of the Company or a Subsidiary is bound or affected; except in the case of each of clauses (ii) and (iii), such as could not have or reasonably be expected to result in a Material Adverse Effect.
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(e) Filings, Consents and Approvals. Except as otherwise disclosed on Schedule 3.1(e), the Company has timely filed all quarterly and annual reports required to be filed by it with the SEC pursuant to the reporting requirements of the Securities Exchange Act of 1934, as amended (the “1934 Act”) (all of the foregoing filed prior to the date hereof and all exhibits included therein and financial statements and schedules thereto and documents (other than exhibits to such documents) incorporated by reference therein, being hereinafter referred to herein as the “SEC Documents”). The Company has delivered to Purchaser true and complete copies of the SEC Documents, except for such exhibits and incorporated documents, and except as such Documents are available EDGAR filings on the SEC’s sec.gov website. As of their respective dates, the SEC Documents complied in all material respects with the requirements of the 1934 Act and the rules and regulations of the SEC promulgated thereunder applicable to the SEC Documents, and none of the SEC Documents, at the time they were filed with the SEC, contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. None of the statements made in any such SEC Documents is, or has been, required to be amended or updated under applicable law (except for such statements as have been amended or updated in subsequent filings prior the date hereof). As of their respective dates, the financial statements of the Company included in the SEC Documents complied as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto. Such financial statements have been prepared in accordance with United States generally accepted accounting principles, consistently applied, during the periods involved and fairly present in all material respects the consolidated financial position of the Company and its consolidated Subsidiaries as of the dates thereof and the consolidated results of their operations and cash flows for the periods then ended (subject, in the case of unaudited statements, to normal year-end audit adjustments). Except as set forth in the financial statements of the Company included in the SEC Documents, the Company has no liabilities, contingent or otherwise, other than (i) liabilities incurred in the ordinary course of business subsequent to December 31, 2023, and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted accounting principles to be reflected in such financial statements, which, individually or in the aggregate, are not material to the financial condition or operating results of the Company. The Company is subject to the reporting requirements of the 1934 Act. For the avoidance of doubt, filing of the documents required in this Section 3(g) via the SEC’s Electronic Data Gathering, Analysis, and Retrieval system (“EDGAR”) shall satisfy all delivery requirements of this Section 3(g).
The Company is not required to obtain any consent, waiver, authorization or order of, give any notice to, or make any filing or registration with, any court or other federal, state, local or other governmental authority or other Person in connection with the execution, delivery and performance by the Company of the Transaction Documents, other than: (i) the filings required pursuant to Section 4.4 of this Agreement, (ii) the notice and/or application(s) to each applicable Trading Market for the issuance and sale of the Securities, and (iii) such filings as are required to be made under applicable state and federal securities laws (collectively, the “Required Approvals”).
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(f) Issuance of the Securities. The Securities are duly authorized and, when issued and paid for in accordance with the applicable Transaction Documents, will be duly and validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company other than restrictions on transfer provided for in the Transaction Documents. The Conversion Shares, when issued in accordance with the terms of the Preferred Stock, will be validly issued, fully paid and nonassessable, free and clear of all Liens imposed by the Company. The Company shall reserve from its duly authorized capital stock a number of shares of Common Stock issuable pursuant to the Preferred Stock.
(g) Capitalization. The capitalization of the Company is as set forth on Schedule 3.1(g), which Schedule 3.1(g) shall also include the number of shares of Common Stock owned beneficially, and of record, by Affiliates of the Company as of the date hereof. Except as set forth on Schedule 3.1(g) or as set forth in such applicable report, the Company has not issued any capital stock since its most recently filed periodic report under the Exchange Act, other than pursuant to the exercise of employee stock options under the Company’s stock option plans, the issuance of shares of Common Stock to employees pursuant to the Company’s employee stock purchase plans and pursuant to the conversion and/or exercise of Common Stock Equivalents outstanding as of the date of the most recently filed periodic report under the Exchange Act, including Current Reports on Form 8-K (“SEC Reports”). No Person has any right of first refusal, preemptive right, right of participation, or any similar right to participate in the transactions contemplated by the Transaction Documents. Except as set forth on Schedule 3.1(g) and except as a result of the purchase and sale of the Securities, there are no outstanding options, warrants, scrip rights to subscribe to, calls or commitments of any character whatsoever relating to, or securities, rights or obligations convertible into or exercisable or exchangeable for, or giving any Person any right to subscribe for or acquire any shares of Common Stock, or contracts, commitments, understandings or arrangements by which the Company or any Subsidiary is or may become bound to issue additional shares of Common Stock or Common Stock Equivalents. The issuance and sale of the Securities will not obligate the Company to issue shares of Common Stock or other securities to any Person and will not result in a right of any holder of Company securities to adjust the exercise, conversion, exchange or reset price under any of such securities. All of the outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable, have been issued in compliance with all federal and state securities laws, and none of such outstanding shares was issued in violation of any preemptive rights or similar rights to subscribe for or purchase securities. No further approval or authorization of any stockholder, the Board of Directors or others is required for the issuance and sale of the Securities. There are no stockholders agreements, voting agreements or other similar agreements with respect to the Company’s capital stock to which the Company is a party or, to the knowledge of the Company, between or among any of the Company’s stockholders.
(h) Intentionally omitted.
(i) Intentionally omitted.
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(j) Litigation. Except as disclosed in Schedule 3.1(j), there is no action, suit, inquiry, notice of violation, proceeding or investigation pending or, to the knowledge of the Company, threatened against or affecting the Company, any Subsidiary or any of their respective properties before or by any court, arbitrator, governmental or administrative agency or regulatory authority (federal, state, county, local or foreign) (collectively, an “Action”) which (i) adversely affects or challenges the legality, validity or enforceability of any of the Transaction Documents or the Securities or (ii) could, if there were an unfavorable decision, have or reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any Subsidiary, nor any director or officer thereof, is or has been the subject of any Action involving a claim of violation of or liability under federal or state securities laws or a claim of breach of fiduciary duty. There has not been, and to the knowledge of the Company, there is not pending or contemplated, any investigation by the Commission involving the Company or any current or former director or officer of the Company. The Commission has not issued any stop order or other order suspending the effectiveness of any registration statement filed by the Company or any Subsidiary under the Exchange Act or the Securities Act.
(k) Labor Relations. Except as disclosed in Schedule 3.1(k), no labor dispute exists or, to the knowledge of the Company, is imminent with respect to any of the employees of the Company, which could reasonably be expected to result in a Material Adverse Effect. None of the Company’s or its Subsidiaries’ employees is a member of a union that relates to such employee’s relationship with the Company or such Subsidiary, and neither the Company nor any of its Subsidiaries is a party to a collective bargaining agreement, and the Company and its Subsidiaries believe that their relationships with their employees are good. To the knowledge of the Company, no executive officer of the Company or any Subsidiary, is, or is now expected to be, in violation of any material term of any employment contract, confidentiality, disclosure or proprietary information agreement or non-competition agreement, or any other contract or agreement or any restrictive covenant in favor of any third party, and the continued employment of each such executive officer does not subject the Company or any of its Subsidiaries to any liability with respect to any of the foregoing matters. The Company and its Subsidiaries are in compliance with all U.S. federal, state, local and foreign laws and regulations relating to employment and employment practices, terms and conditions of employment and wages and hours, except where the failure to be in compliance could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
(l) Compliance. Neither the Company nor any Subsidiary: (i) is in default under or in violation of (and no event has occurred that has not been waived that, with notice or lapse of time or both, would result in a default by the Company or any Subsidiary under), nor has the Company or any Subsidiary received notice of a claim that it is in default under or that it is in violation of, any indenture, loan or credit agreement or any other agreement or instrument to which it is a party or by which it or any of its properties is bound (whether or not such default or violation has been waived) except as disclosed in Schedule 3.1(l), (ii) is in violation of any judgment, decree or order of any court, arbitrator or other governmental authority, except as set forth on Schedule 3.1(l) or (iii) is or has been in violation of any statute, rule, ordinance or regulation of any governmental authority, including without limitation all foreign, federal, state and local laws relating to taxes, other than tax payments related to payroll that are late, environmental protection, occupational health and safety, product quality and safety and employment and labor matters, except in each case as could not have or reasonably be expected to result in a Material Adverse Effect.
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(m) Regulatory Permits. The Company and the Subsidiaries possess all certificates, authorizations and permits issued by the appropriate federal, state, local or foreign regulatory authorities necessary to conduct their respective businesses as described in the SEC Reports, except where the failure to possess such permits could not reasonably be expected to result in a Material Adverse Effect (“Material Permits”), and neither the Company nor any Subsidiary has received any notice of proceedings relating to the revocation or modification of any Material Permit.
(n) Title to Assets. Except as disclosed in Schedule 3.1(n), the Company and the Subsidiaries have good and marketable title in fee simple to all real property owned by them and good and marketable title in all personal property owned by them that is material to the business of the Company and the Subsidiaries, in each case free and clear of all Liens, except for (i) Liens as do not materially affect the value of such property and do not materially interfere with the use made and proposed to be made of such property by the Company and the Subsidiaries and (ii) Liens for the payment of federal, state or other taxes, for which appropriate reserves have been made therefor in accordance with GAAP and, the payment of which is neither delinquent nor subject to penalties. Any real property and facilities held under lease by the Company and the Subsidiaries are held by them under valid, subsisting and enforceable leases with which the Company and the Subsidiaries are in compliance.
(o) Intellectual Property. The Company and the Subsidiaries have, or have rights to use, all patents, patent applications, trademarks, trademark applications, service marks, trade names, trade secrets, inventions, copyrights, licenses and other intellectual property rights and similar rights as described in the SEC Reports as necessary or required for use in connection with their respective businesses and which the failure to so have could have a Material Adverse Effect (collectively, the “Intellectual Property Rights”). Except as disclosed on Schedule 3.1(o), none of, and neither the Company nor any Subsidiary has received a notice (written or otherwise) that any of, the Intellectual Property Rights has expired, terminated or been abandoned, or is expected to expire or terminate or be abandoned, within two (2) years from the date of this Agreement. Neither the Company nor any Subsidiary has received, since the date of the latest audited financial statements included within the SEC Reports, a written notice of a claim or otherwise has any knowledge that the Intellectual Property Rights violate or infringe upon the rights of any Person, except as could not have or reasonably be expected to not have a Material Adverse Effect. To the knowledge of the Company, all such Intellectual Property Rights are enforceable and there is no existing infringement by another Person of any of the Intellectual Property Rights. The Company and its Subsidiaries have taken reasonable security measures to protect the secrecy, confidentiality and value of all of their intellectual properties, except where failure to do so could not, individually or in the aggregate, reasonably be expected to have a Material Adverse Effect.
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(p) Insurance. Except as set forth on Schedule 3.1(p), the Company and the Subsidiaries are insured by insurers of recognized financial responsibility against such losses and risks and in such amounts as are prudent and customary in the businesses in which the Company and the Subsidiaries are engaged, including, but not limited to, directors and officers insurance coverage at least equal to the aggregate Subscription Amount. Neither the Company nor any Subsidiary has any reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business without a significant increase in cost.
(q) Transactions with Affiliates and Employees. Except as set forth in the SEC Reports, none of the officers or directors of the Company or any Subsidiary and, to the knowledge of the Company, none of the employees of the Company or any Subsidiary is presently a party to any transaction with the Company or any Subsidiary (other than for services as employees, officers and directors), including any contract, agreement or other arrangement providing for the furnishing of services to or by, providing for rental of real or personal property to or from, providing for the borrowing of money from or lending of money to or otherwise requiring payments to or from any officer, director or such employee or, to the knowledge of the Company, any entity in which any officer, director, or any such employee has a substantial interest or is an officer, director, trustee, stockholder, member or partner, in each case in excess of $120,000 other than for: (i) payment of salary or consulting fees for services rendered, (ii) reimbursement for expenses incurred on behalf of the Company and (iii) other employee benefits, including stock option agreements under any stock option plan of the Company. Except as set forth on Schedule 3.1(q), all employee salaries and contractor fees have been paid to date and no such amounts are outstanding or past due.
(r) Sarbanes-Oxley; Internal Accounting Controls. Except as may be disclosed in the SEC Reports, the Company and the Subsidiaries are in compliance with any and all applicable requirements of the Sarbanes-Oxley Act of 2002 that are effective as of the date hereof, and any and all applicable rules and regulations promulgated by the Commission thereunder that are effective as of the date hereof and as of each Closing Date. Except as disclosed in the SEC Reports, the Company and the Subsidiaries maintain a system of internal accounting controls sufficient to provide reasonable assurance that: (i) transactions are executed in accordance with management’s general or specific authorizations, (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP and to maintain asset accountability, (iii) access to assets is permitted only in accordance with management’s general or specific authorization, and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. The Company and the Subsidiaries have established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the Company and the Subsidiaries and designed such disclosure controls and procedures to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. The Company’s certifying officers have evaluated the effectiveness of the disclosure controls and procedures of the Company and the Subsidiaries as of the end of the period covered by the most recently filed periodic report under the Exchange Act (such date, the “Evaluation Date”). The Company presented in its most recently filed periodic report under the Exchange Act the conclusions of the certifying officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date. Since the Evaluation Date, there have been no changes in the internal control over financial reporting (as such term is defined in the Exchange Act) of the Company and its Subsidiaries that have materially affected, or is reasonably likely to materially affect, the internal control over financial reporting of the Company and its Subsidiaries.
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(s) Certain Fees. No brokerage or finder’s fees or commissions are or will be payable by the Company or any Subsidiary to any broker, financial advisor or consultant, finder, placement agent, investment banker, bank or other Person with respect to the transactions contemplated by the Transaction Documents, other than as set forth on Schedule 3.1(s). The Purchaser shall have no obligation with respect to any fees or with respect to any claims made by or on behalf of other Persons for fees of a type contemplated in this Section that may be due in connection with the transactions contemplated by the Transaction Documents.
(t) Private Placement. Assuming the accuracy of the Purchaser’s representations and warranties set forth in Section 3.2, no registration under the Securities Act is required for the offer and sale of the Securities by the Company to the Purchaser as contemplated hereby. The issuance and sale of the Securities hereunder does not contravene the rules and regulations of the Trading Market.
(u) Investment Company. The Company is not, and is not an Affiliate of, and immediately after receipt of payment for the Securities, will not be or be an Affiliate of, an “investment company” within the meaning of the Investment Company Act of 1940, as amended. The Company shall conduct its business in a manner so that it will not become an “investment company” subject to registration under the Investment Company Act of 1940, as amended.
(v) Registration Rights. The Company shall use its best efforts to file a registration statement registering the resale of the Securities within ten (10) calendar days from the closing of the Initial Purchase. The Company shall use is best efforts to have the registration statement declared “effective” within sixty (60) calendar days from its filing. The Company shall use its best efforts to have a registration statement registering the resale of the Securities remain effective until such time that the Investor no longer holds any such Securities. No other Person has any right to cause the Company to effect the registration under the Securities Act of any securities of the Company or any Subsidiary.
(w) Listing and Maintenance Requirements. The Company has not in the twelve (12) months preceding the date hereof, received notice from any Trading Market on which the Common Stock is or has been listed or quoted to the effect that the Company is not in compliance with the listing or maintenance requirements of such Trading Market. The Company is and has no reason to believe that it will not in the foreseeable future continue to be, in compliance with all such listing and maintenance requirements.
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(x) [RESERVED]
(y) Disclosure. Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, the Company confirms that neither it nor any other Person acting on its behalf has provided the Purchaser or its agents or counsel with any information that it believes constitutes or might constitute material, non-public information. The Company understands and confirms that the Purchaser will rely on the foregoing representation in effecting transactions in securities of the Company. All of the disclosure furnished by or on behalf of the Company to the Purchaser regarding the Company and its Subsidiaries, their respective businesses and the transactions contemplated hereby, including the Disclosure Schedules to this Agreement, is true and correct and does not contain any untrue statement of a material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. The press releases disseminated by the Company during the twelve months preceding the date of this Agreement taken as a whole do not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made and when made, not misleading. The Company acknowledges and agrees that the Purchaser does not make and has not made any representations or warranties with respect to the transactions contemplated hereby other than those specifically set forth in Section 3.2 hereof.
(z) No Integrated Offering. Assuming the accuracy of the Purchaser’s representations and warranties set forth in Section 3.2, neither the Company, nor any of its Affiliates, nor any Person acting on its or their behalf has, directly or indirectly, made any offers or sales of any security or solicited any offers to buy any security, under circumstances that would cause this offering of the Securities to be integrated with prior offerings by the Company for purposes of (i) the Securities Act which would require the registration of any such securities under the Securities Act, or (ii) any applicable shareholder approval provisions of any Trading Market on which any of the securities of the Company are listed or designated.
(aa) Tax Status. Except for matters that would not, individually or in the aggregate, have or reasonably be expected to result in a Material Adverse Effect, the Company and its Subsidiaries each (i) has made or filed all United States federal, state and local income and all foreign income and franchise tax returns, reports and declarations required by any jurisdiction to which it is subject, (ii) has paid all taxes and other governmental assessments and charges that are material in amount, shown or determined to be due on such returns, reports and declarations and (iii) has set aside on its books provision reasonably adequate for the payment of all material taxes for periods subsequent to the periods to which such returns, reports or declarations apply. There are no unpaid taxes in any material amount claimed to be due by the taxing authority of any jurisdiction, and the officers of the Company or of any Subsidiary know of no basis for any such claim. Immediately after closing of this transaction, the Company covenants to pay to the Past Due Taxes.
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(bb) No General Solicitation. Neither the Company nor any person acting on behalf of the Company has offered or sold any of the Securities by any form of general solicitation or general advertising. The Company has offered the Securities for sale only to the Purchaser.
(cc) Foreign Corrupt Practices. Neither the Company nor any Subsidiary, nor to the knowledge of the Company or any Subsidiary, any agent or other person acting on behalf of the Company or any Subsidiary, has: (i) directly or indirectly, used any funds for unlawful contributions, gifts, entertainment or other unlawful expenses related to foreign or domestic political activity, (ii) made any unlawful payment to foreign or domestic government officials or employees or to any foreign or domestic political parties or campaigns from corporate funds, (iii) failed to disclose fully any contribution made by the Company or any Subsidiary (or made by any person acting on its behalf of which the Company is aware) which is in violation of law or (iv) violated in any material respect any provision of FCPA.
(dd) Accountants. The Company’s accounting firm is set forth on Schedule 3.1(dd) of the Disclosure Schedules. To the knowledge and belief of the Company, such accounting firm: (i) is a registered public accounting firm as required by the Exchange Act and (ii) shall express its opinion with respect to the financial statements to be included in the Company’s Annual Report for the fiscal year ending December 31, 2024.
(ee) Acknowledgment Regarding Purchaser’s Purchase of Securities. The Company acknowledges and agrees that the Purchaser is acting solely in the capacity of an arm’s length purchaser with respect to the Transaction Documents and the transactions contemplated thereby. The Company further acknowledges that the Purchaser is not acting as a financial advisor or fiduciary of the Company (or in any similar capacity) with respect to the Transaction Documents and the transactions contemplated thereby and any advice given by the Purchaser or any of its representatives or agents in connection with the Transaction Documents and the transactions contemplated thereby is merely incidental to the Purchaser’s purchase of the Securities. The Company further represents to the Purchaser that the Company’s decision to enter into this Agreement and the other Transaction Documents has been based solely on the independent evaluation of the transactions contemplated hereby by the Company and its representatives.
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(ff) Acknowledgment Regarding Purchaser’s Trading Activity. Anything in this Agreement or elsewhere herein to the contrary notwithstanding, it is understood and acknowledged by the Company that: (i) the Purchaser has not been asked by the Company to agree, nor has the Purchaser agreed, to desist from purchasing or selling, securities of the Company, or “derivative” securities based on securities issued by the Company or to hold the Securities for any specified term, (ii) past or future open market or other transactions by the Purchaser, specifically including, without limitation, “derivative” transactions, before or after a closing of this or future private placement transactions, may negatively impact the market price of the Company’s publicly-traded securities (iii) Omit and (iv) the Purchaser shall not be deemed to have any affiliation with or control over any arm’s length counter-party in any “derivative” transaction. The Company further understands and acknowledges that (y) the Purchaser may engage in hedging activities at various times during the period that the Securities are outstanding, and (z) such hedging activities (if any) could reduce the value of the existing stockholders’ equity interests in the Company at and after the time that the hedging activities are being conducted. The Company acknowledges that such aforementioned hedging activities do not constitute a breach of any of the Transaction Documents.
(gg) Regulation M Compliance. The Company has not, and to its knowledge no one acting on its behalf has, (i) taken, directly or indirectly, any action designed to cause or to result in the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of any of the Securities, (ii) sold, bid for, purchased, or paid any compensation for soliciting purchases of, any of the Securities, or (iii) paid or agreed to pay to any Person any compensation for soliciting another to purchase any other securities of the Company, other than, in the case of clauses (ii) and (iii), compensation paid to the Company’s placement agent in connection with the placement of the Securities.
(hh) Reserved.
(ii) Stock Options. The Company has not knowingly granted, and there is no and has been no Company policy or practice to knowingly grant, stock options prior to, or otherwise knowingly coordinate the grant of stock options with, the release or other public announcement of material information regarding the Company or its Subsidiaries or their financial results or prospects.
(jj) Office of Foreign Assets Control. Neither the Company nor any Subsidiary nor, to the Company’s knowledge, any director, officer, agent, employee or affiliate of the Company or any Subsidiary is currently subject to any U.S. sanctions administered by the Office of Foreign Assets Control of the U.S. Treasury Department (“OFAC”).
(kk) U.S. Real Property Holding Corporation. The Company is not and has never been a U.S. real property holding corporation within the meaning of Section 897 of the Internal Revenue Code of 1986, as amended, and the Company shall so certify upon Purchaser’s request.
(ll) Bank Holding Company Act. Neither the Company nor any of its Subsidiaries or Affiliates is subject to the Bank Holding Company Act of 1956, as amended (the “BHCA”) and to regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). Neither the Company nor any of its Subsidiaries or Affiliates owns or controls, directly or indirectly, five percent (5%) or more of the outstanding shares of any class of voting securities or twenty-five percent or more of the total equity of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve. Neither the Company nor any of its Subsidiaries or Affiliates exercises a controlling influence over the management or policies of a bank or any entity that is subject to the BHCA and to regulation by the Federal Reserve.
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(mm) Money Laundering. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial record-keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, applicable money laundering statutes and applicable rules and regulations thereunder (collectively, the “Money Laundering Laws”), and no action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or any Subsidiary with respect to the Money Laundering Laws is pending or, to the knowledge of the Company or any Subsidiary, threatened.
3.2 Representations and Warranties of the Purchaser. The Purchaser hereby represents and warrants as of the date hereof and as of each Closing to the Company as follows (unless as of a specific date therein):
(a) Organization; Authority. The Purchaser is either an individual or an entity duly incorporated or formed, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation with full right, corporate, partnership, limited liability company or similar power and authority to enter into and to consummate the transactions contemplated by the Transaction Documents and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of the Transaction Documents and performance by the Purchaser of the transactions contemplated by the Transaction Documents have been duly authorized by all necessary corporate, partnership, limited liability company or similar action, as applicable, on the part of the Purchaser. Each Transaction Document to which it is a party has been duly executed by the Purchaser, and when delivered by the Purchaser in accordance with the terms hereof, will constitute the valid and legally binding obligation of the Purchaser, enforceable against it in accordance with its terms, except: (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.
(b) Own Account. The Purchaser understands that the Securities are “restricted securities” and have not been registered under the Securities Act or any applicable state securities law and is acquiring the Securities as principal for its own account and not with a view to or for distributing or reselling such Securities or any part thereof in violation of the Securities Act or any applicable state securities law, has no present intention of distributing any of such Securities in violation of the Securities Act or any applicable state securities law and has no direct or indirect arrangement or understandings with any other persons to distribute or regarding the distribution of such Securities in violation of the Securities Act or any applicable state securities law (this representation and warranty not limiting the Purchaser’s right to sell the Securities in compliance with applicable federal and state securities laws).
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(c) Purchaser Status. At the time the Purchaser was offered the Securities, it was, and as of the date hereof it is and on each date on which it converts any shares of Preferred Stock, either: (i) an “accredited investor” as defined in Rule 501(a)(1), (a)(2), (a)(3), (a)(7) or (a)(8) under the Securities Act or (ii) a “qualified institutional buyer” as defined in Rule 144A(a) under the Securities Act.
(d) Experience of the Purchaser. The Purchaser, either alone or together with its representatives, has such knowledge, sophistication and experience in business and financial matters so as to be capable of evaluating the merits and risks of the prospective investment in the Securities, and has so evaluated the merits and risks of such investment. The Purchaser is able to bear the economic risk of an investment in the Securities and, at the present time, is able to afford a complete loss of such investment.
(e) General Solicitation. The Purchaser is not purchasing the Securities as a result of any advertisement, article, notice or other communication regarding the Securities published in any newspaper, magazine or similar media or broadcast over television or radio or presented at any seminar or any other general solicitation or general advertisement.
The Company acknowledges and agrees that the representations contained in Section 3.2 shall not modify, amend or affect the Purchaser’s right to rely on the Company’s representations and warranties contained in this Agreement or any representations and warranties contained in any other Transaction Document or any other document or instrument executed and/or delivered in connection with this Agreement or the consummation of the transaction contemplated hereby.
ARTICLE IV.
OTHER AGREEMENTS OF THE PARTIES
4.1 Transfer Restrictions.
(a) The Securities may only be disposed of in compliance with state and federal securities laws. As a condition of transfer, any such transferee shall agree in writing to be bound by the terms of this Agreement and shall have the rights and obligations of the Purchaser under this Agreement.
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(b) The Purchaser agrees to the imprinting, so long as is required by this Section 4.1, of a legend on any of the Securities in the following form:
THIS SECURITY HAS NOT BEEN REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE IN RELIANCE UPON AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND, ACCORDINGLY, MAY NOT BE OFFERED OR SOLD EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OR PURSUANT TO AN AVAILABLE EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT AND IN ACCORDANCE WITH APPLICABLE STATE SECURITIES LAWS AS EVIDENCED BY A LEGAL OPINION OF COUNSEL TO THE TRANSFEROR TO SUCH EFFECT, THE SUBSTANCE OF WHICH SHALL BE REASONABLY ACCEPTABLE TO THE COMPANY. THIS SECURITY MAY BE PLEDGED IN CONNECTION WITH A BONA FIDE MARGIN ACCOUNT WITH A REGISTERED BROKER-DEALER OR OTHER LOAN WITH A FINANCIAL INSTITUTION THAT IS AN “ACCREDITED INVESTOR” AS DEFINED IN RULE 501(a) UNDER THE SECURITIES ACT OR OTHER LOAN SECURED BY SUCH SECURITIES.
The Company acknowledges and agrees that the Purchaser may from time to time pledge pursuant to a bona fide margin agreement with a registered broker-dealer or grant a security interest in some or all of the Securities to a financial institution that is an “accredited investor” as defined in Rule 501(a) under the Securities Act and who agrees to be bound by the provisions of this Agreement and, if required under the terms of such arrangement, the Purchaser may transfer pledged or secured Securities to the pledgees or secured parties. Such a pledge or transfer would not be subject to approval of the Company and no legal opinion of legal counsel of the pledgee, secured party or pledgor shall be required in connection therewith. Further, no notice shall be required of such pledge. At the appropriate Purchaser’s expense, the Company will execute and deliver such reasonable documentation as a pledgee or secured party of Securities may reasonably request in connection with a pledge or transfer of the Securities, including, if the Securities are registered under a registration statement, the preparation and filing of any required prospectus supplement under Rule 424(b)(3) under the Securities Act or other applicable provision of the Securities Act to appropriately amend the list of selling stockholders thereunder.
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(c) Certificates evidencing the Conversion Shares shall not contain any legend (including the legend set forth in Section 4.1(b) hereof): (i) while a registration statement covering the resale of such security is effective under the Securities Act, (ii) following any sale of such Conversion Shares pursuant to Rule 144, (iii) if such Conversion Shares are eligible for sale under Rule 144 without volume or manner-of-sale restrictions, or (iv) if such legend is not required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission). If all or any shares of Preferred Stock are converted at a time when there is an effective registration statement to cover the resale of the Conversion Shares, or if such Conversion Shares may be sold under Rule 144 and the Company is then in compliance with the current public information required under Rule 144, or if the Conversion Shares may be sold under Rule 144 without the requirement for the Company to be in compliance with the current public information required under Rule 144 as to such Conversion Shares and without volume or manner-of-sale restrictions or if such legend is not otherwise required under applicable requirements of the Securities Act (including judicial interpretations and pronouncements issued by the staff of the Commission) then such Conversion Shares shall be issued free of all legends. The Company agrees that following the Effective Date or at such time as such legend is no longer required under this Section 4.1(c), it will, no later than the earlier of (i) two (2) Trading Days and (ii) the number of Trading Days comprising the Standard Settlement Period (as defined below) following the delivery by a Purchaser to the Company or the Transfer Agent of a certificate representing Conversion Shares, issued with a restrictive legend (such date, the “Legend Removal Date”), deliver or cause to be delivered to such Purchaser a certificate representing such shares that is free from all restrictive and other legends. The Company may not make any notation on its records or give instructions to the Transfer Agent that enlarge the restrictions on transfer set forth in this Section 4. Certificates for Conversion Shares subject to legend removal hereunder shall be transmitted by the Transfer Agent to the Purchaser by crediting the account of the Purchaser’s prime broker with the Depository Trust Company System as directed by such Purchaser. As used herein, “Standard Settlement Period” means the standard settlement period, expressed in a number of Trading Days, on the Company’s primary Trading Market with respect to the Common Stock as in effect on the date of delivery of a certificate representing Conversion Shares, issued with a restrictive legend.
(d) In addition to such Purchaser’s other available remedies, (i) the Company shall pay to a Purchaser, in cash, as partial liquidated damages and not as a penalty, for each $1,000 of the value of the Conversion shares for which the Preferred Stock is being converted, $10 per Trading Day for each Trading Day after the Legend Removal Date (increasing to $20 per Trading Day after the fifth Trading Day) until such certificate is delivered without a legend. Nothing herein shall limit such Purchaser’s right to pursue actual damages for the Company’s failure to deliver certificates representing any Securities as required by the Transaction Documents, and such Purchaser shall have the right to pursue all remedies available to it at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief, and (ii) if after the Legend Removal Date such Purchaser purchases (in an open market transaction or otherwise) shares of Common Stock to deliver in satisfaction of a sale by such Purchaser of all or any portion of the number of shares of Common Stock, or a sale of a number of shares of Common Stock equal to all or any portion of the number of shares of Common Stock that such Purchaser anticipated receiving from the Company without any restrictive legend, then, the Company shall pay to such Purchaser, in cash, an amount equal to the excess of such Purchaser’s total purchase price (including brokerage commissions and other out-of-pocket expenses, if any) for the shares of Common Stock so purchased (including brokerage commissions and other out-of-pocket expenses, if any) (the “Buy-In Price”) over the product of (A) such number of Conversion Shares that the Company was required to deliver to such Purchaser by the Legend Removal Date multiplied by (B) the highest closing sale price of the Common Stock on any Trading Day during the period commencing on the date of the delivery by such Purchaser to the Company of the applicable Conversion Shares and ending on the date of such delivery and payment under this Section 4.1(d).
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(e) In the event a Purchaser shall request delivery of unlegended shares as described in this Section 4.1 and the Company is required to deliver such unlegended shares, (i) it shall pay all fees and expenses associated with or required by the legend removal and/or transfer including but not limited to legal fees, Transfer Agent fees and overnight delivery charges and taxes, if any, imposed by any applicable government upon the issuance of Common Stock; and (ii) the Company may not refuse to deliver unlegended shares based on any claim that such Purchaser or anyone associated or affiliated with such Purchaser has not complied with Purchaser’s obligations under the Transaction Documents, or for any other reason, unless, an injunction or temporary restraining order from a court, on notice, restraining and or enjoining delivery of such unlegended shares shall have been sought and obtained by the Company and the Company has posted a surety bond for the benefit of such Purchaser in the amount of the greater of (i) 150% of the amount of the aggregate purchase price of the Conversion Shares (based on conversion price in effect upon conversion) which is subject to the injunction or temporary restraining order, or (ii) the VWAP of the Common Stock on the Trading Day before the issue date of the injunction multiplied by the number of unlegended shares to be subject to the injunction, which bond shall remain in effect until the completion of the litigation of the dispute and the proceeds of which shall be payable to such Purchaser to the extent Purchaser obtains judgment in Purchaser’s favor.
4.2 Acknowledgment of Dilution of Voting Power. The Company acknowledges that the issuance of the Securities will result in dilution of the voting power of the outstanding shares of Common Stock, which dilution will be substantial.
4.3 Integration. The Company shall not sell, offer for sale or solicit offers to buy or otherwise negotiate in respect of any security (as defined in Section 2 of the Securities Act) that would be integrated with the offer or sale of the Securities in a manner that would require the registration under the Securities Act of the sale of the Securities or that would be integrated with the offer or sale of the Securities for purposes of the rules and regulations of any Trading Market such that it would require shareholder approval prior to the closing of such other transaction unless shareholder approval is obtained before the closing of such subsequent transaction.
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4.4 Securities Laws Disclosure; Publicity. The Company shall (a) by 9:00a.m. on the Trading Day immediately following the date hereof, issue a press release disclosing the material terms of the transactions contemplated hereby, and (b) file a Current Report on Form 8-K disclosing the material terms of the transactions contemplated hereby, including the Transaction Documents as exhibits thereto, with the Commission within the time required by the Exchange Act. From and after the issuance of such press release, the Company represents to the Purchasers that it shall have publicly disclosed all material, non-public information delivered to any of the Purchasers (other than Purchasers who are directors or officers of the Company) by the Company or any of its Subsidiaries, or any of their respective officers, directors, employees or agents in connection with the transactions contemplated by the Transaction Documents. In addition, effective upon the issuance of such press release, the Company acknowledges and agrees that any and all confidentiality or similar obligations under any agreement, whether written or oral, between the Company, any of its Subsidiaries or any of their respective officers, directors, agents, employees or Affiliates on the one hand, and any of the Purchasers (other than with Purchasers who are directors or officers of the Company) or any of their Affiliates on the other hand, shall terminate. The Company and each Purchaser shall consult with each other in issuing any other press releases with respect to the transactions contemplated hereby, and neither the Company nor any Purchaser shall issue any such press release nor otherwise make any such public statement without the prior consent of the Company, with respect to any press release of any Purchaser, or without the prior consent of each Purchaser, with respect to any press release of the Company, which consent shall not unreasonably be withheld or delayed, except if such disclosure is required by law, in which case the disclosing party shall promptly provide the other party with prior notice of such public statement or communication. Notwithstanding the foregoing, the Company shall not publicly disclose the name of any Purchaser, or include the name of any Purchaser in any filing with the Commission or any regulatory agency or Trading Market, without the prior written consent of such Purchaser, except: (a) as required by federal securities law in connection with the filing of final Transaction Documents with the Commission and (b) to the extent such disclosure is required by law or Trading Market regulations, in which case the Company shall provide the Purchasers with prior notice of such disclosure permitted under this clause (b).
4.5 Shareholder Rights Plan. No claim will be made or enforced by the Company or, with the consent of the Company, any other Person, that the Purchaser is an “Acquiring Person” under any control share acquisition, business combination, poison pill (including any distribution under a rights agreement) or similar anti-takeover plan or arrangement in effect or hereafter adopted by the Company, or that the Purchaser could be deemed to trigger the provisions of any such plan or arrangement, by virtue of receiving Securities under the Transaction Documents or under any other agreement between the Company and the Purchaser.
4.6 Non-Public Information. Except with respect to the material terms and conditions of the transactions contemplated by the Transaction Documents, the Company covenants and agrees that neither it, nor any other Person acting on its behalf, will provide the Purchaser or its agents or counsel with any information that the Company believes constitutes material non-public information, unless prior thereto the Purchaser shall have entered into a written agreement with the Company regarding the confidentiality and use of such information. The Company understands and confirms that the Purchaser shall be relying on the foregoing covenant in effecting transactions in securities of the Company.
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4.7 Indemnification of Purchaser. Subject to the provisions of this Section 4.7, the Company will indemnify and hold the Purchaser and their respective directors, officers, shareholders, members, partners, employees and agents (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title), each Person who controls the Purchaser (within the meaning of Section 15 of the Securities Act and Section 20 of the Exchange Act), and the directors, officers, shareholders, agents, members, partners or employees (and any other Persons with a functionally equivalent role of a Person holding such titles notwithstanding a lack of such title or any other title) of such controlling persons (each, a “Purchaser Party”) harmless from any and all losses, liabilities, obligations, claims, contingencies, damages, costs and expenses, including all judgments, amounts paid in settlements, court costs and reasonable attorneys’ fees and costs of investigation that any such Purchaser Party may suffer or incur (“Losses”) as a result of or relating to (a) any breach of any of the representations, warranties, covenants or agreements made by the Company in this Agreement or in the other Transaction Documents or (b) any action instituted against the Purchaser Parties in any capacity, or any of them or their respective Affiliates, by any stockholder of the Company who is not an Affiliate of such Purchaser Party, with respect to any of the transactions contemplated by the Transaction Documents (unless such action is based upon a breach of such Purchaser Party’s representations, warranties or covenants under the Transaction Documents or any agreements or understandings such Purchaser Party may have with any such stockholder or any violations by such Purchaser Party of state or federal securities laws or any conduct by such Purchaser Party which constitutes fraud, gross negligence, willful misconduct or malfeasance). If any action shall be brought against any Purchaser Party in respect of which indemnity may be sought pursuant to this Agreement, such Purchaser Party shall promptly notify the Company in writing, and the Company shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to the Purchaser Party. Any Purchaser Party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of such Purchaser Party except to the extent that (i) the employment thereof has been specifically authorized by the Company in writing, (ii) the Company has failed after a reasonable period of time to assume such defense and to employ counsel or such defense once started is subsequently delayed owing to lack of timely payment by the Company of legal fees and expenses or (iii) in such action there is, in the reasonable opinion of counsel, a material conflict on any material issue between the position of the Company and the position of such Purchaser Party, in which case the Company shall be responsible for the reasonable fees and expenses of no more than one such separate counsel. The Company will not be liable to any Purchaser Party under this Agreement (y) for any settlement by a Purchaser Party effected without the Company’s prior written consent, which shall not be unreasonably withheld or delayed; or (z) to the extent, but only to the extent that a loss, claim, damage or liability is attributable to any Purchaser Party’s breach of any of the representations, warranties, covenants or agreements made by such Purchaser Party in this Agreement or in the other Transaction Documents. The indemnification required by this Section 4.7 shall be made by periodic payments of the amount thereof during the course of the investigation or defense, as and when bills are received or are incurred. The indemnity agreements contained herein shall be in addition to any cause of action or similar right of any Purchaser Party against the Company or others and any liabilities the Company may be subject to pursuant to law. Notwithstanding anything to the contrary herein, all indemnity obligations under this Section 4.7 shall be limited to the Purchase Price.
4.8 Certain Transactions and Confidentiality. The Purchaser, covenants that neither it, nor any Affiliate acting on its behalf or pursuant to any understanding with it will (i) execute any Short Sales, of any of the Company’s securities during the period commencing with the execution of this Agreement and ending at such time that the transactions contemplated by this Agreement are first publicly announced pursuant to the initial press release as described in Section 4.4 or (ii) from the date hereof until the earlier of the 12 month anniversary of the date hereof and the date that the Preferred Stock is no longer outstanding, execute any Short Sales of the Common Stock (a “Prohibited Short Sale”). The Purchaser covenants that until such time as the transactions contemplated by this Agreement are publicly disclosed by the Company pursuant to the initial press release as described in Section 4.4, the Purchaser will maintain the confidentiality of the existence and terms of this transaction and the information included in the Transaction Documents and the Disclosure Schedules. Notwithstanding the foregoing, and notwithstanding anything contained in this Agreement to the contrary, the Company expressly acknowledges and agrees that (i) the Purchaser does not make any representation, warranty or covenant hereby that it will not engage in effecting transactions in any securities of the Company after the time that the transactions contemplated by this Agreement are first publicly announced pursuant to the initial press release as described in Section 4.4, (ii) except for a Prohibited Short Sale, the Purchaser shall not be restricted or prohibited from effecting any transactions in any securities of the Company in accordance with applicable securities laws from and after the time that the transactions contemplated by this Agreement are first publicly announced pursuant to the initial press release as described in Section 4.4 and (iii) the Purchaser shall have no duty of confidentiality to the Company or its Subsidiaries after the issuance of the initial press release as described in Section 4.4.
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4.9 Form D; Blue Sky Filings. The Company agrees to timely file a Form D with respect to the Securities as required under Regulation D and to provide a copy thereof, promptly upon request of the Purchaser. The Company shall take such action as the Company shall reasonably determine is necessary in order to obtain an exemption for, or to qualify the Securities for, sale to the Purchaser under applicable securities or “Blue Sky” laws of the states of the United States, and shall provide evidence of such actions promptly upon request of the Purchaser.
4.10 Redemption. On the thirtieth (30th) calendar day following the Closing Date (the “Corporation Redemption Payment Date”), the Corporation shall have the obligation to redeem one-third of the Preferred Stock outstanding for a redemption price equal to the Stated Value of each such Share of Preferred Stock, plus any accrued but unpaid dividends, plus all other amounts due to the Holder pursuant to this Certificate of Designation and/or any Transaction Document including, but not limited to Late Fees, liquidated damages and the legal fees and expenses of the Holder’s counsel relating to this Certification of Designation, any other Transaction Document and/or the transactions contemplated thereunder and/or hereunder (the “Corporation Redemption Price”). On the sixtieth (60th) calendar day following the Closing Date, the Corporation shall have the obligation to redeem one-half of the Preferred Stock then outstanding for the Corporate Redemption Price. On the ninetieth (90th) calendar day following the date Closing Date, the Corporation shall have the obligation to redeem all of the Preferred Stock then outstanding for the Corporate Redemption Price.
4.11 Dividends The Company shall pay a dividend of eight percent (8%) per annum on the Preferred Stock, for as long as the relevant Preferred Stock has not been redeemed or converted. Dividends shall be paid quarterly, and at the Company’s discretion, in cash or Preferred Stock calculated at the purchase price.
4.12 Event of Default Following any Event of Default, all outstanding Preferred Stock shall come immediately due for redemption and the redemption amount shall accrue dividends at the lesser of (a) 14% per annum or (b) the maximum legal rate. Redemption following an Event of Default shall occur at an amount equaling the product of one hundred and thirty five percent (135%), multiplied by the sum of the Stated Value, all accrued but unpaid dividends and all other amounts due pursuant to this Agreement and the Certificate of Designation for all Preferred Stock.
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4.13 Conversion Procedures. The forms of Notice of Conversion included in the Preferred Stock set forth the totality of the procedures required of the Purchaser in order to convert the Preferred Stock. No additional legal opinion, other information or instructions shall be required of the Purchaser to convert their Preferred Stock. Without limiting the preceding sentences, no ink-original Notice of Conversion shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Conversion form be required in order to convert the Preferred Stock. The Company shall honor conversion of the Preferred Stock and shall deliver Conversion Shares, in accordance with the terms, conditions and time periods set forth in the Transaction Documents.
4.14 DTC Program. For so long as the Preferred Stock is outstanding, the Company will employ as the Transfer Agent for the Common Stock a participant in the DTC Automated Securities Transfer Program and cause the Common Stock to be transferable pursuant to such program.
4.15 Most Favored Nations. From the date hereof until the date when the Purchaser no longer holds any Securities, upon any issuance by the Company or any of its subsidiaries of Common Stock, Common Stock Equivalents for cash consideration, indebtedness or a combination of units hereof (a “Subsequent Financing”), Purchaser may elect, in its sole discretion, to exchange (in lieu of conversion), if applicable, all or some of the Securities then held for any securities or units issued in a Subsequent Financing on a $1.00 for $1.00 basis. The Company shall provide the Purchaser with notice of any such Subsequent Financing in the manner set forth below. Additionally, if in such Subsequent Financing there are any contractual provisions or side letters that provide terms more favorable to the investors than the terms provided for hereunder, then the Company shall specifically notify the Purchaser of such additional or more favorable terms and such terms, at Purchaser’s option, shall become a part of the transaction documents with the Purchaser. The types of terms contained in another security that may be more favorable to the holder of such security include, but are not limited to, terms addressing stock sale price, price per share, and warrant coverage.
ARTICLE V.
MISCELLANEOUS
5.1 Termination. This Agreement may be terminated by the Purchaser, as to the Purchaser’s obligations hereunder, if the Closing has not been consummated within five (5) Business Days of the date hereof; provided, however, that such termination will not affect the right of any party to sue for any breach by any other party (or parties).
5.2 Fees and Expenses. At the Closing, the Company has agreed to reimburse the Purchaser $10,000 for its legal fees in connection with the transaction contemplated by the Transaction Documents, which such amount may be withheld from the Purchaser’s Subscription Amount deliverable at Closing. Except as expressly set forth in the Transaction Documents to the contrary, each party shall pay the fees and expenses of its advisers, counsel, accountants and other experts, if any, and all other expenses incurred by such party incident to the negotiation, preparation, execution, delivery and performance of this Agreement. The Company shall pay all Transfer Agent fees (including, without limitation, any fees required for same-day processing of any instruction letter delivered by the Company), stamp taxes and other taxes and duties levied in connection with the delivery of any Securities to the Purchaser.
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5.3 Entire Agreement. The Transaction Documents, together with the exhibits and schedules thereto, contain the entire understanding of the parties with respect to the subject matter hereof and thereof and supersede all prior agreements and understandings, oral or written, with respect to such matters, which the parties acknowledge have been merged into such documents, exhibits and schedules.
5.4 Notices. Any and all notices or other communications or deliveries required or permitted to be provided hereunder shall be in writing and shall be deemed given and effective on the earliest of: (a) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto at or prior to 5:30 p.m. (New York City time) on a Trading Day, (b) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth on the signature pages attached hereto on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (c) the second (2nd) Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service or (d) upon actual receipt by the party to whom such notice is required to be given. The address for such notices and communications shall be as set forth on the signature pages attached hereto.
5.5 Amendments; Waivers. No provision of this Agreement may be waived, modified, supplemented or amended except in a written instrument signed, in the case of an amendment, by the Company and the holders of at least 75% in interest of the Securities then outstanding or, in the case of a waiver, by the party against whom enforcement of any such waived provision is sought. No waiver of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any subsequent default or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right.
5.6 Headings. The headings herein are for convenience only, do not constitute a part of this Agreement and shall not be deemed to limit or affect any of the provisions hereof.
5.7 Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The Company may not assign this Agreement or any rights or obligations hereunder without the prior written consent of the Purchaser (other than by merger). The Purchaser may assign any or all of its rights under this Agreement to any Person to whom the Purchaser assigns or transfers any Securities, provided that such transferee agrees in writing to be bound, with respect to the transferred Securities, by the provisions of the Transaction Documents that apply to the “Purchaser.”
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5.8 No Third-Party Beneficiaries. This Agreement is intended for the benefit of the parties hereto and their respective successors and permitted assigns and is not for the benefit of, nor may any provision hereof be enforced by, any other Person, except as otherwise set forth in Section 4.7 and this Section 5.8.
5.9 Governing Law. All questions concerning the construction, validity, enforcement and interpretation of the Transaction Documents shall be governed by and construed and enforced in accordance with the internal laws of the State of Nevada, without regard to the principles of conflicts of law thereof. Each party agrees that all legal proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement and any other Transaction Documents (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state or federal courts sitting in the Borough of Manhattan, New York, New York Each party hereby irrevocably submits to the exclusive jurisdiction of the state and federal courts sitting in the Borough of Manhattan, New York, New York for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such suit, action or proceeding is improper or is an inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Agreement and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by law. If either party shall commence an action, suit or proceeding to enforce any provisions of the Transaction Documents, then, in addition to the obligations of the Company under Section 4.7, the prevailing party in such action, suit or proceeding shall be reimbursed by the other party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such action or proceeding.
5.10 Survival. The representations and warranties contained herein shall survive each Closing and the delivery of the Securities.
5.11 Execution. This Agreement may be executed in two or more counterparts, all of which when taken together shall be considered one and the same agreement and shall become effective when counterparts have been signed by each party and delivered to each other party, it being understood that the parties need not sign the same counterpart. In the event that any signature is delivered by facsimile transmission or by e-mail delivery of a “.pdf” format data file, such signature shall create a valid and binding obligation of the party executing (or on whose behalf such signature is executed) with the same force and effect as if such facsimile or “.pdf” signature page were an original thereof.
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5.12 Severability. If any term, provision, covenant or restriction of this Agreement is held by a court of competent jurisdiction to be invalid, illegal, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions set forth herein shall remain in full force and effect and shall in no way be affected, impaired or invalidated, and the parties hereto shall use their commercially reasonable efforts to find and employ an alternative means to achieve the same or substantially the same result as that contemplated by such term, provision, covenant or restriction. It is hereby stipulated and declared to be the intention of the parties that they would have executed the remaining terms, provisions, covenants and restrictions without including any of such that may be hereafter declared invalid, illegal, void or unenforceable.
5.13 Rescission and Withdrawal Right. Notwithstanding anything to the contrary contained in (and without limiting any similar provisions of) any of the other Transaction Documents, whenever any Purchaser exercises a right, election, demand or option under a Transaction Document and the Company does not timely perform its related obligations within the periods therein provided, then the Purchaser may rescind or withdraw, in its sole discretion from time to time upon written notice to the Company, any relevant notice, demand or election in whole or in part without prejudice to its future actions and rights.
5.14 Replacement of Securities. If any certificate or instrument evidencing any Securities is mutilated, lost, stolen or destroyed, the Company shall issue or cause to be issued in exchange and substitution for and upon cancellation thereof (in the case of mutilation), or in lieu of and substitution therefor, a new certificate or instrument, but only upon receipt of evidence reasonably satisfactory to the Company of such loss, theft or destruction. The applicant for a new certificate or instrument under such circumstances shall also pay any reasonable third-party costs (including customary indemnity) associated with the issuance of such replacement Securities.
5.15 Remedies. In addition to being entitled to exercise all rights provided herein or granted by law, including recovery of damages, the Purchaser and the Company will be entitled to specific performance under the Transaction Documents. The parties agree that monetary damages may not be adequate compensation for any loss incurred by reason of any breach of obligations contained in the Transaction Documents and hereby agree to waive and not to assert in any action for specific performance of any such obligation the defense that a remedy at law would be adequate.
5.16 Payment Set Aside. To the extent that the Company makes a payment or payments to the Purchaser pursuant to any Transaction Document or the Purchaser enforces or exercises its rights thereunder, and such payment or payments or the proceeds of such enforcement or exercise or any part thereof are subsequently invalidated, declared to be fraudulent or preferential, set aside, recovered from, disgorged by or are required to be refunded, repaid or otherwise restored to the Company, a trustee, receiver or any other Person under any law (including, without limitation, any bankruptcy law, state or federal law, common law or equitable cause of action), then to the extent of any such restoration the obligation or part thereof originally intended to be satisfied shall be revived and continued in full force and effect as if such payment had not been made or such enforcement or setoff had not occurred.
5.17 Liquidated Damages. The Company’s obligations to pay any partial liquidated damages or other amounts owing under the Transaction Documents is a continuing obligation of the Company and shall not terminate until all unpaid partial liquidated damages and other amounts have been paid notwithstanding the fact that the instrument or security pursuant to which such partial liquidated damages or other amounts are due and payable shall have been canceled.
5.18 Saturdays, Sundays, Holidays, etc. If the last or appointed day for the taking of any action or the expiration of any right required or granted herein shall not be a Business Day, then such action may be taken or such right may be exercised on the next succeeding Business Day.
5.19 Construction. The parties agree that each of them and/or their respective counsel have reviewed and had an opportunity to revise the Transaction Documents and, therefore, the normal rule of construction to the effect that any ambiguities are to be resolved against the drafting party shall not be employed in the interpretation of the Transaction Documents or any amendments thereto. In addition, each and every reference to share prices and shares of Common Stock in any Transaction Document shall be subject to adjustment for reverse and forward stock splits, stock dividends, stock combinations and other similar transactions of the Common Stock that occur after the date of this Agreement.
5.20 WAIVER OF JURY TRIAL. IN ANY ACTION, SUIT, OR PROCEEDING IN ANY JURISDICTION BROUGHT BY ANY PARTY AGAINST ANY OTHER PARTY, THE PARTIES EACH KNOWINGLY AND INTENTIONALLY, TO THE GREATEST EXTENT PERMITTED BY APPLICABLE LAW, HEREBY ABSOLUTELY, UNCONDITIONALLY, IRREVOCABLY AND EXPRESSLY WAIVES FOREVER TRIAL BY JURY.
(Signature Pages Follow)
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IN WITNESS WHEREOF, the parties hereto have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
| ARTIFICAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. | Address for Notice: | ||
| By: | /s/ Steven Reinharz | 10800 Galaxie Avenue | |
| Steven Reinharz, | Ferndale, Michigan 48220 | ||
| Chief Executive Officer : | |||
| With a copy to (which shall not constitute notice): | |||
| Attn: | |||
| Email: | |||
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
SIGNATURE PAGE FOR PURCHASER FOLLOWS]
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[PURCHASER SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
IN WITNESS WHEREOF, the undersigned have caused this Securities Purchase Agreement to be duly executed by their respective authorized signatories as of the date first indicated above.
Name of Purchaser:
Signature of Authorized Signatory of Purchaser: ____________________________________________________
Name of Authorized Signatory:
Title of Authorized Signatory:
Address for Notice to Purchaser:
Address for Delivery of Securities to Purchaser (if not same as address for notice):
Facsimile Number:
Closing Subscription Amount: $300,000
Subscription Date:
Closing Shares of Preferred Stock: 300 + 20 Commitment Shares
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Exhibit A
Certificate of Designation
ARTIFICAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES B CONVERTIBLE PREFERRED STOCK
The undersigned, Steven Reinharz, does hereby certify that:
1. He is the Chief Executive Officer of ARTIFICAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC., a Nevada corporation (the “Corporation” or the “Company”).
2. The Corporation is authorized to issue up to 20,000,000 shares of preferred stock, of which have been issued, as follows: (a) 4,350,000 Series E Preferred Stock; and (b) 4,350 Series F Convertible Preferred Stock.
3. The following resolutions were duly adopted by the board of directors of the Corporation (the “Board of Directors”):
WHEREAS, the Articles of Incorporation of the Corporation provides for a class of its authorized stock known as preferred stock, consisting of 20,000,000 authorized shares. issuable from time to time in one or more series.
WHEREAS, the Board of Directors is authorized to fix the dividend rights, dividend rate, voting rights, conversion rights, rights and terms of redemption and liquidation preferences of any wholly unissued series of preferred stock and the number of shares constituting any series and the designation thereof, of any of them; and
WHEREAS, it is the desire of the Board of Directors, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to Series B Preferred Stock, a series of the preferred stock, which shall consist of, except as otherwise set forth in the Purchase Agreement with GHS , up to 5,000 shares of the preferred stock which the Corporation has the authority to issue, as follows:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for the issuance of Series B Preferred Stock, a series of preferred stock for cash or exchange of other securities, rights or property and does hereby fix and determine the rights, preferences, restrictions and other matters relating to such series of preferred stock as follows:
TERMS OF PREFERRED STOCK
Section 1. Definitions. For the purposes hereof, the following terms shall have the following meanings:
“Affiliate” means any Person that, directly or indirectly through one or more intermediaries, controls or is controlled by or is under common control with a Person, as such terms are used in and construed under Rule 405 of the Securities Act.
“Alternate Consideration” shall have the meaning set forth in Section 7(e).
“Bankruptcy Event” means any of the following events: (a) the Corporation or any Significant Subsidiary (as such term is defined in Rule 1-02(w) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Corporation or any Significant Subsidiary thereof, (b) there is commenced against the Corporation or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within sixty (60) days after commencement, (c) the Corporation or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered, (d) the Corporation or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within sixty (60) calendar days after such appointment, (e) the Corporation or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors, (f) the Corporation or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts, or (g) the Corporation or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.
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“Beneficial Ownership Limitation” shall have the meaning set forth in Section 6(d).
“Business Day” means any day except any Saturday, any Sunday, any day which is a federal legal holiday in the United States or any day on which banking institutions in the State of New York are authorized or required by law or other governmental action to close.
“Buy-In” shall have the meaning set forth in Section 5(c)(iv).
“Change of Control Transaction” means the occurrence after the date hereof of any of (a) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of effective control (whether through legal or beneficial ownership of capital stock of the Corporation, by contract or otherwise) of in excess of 49% of the voting securities of the Corporation (other than by means of conversion or exercise of Preferred Stock and the Securities issued together with the Preferred Stock), (b) the Corporation merges into or consolidates with any other Person, or any Person merges into or consolidates with the Corporation and, after giving effect to such transaction, the stockholders of the Corporation immediately prior to such transaction own less than 33% of the aggregate voting power of the Corporation or the successor entity of such transaction, (c) the Corporation sells or transfers all or substantially all of its assets to another Person and the stockholders of the Corporation immediately prior to such transaction own less than 33% of the aggregate voting power of the acquiring entity immediately after the transaction, (d) a replacement at one time or within a one year period of more than one-half of the members of the Board of Directors which is not approved by a majority of those individuals who are members of the Board of Directors on the Original Issue Date (or by those individuals who are serving as members of the Board of Directors on any date whose nomination to the Board of Directors was approved by a majority of the members of the Board of Directors who are members on the Original Issue Date), or (e) the execution by the Corporation of an agreement to which the Corporation is a party or by which it is bound, providing for any of the events set forth in clauses (a) through (d) above.
“Closing” means the closing of the purchase and sale of the Securities pursuant to Section 2.1 of the respective Purchase Agreements.
“Closing Date” means the applicable Trading Day on which all of the Transaction Documents have been executed and delivered by the applicable parties thereto and all conditions precedent to (i) each Holder’s obligations to pay the Subscription Amount for a Closing and (ii) the Corporation’s obligations to deliver the Securities have been satisfied or waived.
“Commission” or the “SEC” means the United States Securities and Exchange Commission.
“Common Stock” means the Corporation’s common stock, par value $0.00001 per share, and stock of any other class of securities into which such securities may hereafter be reclassified or changed.
“Common Stock Equivalents” means any securities of the Corporation or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
“Conversion Amount” means the sum of the Stated Value at issue.
“Conversion Date” shall have the meaning set forth in Section 5(a).
“Conversion Price” shall have the meaning set forth in Section 5(b).
“Conversion Shares” means, collectively, the shares of Common Stock issuable upon conversion of the shares of Preferred Stock in accordance with the terms hereof.
“Corporation Redemption” has the meaning set forth in Section 8.
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“Corporation Redemption Price” has the meaning set forth in Section 8.
“Corporation Redemption Payment Date” has the meaning set forth in Section 8.
“Corporation Redemption Notice” has the meaning set forth in Section 8.
“Designation, Amount and Par Value” The series of preferred stock shall be designated as Series [ ] Convertible Preferred Stock and the number of shares so designated shall be up to [ ] ([ ]) (which shall not be subject to increase without the written consent of all of the Holders of the Preferred Stock. Each share of Preferred Stock shall have a par value of $[ ] per share and a stated value of $1,200, subject to increase set forth in Section 3 and/or elsewhere in this Certificate of Designation below.
“DTC” means the Depository Trust Company.
“DTC/FAST Program” means the DTC’s Fast Automated Securities Transfer Program.
“Dividend” shall have the meaning set forth in Section 2.
“DWAC Eligible” means that (a) the Common Stock is eligible at DTC for full services pursuant to DTC’s Operational Arrangements, including without limitation transfer through DTC’s DWAC system, (b) the Corporation has been approved (without revocation) by the DTC’s underwriting department, (c) the Transfer Agent is approved as an agent in the DTC/FAST Program, (d) the Conversion Shares are otherwise eligible for delivery via DWAC, and (e) the Transfer Agent does not have a policy prohibiting or limiting delivery of the Conversion Shares via DWAC.
“Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder.
“New York Courts” shall have the meaning set forth in Section 12(d).
“Fundamental Transaction” shall have the meaning set forth in Section 7(e).
“GAAP” means United States generally accepted accounting principles.
“Holders” means Holders of the Preferred Stock.
“Indemnified Party” shall have the meaning set forth in Section 11(f).
“Indebtedness” means (a) any liabilities for borrowed money or amounts owed in excess of $100,000 (other than trade accounts payable incurred in the ordinary course of business), (b) all guaranties, endorsements and other contingent obligations in respect of indebtedness of others, whether or not the same are or should be reflected in the Corporation’s balance sheet (or the notes thereto), except guaranties by endorsement of negotiable instruments for deposit or collection or similar transactions in the ordinary course of business, and (c) the present value of any lease payments in excess of $10,000 due under leases required to be capitalized in accordance with GAAP.
“Junior Securities” means the Common Stock and all other Common Stock Equivalents of the Corporation other than those securities which are explicitly senior or pari passu to the Preferred Stock in dividend rights or liquidation preference.
“Late Fees” shall have the meaning set forth in Section 2(d).
“Liens” means a lien, charge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.
“Liquidation” shall have the meaning set forth in Section 4.
“Losses” shall have the meaning set forth in Section 11(f).
“Notice of Conversion” shall have the meaning set forth in Section 5.
“Original Issue Date” means the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock.
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“Permitted Governmental Indebtedness” means Indebtedness for the purpose of supporting product sales by the Borrower.
“Permitted Indebtedness” means (i)) Indebtedness of the Corporation set forth in Corporation’s most recent SEC report filed with the SEC by the Corporation on Form 10-Q or Form 10-K (the “SEC Reports”) provided none of such Indebtedness, has been increased, extended and/or otherwise changed), (ii) Indebtedness secured by Permitted Liens described in clauses “(iii)” of the definition of Permitted Liens, and (iv) Permitted Governmental Indebtedness.
“Permitted Liens” means (i) any Lien for taxes not yet due or delinquent or being contested in good faith by appropriate proceedings for which adequate reserves have been established in accordance with GAAP, (ii) any statutory Lien arising in the ordinary course of business by operation of law with respect to a liability that is not yet due or delinquent, (iii) any Lien created by operation of law, such as materialmen’s liens, mechanics’ liens and other similar liens, arising in the ordinary course of business with respect to a liability that is not yet due or delinquent or that are being contested in good faith by appropriate proceedings, (iv) Liens (a) upon or in any equipment acquired or held by the Borrower or any of its Subsidiaries to secure the purchase price of such equipment or indebtedness incurred solely for the purpose of financing the acquisition or lease of such equipment, and (b) existing on such equipment at the time of its acquisition, provided that the Lien is confined solely to the property so acquired and improvements thereon, and the proceeds of such equipment and (v) any Liens for Permitted Indebtedness set forth in (i) and (ii) of the definition of Permitted Indebtedness provided as to “(ii)” of Permitted Indebtedness such Liens were in existence and not amended, supplemented and/or modified since the original issuance date any such Indebtedness was incurred.
“Person” means an individual or corporation, partnership, trust, incorporated or unincorporated association, joint venture, limited liability company, joint stock company, government (or an agency or subdivision thereof) or other entity of any kind.
“Piggy-Back Registration” shall have the meaning set forth in Section 11(a).
“Preferred Stock” shall mean Series [ ] Convertible Preferred Stock of the Company.
“Premium Rate” shall have the meaning set forth in Section 8(a).
“Purchase Agreement” means that certain Securities Purchase Agreement, dated on or about the Original Issue Date, among the Corporation and the original Holders, as amended, modified or supplemented from time to time in accordance with its terms.
“Registration Statement” shall have the meaning set forth in Section 11(a).
“Securities” means the Preferred Stock and the Underlying Shares.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
“Share Delivery Date” shall have the meaning set forth in Section 5(c)(i).
“Stated Value” shall mean $1,200, subject to increase set forth in Section 3 and/or elsewhere in this Certificate of Designation.
“Subscription Amount” shall mean, as to each Holder, the aggregate amount to be paid for the Preferred Stock purchased pursuant to the Purchase Agreement as specified below such Holder’s name on the signature page of the Purchase Agreement and next to the heading “Subscription Amount,” in United States dollars and in immediately available funds.
“Subsidiary” means any subsidiary of the Corporation as set forth on Schedule 3.1(a) of the Purchase Agreement and shall, where applicable, also include any direct or indirect subsidiary of the Corporation formed or acquired after the date of the Purchase Agreement.
“Successor Entity” shall have the meaning set forth in Section 3.
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“Trading Day or Date” means a day on which the principal Trading Market is open for business.
“Trading Market” means any of the following markets or exchanges on which the Common Stock (or any other common stock of any other Person that references the Trading Market for its common stock) is listed or quoted for trading on the date in question: The NASDAQ Global Market, The NASDAQ Global Select Market, The NASDAQ Capital Market, the New York Stock Exchange, NYSE Arca, the NYSE MKT, CBOE Global Markets or the OTCQX Marketplace, the OTCQB Marketplace, the OTC Pink Marketplace or any other tier operated by OTC Markets Group Inc. (or any successor to any of the foregoing).
“Transaction Documents” means this Certificate of Designation, the Purchase Agreement, all exhibits and schedules thereto and hereto and any other documents or agreements executed in connection with the transactions contemplated pursuant to the Purchase Agreement.
“Transfer Agent” means Transhare Corp., with a mailing address of Bayside Center 1, 17755 North US Highway 19, Suite 140, Clearwater, Florida 33764 and any successor transfer agent of the Company.
“Triggering Event” shall have the meaning set forth in Section 10(a).
“Triggering Redemption Amount” means, for each share of Preferred Stock, the sum of (a) 135% of the Stated Value and (b) all accrued but unpaid dividends thereon and (c) all liquidated damages, Late Fees and other costs, expenses or amounts due in respect of the Preferred Stock including, but not limited to legal fees and expenses of legal counsel to the Holder in connection with, related to and/or arising out of a Triggering Event.
“Triggering Redemption Payment Date” shall have the meaning set forth in Section 10(b).
“Underlying Shares” means the shares of Common Stock issued and issuable upon conversion of the Preferred Stock.
“VWAP” means, for or as of any date for the Common Stock, the dollar volume-weighted average price for the Common Stock on the Trading Market during the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg through its “HP” function (set to weighted average) or, if the foregoing does not apply, the dollar volume-weighted average price of the Common Stock in the over-the-counter market on the electronic bulletin board for the Common Stock during the period beginning at 9:30:01 a.m., New York time, and ending at 4:00:00 p.m., New York time, as reported by Bloomberg, or, if no dollar volume-weighted average price is reported for the Common Stock by Bloomberg for such hours, the average of the highest closing bid price and the lowest closing ask price of any of the market makers for the Common Stock as reported in the “pink sheets” by OTC Markets Group Inc. (formerly Pink Sheets LLC). If the VWAP cannot be calculated for the Common Stock on such date on any of the foregoing bases, the VWAP of the Common Stock on such date shall be the fair market value as mutually determined by the Company and the Holder. All such determinations shall be appropriately adjusted for any stock dividend, stock split, stock combination, recapitalization or other similar transaction during such period.
Section 2. Dividends.
(a) Dividends in Cash or in Kind. Each share of Preferred Stock shall be entitled to receive, and the Corporation shall pay, cumulative dividends of eight percent (8%) per annum, payable quarterly, beginning on the Original Issuance Date and ending on the date that such share of Preferred Share has been converted or redeemed (the “Dividend End Date”). Dividends may be paid in cash or in shares of Preferred Stock at the discretion of the Company.
(b) Dividend Calculations. Subject to Section 3(a), dividends on the Preferred Stock shall be calculated on the basis of a 360-day year, consisting of twelve (12) thirty (30) calendar day periods, and shall accrue and compound daily commencing on the Original Issue Date, and shall be deemed to accrue from such date whether or not earned or declared and whether or not there are profits, surplus or other funds of the Corporation legally available for the payment of dividends. Dividends shall cease to accrue with respect to any Preferred Stock redeemed or converted, provided that the Corporation actually delivers the Conversion Shares within the time period required by Section 6(c)(i) herein.
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(c) Late Fees. Any dividends that are not paid a Dividend Payment Date shall continue to accrue and shall entail a late fee (“Late Fees”), which must be paid in cash, at the rate of 14% per annum or the lesser rate permitted by applicable law which shall accrue and compound daily from the Dividend Payment Date through and including the date of actual payment in full.
(d) Other Securities. So long as any Preferred Stock shall remain outstanding, neither the Corporation nor any Subsidiary thereof shall redeem, purchase or otherwise acquire directly or indirectly any Junior Securities or pari passu securities other than any Preferred Stock purchased to the terms of this Certificate of Designation. So long as any Preferred Stock shall remain outstanding, neither the Corporation nor any Subsidiary thereof shall directly or indirectly pay or declare any dividend or make any distribution upon (other than a dividend or distribution described in Section 2 or dividends due and paid in the ordinary course on preferred stock of the Corporation at such times when the Corporation is in compliance with its payment and other obligations hereunder), nor shall any distribution be made in respect of, any Junior Securities or pari passu securities as long as any dividends due on the Preferred Stock remain unpaid, nor shall any monies be set aside for or applied to the purchase or redemption (through a sinking fund or otherwise) of any Junior Securities or pari passu securities.
Section 3. Voting Rights. The Preferred Stock will vote together with the common stock on an as-converted basis subject to the Beneficial Ownership Limitations. However, as long as any shares of Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of a majority of the then outstanding shares of the Preferred Stock directly and/or indirectly (a) alter or change adversely the powers, preferences or rights given to the Preferred Stock or alter or amend this Certificate of Designation, (b) authorize or create any class of stock ranking as to redemption or distribution of assets upon a Liquidation (as defined in Section 5) senior to, or otherwise pari passu with, the Preferred Stock or, authorize or create any class of stock ranking as to dividends senior to, or otherwise pari passu with, the Preferred Stock, (c) amend its Articles of Incorporation or other charter documents in any manner that adversely affects any rights of the Holders, (d) increase the number of authorized shares of Preferred Stock, or (e) enter into any agreement with respect to any of the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”), the Holders shall be entitled to receive out of the assets, whether capital or surplus, of the Corporation an amount equal to the Stated Value, plus any accrued and unpaid dividends thereon and any other fees or liquidated damages then due and owing thereon under this Certificate of Designation, for each share of Preferred Stock before any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Corporation shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Holders shall be ratably distributed among the Holders in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full. A Fundamental Transaction or Change of Control Transaction shall not be deemed a Liquidation. The Corporation shall mail written notice of any such Liquidation, not less than forty-five (45) days prior to the payment date stated therein, to each Holder.
Section 5. Conversion.
a) Conversions at Option of Holder. Each share of Preferred Stock shall be convertible, at any time and from time to time from and after the Original Issue Date at the option of the Holder thereof, into that number of shares of Common Stock (subject to the limitations set forth in Section 5(d)) determined by dividing the Stated Value of such share of Preferred Stock by the Conversion Price. Holders shall effect conversions by providing the Corporation with the form of conversion notice attached hereto as Annex A (a “Notice of Conversion”). Each Notice of Conversion shall specify the number of shares of Preferred Stock to be converted, the number of shares of Preferred Stock owned prior to the conversion at issue, the number of shares of Preferred Stock owned subsequent to the conversion at issue and the date on which such conversion is to be effected, which date may not be prior to the date the applicable Holder delivers by facsimile or email such Notice of Conversion to the Corporation (such date, the “Conversion Date”). If no Conversion Date is specified in a Notice of Conversion, the Conversion Date shall be the date that such Notice of Conversion to the Corporation is deemed delivered hereunder. No ink-original Notice of Conversion shall be required, nor shall any medallion guarantee (or other type of guarantee or notarization) of any Notice of Conversion form be required. The calculations and entries set forth in the Notice of Conversion shall control in the absence of manifest or mathematical error. To effect conversions of shares of Preferred Stock, a Holder shall not be required to surrender the certificate(s) representing the shares of Preferred Stock to the Corporation unless all of the shares of Preferred Stock represented thereby are so converted, in which case such Holder shall deliver the certificate representing such shares of Preferred Stock promptly following the Conversion Date at issue. Shares of Preferred Stock converted into Common Stock or redeemed in accordance with the terms hereof shall be canceled and shall not be reissued.
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b) Conversion Price. The conversion price (the “Conversion Price”) for the Preferred Stock shall be the amount equal to the lower of (1) a fixed price equaling the closing bid price of the Common Stock on the trading day immediately preceding the date of the Purchase Agreement and (2) the lowest traded price of the Common Stock during the ten (10) calendar days immediately preceding, but not including, the Conversion Date. All such foregoing determinations will be appropriately adjusted for any stock dividend, stock split, stock combination, reclassification or similar transaction that proportionately decreases or increases the Common Stock during such measuring period. Nothing herein shall limit a Holder’s right to pursue actual damages including, but not limited to, as a result of a Triggering Event pursuant to Section 10 hereof and the Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit the Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law. Following an “Event of Default,” as defined in the Purchase Agreement, the Conversion price shall equal the lower of: (a) the then applicable Conversion Price; or (b) a price per share equaling eighty five percent (85%) of the lowest traded price for the Company’s common stock during the fifteen (15) Trading Days immediately preceding, but not including, the Conversion Date.
c) Mechanics of Conversion
i. Delivery of Conversion Shares Upon Conversion. Not later than two (2) Trading Days after each Conversion Date (the “Share Delivery Date”), the Corporation shall deliver, or cause to be delivered, to the converting Holder (A) the number of Conversion Shares being acquired upon the conversion of the Preferred Stock, which Conversion Shares shall be free of restrictive legends and trading restrictions, and (B) a bank check in the amount of accrued and unpaid dividends (if the Corporation has elected or is required to pay accrued dividends in cash). The Corporation shall deliver the Conversion Shares electronically through the Depository Trust Company or another established clearing corporation performing similar functions.
ii. Failure to Deliver Conversion Shares. If, in the case of any Notice of Conversion, such Conversion Shares are not delivered to or as directed by the applicable Holder by the Share Delivery Date, the Holder shall be entitled to elect by written notice to the Corporation at any time on or before its receipt of such Conversion Shares, to rescind such Conversion, in which event the Corporation shall promptly return to the Holder any original Preferred Stock certificate delivered to the Corporation and the Holder shall promptly return to the Corporation the Conversion Shares issued to such Holder pursuant to the rescinded Conversion Notice.
iii. Obligation Absolute; Partial Liquidated Damages. The Corporation’s obligation to issue and deliver the Conversion Shares upon conversion of Preferred Stock in accordance with the terms hereof are absolute and unconditional, irrespective of any action or inaction by a Holder to enforce the same, any waiver or consent with respect to any provision hereof, the recovery of any judgment against any Person or any action to enforce the same, or any setoff, counterclaim, recoupment, limitation or termination, or any breach or alleged breach by such Holder or any other Person of any obligation to the Corporation or any violation or alleged violation of law by such Holder or any other person, and irrespective of any other circumstance which might otherwise limit such obligation of the Corporation to such Holder in connection with the issuance of such Conversion Shares; provided, however, that such delivery shall not operate as a waiver by the Corporation of any such action that the Corporation may have against such Holder. In the event a Holder shall elect to convert any or all of the Stated Value of its Preferred Stock, the Corporation may not refuse conversion based on any claim that such Holder or any one associated or affiliated with such Holder has been engaged in any violation of law, agreement or for any other reason, unless an injunction from a court, on notice to Holder, restraining and/or enjoining conversion of all or part of the Preferred Stock of such Holder shall have been sought and obtained, and the Corporation posts a surety bond for the benefit of such Holder in the amount of 150% of the Stated Value of Preferred Stock which is subject to the injunction, which bond shall remain in effect until the completion of arbitration/litigation of the underlying dispute and the proceeds of which shall be payable to such Holder to the extent it obtains judgment. In the absence of such injunction, the Corporation shall issue Conversion Shares and, if applicable, cash, upon a properly noticed conversion. If the Corporation fails to deliver to a Holder such Conversion Shares pursuant to Section 5 on the second Trading Day after the Share Delivery Date applicable to such conversion, the Corporation shall pay to such Holder, in cash, as liquidated damages and not as a penalty, for each $5,000 of Stated Value of Preferred Stock being converted, $100 per Trading Day (increasing to $150 per Trading Day on the third Trading Day and increasing to $200 per Trading Day on the sixth Trading Day after such damages begin to accrue) for each Trading Day after such second Trading Day after the Share Delivery Date until such Conversion Shares are delivered or Holder rescinds such conversion. All liquidated damages shall be paid to the Holder not later than the fifth (5th) Trading Day after notice is provided to the Company by the Holder stating that any such liquidated damages are due pursuant to this Section 5. Nothing herein shall limit a Holder’s right to pursue actual damages or declare a Triggering Event pursuant to Section 10 hereof for the Corporation’s failure to deliver Conversion Shares within the period specified herein and such Holder shall have the right to pursue all remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief. The exercise of any such rights shall not prohibit a Holder from seeking to enforce damages pursuant to any other Section hereof or under applicable law.
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iv. Compensation for Buy-In on Failure to Timely Deliver Conversion Shares Upon Conversion. In addition to any other rights available to the Holder, if the Corporation fails for any reason to deliver to a Holder the applicable Conversion Shares by the Share Delivery Date pursuant to Section 5, and if after such Share Delivery Date such Holder is required by its brokerage firm to purchase (in an open market transaction or otherwise), or the Holder’s brokerage firm otherwise purchases, shares of Common Stock to deliver in satisfaction of a sale by such Holder of the Conversion Shares which such Holder was entitled to receive upon the conversion relating to such Share Delivery Date (a “Buy-In”), then the Corporation shall (A) pay in cash to such Holder (in addition to any other remedies available to or elected by such Holder) the amount, if any, by which (x) such Holder’s total purchase price (including any brokerage commissions) for the Common Stock so purchased exceeds (y) the product of (1) the aggregate number of shares of Common Stock that such Holder was entitled to receive from the conversion at issue multiplied by (2) the actual sale price at which the sell order giving rise to such purchase obligation was executed (including any brokerage commissions) and (B) at the option of such Holder, either reissue (if surrendered) the shares of Preferred Stock equal to the number of shares of Preferred Stock submitted for conversion (in which case, such conversion shall be deemed rescinded) or deliver to such Holder the number of shares of Common Stock that would have been issued if the Corporation had timely complied with its delivery requirements under Section 5. For example, if a Holder purchases shares of Common Stock having a total purchase price of $11,000 to cover a Buy-In with respect to an attempted conversion of shares of Preferred Stock with respect to which the actual sale price of the Conversion Shares (including any brokerage commissions) giving rise to such purchase obligation was a total of $10,000 under clause (A) of the immediately preceding sentence, the Corporation shall be required to pay such Holder $1,000. The payment of all amounts due by the Company to the Holder shall be paid in cash no later than the fifth (5th) Business Day after notice is provided by a Holder to the Company requesting the payment of any such liquidated damages. The Holder shall provide the Corporation written notice indicating the amounts payable to such Holder in respect of the Buy-In and, upon request of the Corporation, evidence of the amount of such loss. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Corporation’s failure to timely deliver the Conversion Shares upon conversion of the shares of Preferred Stock as required pursuant to the terms hereof.
v. Reservation of Shares Issuable Upon Conversion. The Company covenants that it will reserve and keep available out of its authorized and unissued shares of Common Stock a number of shares of Common Stock at least equal to 300% of the Required Minimum for the sole purpose of issuance upon conversion of the Preferred Stock and payment of dividends on the Preferred Stock, all as herein provided, free from preemptive rights or any other actual contingent purchase rights of Persons other than the Purchasers, not less than such aggregate number of shares of the Common Stock as shall (subject to the terms and conditions set forth in the Purchase Agreement) be issuable (taking into account the adjustments and restrictions of Section 7, but ignoring any Beneficial Ownership Limitations or other restrictions and/or limitations on conversions set forth herein or elsewhere) upon the conversion of the then outstanding shares of the Preferred Stock and payment of dividends hereunder. The Company covenants that all shares of Common Stock that shall be so issuable shall, upon issue, be duly authorized, validly issued, fully paid and nonassessable, and, at such times as a registration statement covering such shares is then effective under the Securities Act, will be registered for public resale in accordance with such registration statement. For purposes of this Certification of Designation, the term “Required Minimum” shall be defined as the product of (i) 300%, multiplied by (ii) the quotient of (A)(x) all outstanding Stated Value of all issued and outstanding shares of the Preferred Stock, (y) all unpaid dividends thereon (whether accrued or not), and (z) all fees and/or any costs and expenses relating to the Transaction Documents including, but not limited to Late Fees and liquidation damages, divided by (B) the Conversion Price on the date of Closing. The Required Minimum shall be increased from time to time to ensure appropriate coverage for Securities issued or issuable to Purchaser.
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vi. Fractional Shares. No fractional shares or scrip representing fractional shares shall be issued upon the conversion of the Preferred Stock. As to any fraction of a share which the Holder would otherwise be entitled to purchase upon such conversion, the Corporation shall at its election, either pay a cash adjustment in respect of such final fraction in an amount equal to such fraction multiplied by the Conversion Price or round up to the next whole share.
vii. Transfer Taxes and Expenses. The issuance of Conversion Shares on conversion of this Preferred Stock shall be made without charge to any Holder for any documentary stamp or similar taxes that may be payable in respect of the issue or delivery of such Conversion Shares, provided that the Corporation shall not be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of any such Conversion Shares upon conversion in a name other than that of the Holders of such shares of Preferred Stock and the Corporation shall not be required to issue or deliver such Conversion Shares unless or until the Person or Persons requesting the issuance thereof shall have paid to the Corporation the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. In the event that the Holder requests same-day processing for a Notice of Conversion, such Holder shall pay all Transfer Agent fees required for such same-day processing and all fees to the Depository Trust Company (or another established clearing corporation performing similar functions) required for same-day electronic delivery of the Conversion Shares.
d) Beneficial Ownership Limitation. The Corporation shall not effect any conversion of the Preferred Stock, and a Holder shall not have the right to convert any portion of the Preferred Stock, to the extent that, after giving effect to the conversion set forth on the applicable Notice of Conversion, such Holder (together with such Holder’s Affiliates, and any Persons acting as a group together with such Holder or any of such Holder’s Affiliates) would beneficially own in excess of the Beneficial Ownership Limitation (as defined below). For purposes of the foregoing sentence, the number of shares of Common Stock beneficially owned by such Holder and its Affiliates shall include the number of shares of Common Stock issuable upon conversion of the Preferred Stock with respect to which such determination is being made, but shall exclude the number of shares of Common Stock which are issuable upon (i) conversion of the remaining, unconverted Stated Value of Preferred Stock beneficially owned by such Holder or any of its Affiliates and (ii) exercise or conversion of the unexercised or unconverted portion of any other securities of the Corporation subject to a limitation on conversion or exercise analogous to the limitation contained herein (including, without limitation, the Preferred Stock or the Warrants) beneficially owned by such Holder or any of its Affiliates. Except as set forth in the preceding sentence, for purposes of this Section 6(d), beneficial ownership shall be calculated in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. To the extent that the limitation contained in this Section 6(d) applies, the determination of whether the Preferred Stock is convertible (in relation to other securities owned by such Holder together with any Affiliates) and of how many shares of Preferred Stock are convertible shall be in the sole discretion of such Holder, and the submission of a Notice of Conversion shall be deemed to be such Holder’s determination of whether the shares of Preferred Stock may be converted (in relation to other securities owned by such Holder together with any Affiliates) and how many shares of the Preferred Stock are convertible, in each case subject to the Beneficial Ownership Limitation. To ensure compliance with this restriction, the Holder will be deemed to represent to the Corporation each time it delivers a Notice of Conversion that such Notice of Conversion has not violated the restrictions set forth in this paragraph and the Corporation shall have no obligation to verify or confirm the accuracy of such determination. In addition, a determination as to any group status as contemplated above shall be determined in accordance with Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder. For purposes of this Section 6(d), in determining the number of outstanding shares of Common Stock, the Holder may rely on the number of outstanding shares of Common Stock as stated in the most recent of the following: (i) the Corporation’s most recent periodic or annual report filed with the Commission, as the case may be, (ii) a more recent public announcement by the Corporation or (iii) a more recent written notice by the Corporation or the Transfer Agent setting forth the number of shares of Common Stock outstanding. Upon the written or oral request of a Holder, the Corporation shall within two (2) Trading Days confirm orally and in writing to such Holder the number of shares of Common Stock then outstanding. In any case, the number of outstanding shares of Common Stock shall be determined after giving effect to the conversion or exercise of securities of the Corporation, including the Preferred Stock, by such Holder or its Affiliates since the date as of which such number of outstanding shares of Common Stock was reported. The “Beneficial Ownership Limitation” shall be 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of Preferred Stock held by the applicable Holder.
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Section 6. Intentionally Omitted.
Section 7. Certain Adjustments.
a) Stock Dividends and Stock Splits. If the Corporation, at any time while this Preferred Stock is outstanding: (i) pays a stock dividend or otherwise makes a distribution or distributions that is payable in shares of Common Stock on shares of Common Stock or any other Common Stock Equivalents (which, for avoidance of doubt, shall not include any shares of Common Stock issued by the Corporation upon conversion of, or payment of a dividend on, the Preferred Stock), (ii) subdivides outstanding shares of Common Stock into a larger number of shares, (iii) combines (including by way of a reverse stock split) outstanding shares of Common Stock into a smaller number of shares, or (iv) issues, in the event of a reclassification of shares of the Common Stock, any shares of capital stock of the Corporation, then the Conversion Price shall be multiplied by a fraction of which the numerator shall be the number of shares of Common Stock (excluding any treasury shares of the Corporation) outstanding immediately before such event, and of which the denominator shall be the number of shares of Common Stock outstanding immediately after such event. Any adjustment made pursuant to this Section 7(a) shall become effective immediately after the record date for the determination of stockholders entitled to receive such dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision, combination or re-classification.
b) Most Favored Nation Provision. From the date hereof until the date when the Holder no longer holds any Preferred Stock, upon any issuance by the Company or any of its Subsidiaries of Common Stock or Common Stock Equivalents for cash consideration, Indebtedness or a combination of units thereof (a “Subsequent Financing”), the Holder may elect, in its sole discretion, to exchange (in lieu of conversion), if applicable, all or some of the shares of Preferred Stock then held for any securities or units issued in a Subsequent Financing on a $1.00 for $1.00 basis. The Company shall provide the Holder with notice of any such Subsequent Financing in the manner set forth below Additionally, if in such Subsequent Financing there are any contractual provisions or side letters that provide terms more favorable to the investors than the terms provided for hereunder, then the Company shall specifically notify the Holder of such additional or more favorable terms and such terms, at Holder’s option, shall become a part of the transaction documents with the Holder. The types of terms contained in another security that may be more favorable to the holder of such security include, but are not limited to, terms addressing stock sale price, private placement price per share, and warrant coverage.
c) Subsequent Rights Offerings. In addition to any adjustments pursuant to Section 7(a) above, if at any time the Corporation grants, issues or sells any Common Stock Equivalents or rights to purchase stock, warrants, securities or other property pro rata to the record holders of any class of shares of Common Stock (the “Purchase Rights”), then the Holder of will be entitled to acquire, upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights which the Holder could have acquired if the Holder had held the number of shares of Common Stock acquirable upon complete conversion of such Holder’s Preferred Stock (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date on which a record is taken for the grant, issuance or sale of such Purchase Rights, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the grant, issue or sale of such Purchase Rights (provided, however, to the extent that the Holder’s right to participate in any such Purchase Right would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Purchase Right to such extent (or beneficial ownership of such shares of Common Stock as a result of such Purchase Right to such extent) and such Purchase Right to such extent shall be held in abeyance for the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
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d) Pro Rata Distributions. During such time as this Preferred Stock is outstanding, if the Corporation shall declare or make any dividend or other distribution of its assets (or rights to acquire its assets) to holders of shares of Common Stock, by way of return of capital or otherwise (including, without limitation, any distribution of cash, stock or other securities, property or options by way of a dividend, spin off, reclassification, corporate rearrangement, scheme of arrangement or other similar transaction) (a “Distribution”), at any time after the issuance of this Preferred Stock, then, in each such case, the Holder shall be entitled to participate in such Distribution to the same extent that the Holder would have participated therein if the Holder had held the number of shares of Common Stock acquirable upon complete exercise of this Preferred Stock (without regard to any limitations on exercise hereof, including without limitation, the Beneficial Ownership Limitation) immediately before the date of which a record is taken for such Distribution, or, if no such record is taken, the date as of which the record holders of shares of Common Stock are to be determined for the participation in such Distribution (provided, however, to the extent that the Holder’s right to participate in any such Distribution would result in the Holder exceeding the Beneficial Ownership Limitation, then the Holder shall not be entitled to participate in such Distribution to such extent (or in the beneficial ownership of any shares of Common Stock as a result of such Distribution to such extent) and the portion of such Distribution shall be held in abeyance for the benefit of the Holder until such time, if ever, as its right thereto would not result in the Holder exceeding the Beneficial Ownership Limitation).
e) Fundamental Transaction.
1) General. The Company shall not enter into or be party to a Fundamental Transaction unless (i) the Successor Entity (as defined below) assumes in writing all of the obligations of the Company under this Certificate of Designation in accordance with the provisions of this Section 7.e) pursuant to written agreements in form and substance satisfactory to the Holder and approved by the Holder prior to such Fundamental Transaction, including agreements to deliver to the Holder in exchange for shares of Preferred Stock a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Preferred Stock, including, without limitation, which is convertible into a corresponding number of shares of capital stock equivalent to the shares of Common Stock acquirable and receivable upon conversion of the Preferred Stock (without regard to any limitations on the conversion of the Preferred Stock) prior to such Fundamental Transaction, and with a conversion price which applies the conversion price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such adjustments to the number of shares of capital stock and such conversion price being for the purpose of protecting the economic value of the Preferred Stock immediately prior to the consummation of such Fundamental Transaction) and (ii) if the Fundamental Transaction occurs within six (6) months of the Closing Date, the Successor Entity (including its Parent Entity) is a publicly traded corporation whose common stock is quoted on or listed for trading on an Eligible Market. Upon the consummation of each Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of the applicable Fundamental Transaction, the provisions of this Certificate of Designation referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Certificate of Designation with the same effect as if such Successor Entity had been named as the Company herein. Upon consummation of each Fundamental Transaction, the Successor Entity shall deliver to the Holder confirmation that there shall be issued upon conversion of the Preferred Stock at any time after the consummation of the applicable Fundamental Transaction, in lieu of the shares of Common Stock (or other securities, cash, assets or other property) issuable upon the conversion of the Preferred Stock prior to the applicable Fundamental Transaction, such shares of publicly traded common stock (or its equivalent) of the Successor Entity (including its Parent Entity) which the Holder would have been entitled to receive upon the happening of the applicable Fundamental Transaction had the Preferred Stock been converted immediately prior to the applicable Fundamental Transaction (without regard to any limitations on the conversion of the Preferred Stock), as adjusted in accordance with the provisions of this Certificate of Designation. Notwithstanding the foregoing, and without limiting Section 5 hereof, the Holder may elect, at its sole option, by delivery of written notice to the Company to waive this Section 7.e) to permit the Fundamental Transaction without the assumption of the Preferred Stock. In addition to and not in substitution for any other rights hereunder, prior to the consummation of each Fundamental Transaction pursuant to which holders of shares of Common Stock are entitled to receive securities or other assets with respect to or in exchange for shares of Common Stock (a “Corporate Event”), the Company shall make appropriate provision to insure that the Holder will thereafter have the right to receive upon a conversion of the Preferred Stock at any time after the consummation of the applicable Fundamental Transaction but prior to the Expiration Date, in lieu of the shares of the Common Stock (or other securities, cash, assets or other property) issuable upon the conversion of the Preferred Stock prior to such Fundamental Transaction, such shares of stock, securities, cash, assets or any other property whatsoever (including warrants or other purchase or subscription rights) which the Holder would have been entitled to receive upon the happening of the applicable Fundamental Transaction had the Preferred Shares been exercised immediately prior to the applicable Fundamental Transaction (without regard to any limitations on the conversion of the Preferred Stock). Provision made pursuant to the preceding sentence shall be in a form and substance reasonably satisfactory to the Holder.
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2) Black Scholes Value. Notwithstanding the foregoing and the provisions of Section 5 above, at the request of the Holder delivered at any time commencing on the earliest to occur of (x) the public disclosure of any Fundamental Transaction, (y) the consummation of any Fundamental Transaction and (z) the Holder first becoming aware of any Fundamental Transaction through the date that is ninety (90) days after the public disclosure of the consummation of such Fundamental Transaction by the Company pursuant to a Current Report on Form 8-K filed with the SEC, the Company or the Successor Entity (as the case may be) shall purchase the Preferred Stock from the Holder on the date of such request by paying to the Holder cash in an amount equal to the Black Scholes Value.
3) Fundamental Transaction. If, at any time while any Preferred Stock is outstanding, (i) the Company, directly or indirectly, in one or more related transactions effects any merger or consolidation of the Company with or into another Person, (ii) the Company, directly or indirectly, effects any sale, lease, license, assignment, transfer, conveyance or other disposition of all or substantially all of its assets in one or a series of related transactions, (iii) any, direct or indirect, purchase offer, tender offer or exchange offer (whether by the Company or another Person) is completed pursuant to which holders of Common Stock are permitted to sell, tender or exchange their shares for other securities, cash or property and has been accepted by the holders of 50% or more of the outstanding Common Stock, (iv) the Company, directly or indirectly, in one or more related transactions effects any reclassification, reorganization or recapitalization of the Common Stock or any compulsory share exchange pursuant to which the Common Stock is effectively converted into or exchanged for other securities, cash or property, or (v) the Company, directly or indirectly, in one or more related transactions consummates a stock or share purchase agreement or other business combination (including, without limitation, a reorganization, recapitalization, spin-off or scheme of arrangement) with another Person or group of Persons whereby such other Person or group acquires more than 50% of the outstanding shares of Common Stock (not including any shares of Common Stock held by the other Person or other Persons making or party to, or associated or affiliated with the other Persons making or party to, such stock or share purchase agreement or other business combination) (each a “Fundamental Transaction”), then, upon any subsequent conversion of the Preferred Stock, the Holder shall have the right to receive, for each Conversion Share that would have been issuable upon such conversion immediately prior to the occurrence of such Fundamental Transaction, at the option of the Holder (without regard to any limitation in Section 6 on the conversion of the Preferred Stock), the number of shares of Common Stock of the successor or acquiring corporation or of the Company, if it is the surviving corporation, and any additional consideration (the “Alternate Consideration”) receivable as a result of such Fundamental Transaction by a holder of the number of shares of Common Stock into which each share of Preferred Stock is convertible immediately prior to such Fundamental Transaction (without regard to any limitation in Section 6 on the conversion of the Preferred Stock). For purposes of any such conversion, the determination of the Conversion Price shall be appropriately adjusted to apply to such Alternate Consideration based on the amount of Alternate Consideration issuable in respect of one share of Common Stock in such Fundamental Transaction, and the Company shall apportion the Conversion Price among the Alternate Consideration in a reasonable manner reflecting the relative value of any different components of the Alternate Consideration. If holders of Common Stock are given any choice as to the securities, cash or property to be received in a Fundamental Transaction, then the Holder shall be given the same choice as to the Alternate Consideration it receives upon any conversion of this preferred stock following such Fundamental Transaction. Notwithstanding anything to the contrary, in the event of a Fundamental Transaction, the Company or any Successor Entity shall, at the Holder’s option, exercisable at any time concurrently with, or within 30 days after, the consummation of the Fundamental Transaction, purchase the shares of Preferred Stock from the Holder by paying to the Holder an amount of cash equal to the Black Scholes Value of the remaining unconverted shares of Preferred Stock on the date of the consummation of such Fundamental Transaction. “Black Scholes Value” means the value of the unconverted shares of Preferred Stock remaining on the date of the Holder’s request pursuant to Section 7(e)(2) which value is calculated using the Black Scholes Option Pricing Model for a “call” or “put” option, as elected by the Holder, as obtained from the “OV” function on Bloomberg utilizing (i) an underlying price per share equal to the greater of (1) the highest Closing Sale Price of the Common Stock during the period beginning on the Trading Day immediately preceding the announcement of the applicable Fundamental Transaction (or the consummation of the applicable Fundamental Transaction, if earlier) and ending on the Trading Day of the Holder’s request pursuant to Section 7(e)(2) and (2) the sum of the price per share being offered in cash in the applicable Fundamental Transaction (if any) plus the value of the non-cash consideration being offered in the applicable Fundamental Transaction (if any), (ii) a strike price equal to the Conversion Price in effect on the date of the Holder’s request pursuant to Section 7(e)(2), (iii) a risk-free interest rate corresponding to the U.S. Treasury rate as of the date of the Holder’s request pursuant to Section 7(e)(2) if such request is prior to the date of the consummation of the applicable Fundamental Transaction, (iv) a zero cost of borrow and (v) an expected volatility equal to the greater of 100% and the 30 day volatility obtained from the “HVT” function on Bloomberg (determined utilizing a 365 day annualization factor) as of the Trading Day immediately following the earliest to occur of (A) the public disclosure of the applicable Fundamental Transaction, (B) the consummation of the applicable Fundamental Transaction and (C) the date on which the Holder first became aware of the applicable Fundamental Transaction. The Company shall cause any successor entity in a Fundamental Transaction in which the Company is not the survivor (the “Successor Entity”) to assume in writing all of the obligations of the Company under this Certificate of Designation and the other Transaction Documents in accordance with the provisions of this Section 7(e) pursuant to written agreements in form and substance reasonably satisfactory to the Holder and approved by the Holder (without unreasonable delay) prior to such Fundamental Transaction and shall, at the option of the Holder, deliver to the Holder in exchange for the Preferred Stock a security of the Successor Entity evidenced by a written instrument substantially similar in form and substance to the Preferred Stock which is convertible into a corresponding number of shares of capital stock of such Successor Entity (or its parent entity) equivalent to the shares of Common Stock acquirable and receivable upon conversion of the Preferred Stock (without regard to any limitations on the conversion of the Preferred Stock) prior to such Fundamental Transaction, and with a conversion price which applies the Conversion Price hereunder to such shares of capital stock (but taking into account the relative value of the shares of Common Stock pursuant to such Fundamental Transaction and the value of such shares of capital stock, such number of shares of capital stock and such conversion price being for the purpose of protecting the economic value of the Preferred Stock immediately prior to the consummation of such Fundamental Transaction), and which is reasonably satisfactory in form and substance to the Holder. Upon the occurrence of any such Fundamental Transaction, the Successor Entity shall succeed to, and be substituted for (so that from and after the date of such Fundamental Transaction, the provisions of this Preferred Stock and the other Transaction Documents referring to the “Company” shall refer instead to the Successor Entity), and may exercise every right and power of the Company and shall assume all of the obligations of the Company under this Preferred Stock and the other Transaction Documents with the same effect as if such Successor Entity had been named as the Company herein.
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f) Calculations. All calculations under this Section 7 shall be made to the nearest cent or the nearest 1/100th of a share, as the case may be. For purposes of this Section 7, the number of shares of Common Stock deemed to be issued and outstanding as of a given date shall be the sum of the number of shares of Common Stock (excluding any treasury shares of the Corporation) issued and outstanding.
g) Notice to the Holders.
i. Adjustment to Conversion Price. Whenever the Conversion Price is adjusted pursuant to any provision of this Section 7, the Corporation shall promptly deliver to each Holder a notice setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment.
ii. Notice to Allow Conversion by Holder. If (A) the Corporation shall declare a dividend (or any other distribution in whatever form) on the Common Stock, (B) the Corporation shall declare a special nonrecurring cash dividend on or a redemption of the Common Stock, (C) the Corporation shall authorize the granting to all holders of the Common Stock of rights or warrants to subscribe for or purchase any shares of capital stock of any class or of any rights, (D) the approval of any stockholders of the Corporation shall be required in connection with any reclassification of the Common Stock, any consolidation or merger to which the Corporation is a party, any sale or transfer of all or substantially all of the assets of the Corporation, or any compulsory share exchange whereby the Common Stock is converted into other securities, cash or property (E) the Corporation shall authorize the voluntary or involuntary dissolution, liquidation or winding up of the affairs of the Corporation (F) the Corporation shall take any action to effectuate an Corporation Redemption, or (G) a Triggering Event shall have occurred, then, in each case, the Corporation shall cause to be filed at each office or agency maintained for the purpose of conversion of this Preferred Stock, and shall cause to be delivered to each Holder at its last address as it shall appear upon the stock books of the Corporation, at least twenty (20) calendar days prior to the applicable record or effective date hereinafter specified (unless a greater or lesser time period is expressly required elsewhere in this Certificate of Designation), a notice stating (x) the date on which a record is to be taken for the purpose of such dividend, distribution, redemption, rights or warrants, or if a record is not to be taken, the date as of which the holders of the Common Stock of record to be entitled to such dividend, distributions, redemption, rights or warrants are to be determined or (y) the date on which such reclassification, consolidation, merger, sale, transfer or share exchange is expected to become effective or close, and the date as of which it is expected that holders of the Common Stock of record shall be entitled to exchange their shares of the Common Stock for securities, cash or other property deliverable upon such reclassification, consolidation, merger, sale, transfer or share exchange, provided that the failure to deliver such notice or any defect therein or in the delivery thereof shall not affect the validity of the corporate action required to be specified in such notice. To the extent that any notice provided hereunder constitutes, or contains, material, non-public information regarding the Corporation or any of the Subsidiaries, the Corporation shall simultaneously file such notice with the Commission pursuant to a Current Report on Form 8-K. The Holder shall remain entitled to convert the Conversion Amount of this Preferred Stock (or any part hereof) during the 20-day period commencing on the date of such notice through the effective date of the event triggering such notice except as may otherwise be expressly set forth in this Certificate of Designation.
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(h) Participation in Subsequent Financing.
(i) Upon a Subsequent Financing, a Holder of at least one hundred (100) shares of Preferred Stock (each such Holder, a “Significant Purchaser”) shall have the right to participate in up to an amount of the Subsequent Financing equal to 100% of the Subsequent Financing (the “Participation Maximum”) on the same terms, conditions and price provided for in the Subsequent Financing.
(ii) At least five (5) Trading Days prior to the closing of the Subsequent Financing, the Company shall deliver to each Significant Purchaser a written notice of its intention to effect a Subsequent Financing (“Pre-Notice”), which Pre-Notice shall ask such Significant Purchaser if it wants to review the details of such financing (such additional notice, a “Subsequent Financing Notice”). Upon the request of a Significant Purchaser, and only upon a request by such Significant Purchaser, for a Subsequent Financing Notice, the Company shall promptly, but no later than one (1) Trading Day after such request, deliver a Subsequent Financing Notice to such Significant Purchaser. The Subsequent Financing Notice shall describe in reasonable detail the proposed terms of such Subsequent Financing, the amount of proceeds intended to be raised thereunder and the Person or Persons through or with whom such Subsequent Financing is proposed to be effected and shall include a term sheet or similar document relating thereto as an attachment.
(iii) Any Significant Purchaser desiring to participate in such Subsequent Financing must provide written notice to the Company by not later than 5:30 p.m. (New York City time) on the fifth (5th) Trading Day after all of the Significant Purchasers have received the Pre-Notice that such Significant Purchaser is willing to participate in the Subsequent Financing, the amount of such Purchaser’s participation, and representing and warranting that such Significant Purchaser has such funds ready, willing, and available for investment on the terms set forth in the Subsequent Financing Notice. If the Company receives no such notice from a Significant Purchaser as of such fifth (5th) Trading Day, such Significant Purchaser shall be deemed to have notified the Company that it does not elect to participate.
(iv) If by 5:30 p.m. (New York City time) on the fifth (5th) Trading Day after all of the Significant Purchasers have received the Pre-Notice, notifications by the Significant Purchasers of their willingness to participate in the Subsequent Financing (or to cause their designees to participate) is, in the aggregate, less than the total amount of the Subsequent Financing, then the Company may effect the remaining portion of such Subsequent Financing on the terms and with the Persons set forth in the Subsequent Financing Notice.
(v) If by 5:30 p.m. (New York City time) on the fifth (5th) Trading Day after all of the Purchasers have received the Pre-Notice, the Company receives responses to a Subsequent Financing Notice from Significant Purchasers seeking to purchase more than the aggregate amount of the Participation Maximum, each such Significant Purchaser shall have the right to purchase its Pro Rata Portion (as defined below) of the Participation Maximum. “Pro Rata Portion” means the ratio of (x) the Subscription Amount of Securities purchased on the Closing Date by a Significant Purchaser participating under this Section 7(h) and (y) the sum of the aggregate Subscription Amounts of Securities purchased on the Closing Date by all Significant Purchasers participating under this Section 7(h).
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(vi) The Company must provide the Significant Purchasers with a second Subsequent Financing Notice, and the Significant Purchasers will again have the right of participation set forth above in this Section 7(h), if the Subsequent Financing subject to the initial Subsequent Financing Notice is not consummated for any reason on the terms set forth in such Subsequent Financing Notice within ten (10) Trading Days after the date of the initial Subsequent Financing Notice.
(vii) The Company and each Significant Purchaser agree that if any Significant Purchaser elects to participate in the Subsequent Financing, the transaction documents related to the Subsequent Financing shall not include any term or provision whereby such Significant Purchaser shall be required to agree to any restrictions on trading as to any of the Securities purchased hereunder or be required to consent to any amendment to or termination of, or grant any waiver, release or the like under or in connection with, this Agreement, without the prior written consent of such Significant Purchaser. In addition, the Company and each Significant Purchaser agree that, in connection with a Subsequent Financing, the transaction documents related to the Subsequent Financing shall include a requirement for the Company to issue a widely disseminated press release by 9:30 am (New York City time) on the Trading Day of execution of the transaction documents in such Subsequent Financing (or, if the date of execution is not a Trading Day, on the immediately following Trading Day) that discloses the material terms of the transactions contemplated by the transaction documents in such Subsequent Financing.
(viii) Notwithstanding anything to the contrary in this Section 7(h) and unless otherwise agreed to by such Significant Purchaser, the Company shall either confirm in writing to such Significant Purchaser that the transaction with respect to the Subsequent Financing has been abandoned or shall publicly disclose its intention to issue the securities in the Subsequent Financing, in either case in such a manner such that such Significant Purchaser will not be in possession of any material, non-public information, by the tenth (10th) Business Day following delivery of the Subsequent Financing Notice. If by such tenth (10th) Business Day, no public disclosure regarding a transaction with respect to the Subsequent Financing has been made, and no notice regarding the abandonment of such transaction has been received by such Significant Purchaser, such transaction shall be deemed to have been abandoned and such Significant Purchaser shall not be deemed to be in possession of any material, non-public information with respect to the Company or any of its Subsidiaries.
(ix) Notwithstanding the foregoing, this Section 7(h) shall not apply in respect of an Exempt Issuance.
Section 8. Mandatory Corporation Redemption.
(a) On the thirtieth (30th) calendar day following the date Preferred Stock is issued (the “Corporation Redemption Payment Date”), the Corporation shall have the obligation to redeem one-third of the Preferred Stock outstanding for a redemption price equal to the Stated Value of each such Share of Preferred Stock, plus any accrued but unpaid dividends, plus all other amounts due to the Holder pursuant to this Certificate of Designation and/or any Transaction Document including, but not limited to Late Fees, liquidated damages and the legal fees and expenses of the Holder’s counsel relating to this Certification of Designation, any other Transaction Document and/or the transactions contemplated thereunder and/or hereunder (the “Corporation Redemption Price”). On the sixtieth (60th) calendar day following the date Preferred Stock is issued, the Corporation shall have the obligation to redeem one-half of the Preferred Stock then outstanding for the Corporate Redemption Price. On the ninetieth (90th) calendar day following the date Preferred Stock is issued, the Corporation shall have the obligation to redeem all of the Preferred Stock then outstanding for the Corporate Redemption Price.
(b) The Corporation Redemption Price required to be paid by the Corporation to each Holder shall be paid in the cash to each Holder of shares of Preferred Stock no later than two (2) calendar days from the date of mailing of the Corporation Redemption Notice (the “Corporation Redemption Payment Date”).
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(c) Notwithstanding the delivery of a Corporation Redemption Notice, a Holder may convert some or all of its shares of Preferred Stock until the date it receives in full Corporation Redemption Price, provided, however, that notwithstanding anything to the contrary provided herein or elsewhere (i) in the event a Holder would be precluded from converting any shares of Preferred Stock, due to the limitation contained in Section 5, any such Holder may elect to extend the Corporation Redemption Payment Date as to any or all of such Holder’s Preferred Stock for up to one hundred twenty (120) days following the Corporation Redemption Payment Date to allow such Holder to convert its remaining Preferred Stock into Conversion Shares.
Section 9. Negative Covenants. From the date hereof until the date no shares of Preferred Stock are issued and outstanding, unless Holders of at least 75% in Stated Value of the then outstanding shares of Preferred Stock shall have otherwise given prior written consent, the Corporation shall not, and shall not permit any of the Subsidiaries to, directly or indirectly:
(a) other than Permitted Indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, including but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
(b) other than Permitted Liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom;
(c) amend its charter documents, including, without limitation, its articles of incorporation and bylaws, in any manner that materially and adversely affects any rights of the Holder;
(d) repay, repurchase or offer to repay, repurchase or otherwise acquire of any shares of its Common Stock, Common Stock Equivalents or Junior Securities, other than as to the Conversion Shares as permitted or required under the Transaction Documents,
(e) pay cash dividends or distributions on Junior Securities of the Corporation;
(f) enter into any transaction with any Affiliate of the Corporation which would be required to be disclosed in any public filing with the Commission, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Corporation (even if less than a quorum otherwise required for board approval); or
(g) enter into any agreement with respect to any of the foregoing.
Section 10. Redemption Upon Triggering Events.
(a) “Triggering Event” means, wherever used herein any of the following events (whatever the reason for such event and whether such event shall be voluntary or involuntary or effected by operation of law or pursuant to any judgment, decree or order of any court, or any order, rule or regulation of any administrative or governmental body):
i. the Corporation shall fail to deliver Conversion Shares issuable upon a conversion hereunder that comply with the provisions hereof prior to the fifth Trading Day after such shares are required to be delivered hereunder, or the Corporation shall provide written notice to any Holder, including by way of public announcement, at any time, of its intention not to comply with requests for conversion of any shares of Preferred Stock in accordance with the terms hereof;
ii. the Corporation shall fail for any reason to pay in full the amount of cash due pursuant to a Buy-In within five (5) Trading Days after notice therefor is delivered hereunder.
iii. the Corporation shall fail to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to such Holder upon a conversion hereunder;
iv. unless specifically addressed elsewhere in this Certificate of Designation as a Triggering Event, the Corporation shall fail to observe or perform any other covenant, agreement or warranty contained in, or otherwise commit any breach of the Transaction Documents, and such failure or breach shall not, if subject to the possibility of a cure by the Corporation, have been cured within 5 calendar days after the date on which written notice of such failure or breach shall have been delivered;
v. the Corporation shall redeem Junior Securities or pari passu securities;
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vi. the Corporation shall be party to a Change of Control Transaction;
vii. there shall have occurred a Bankruptcy Event;
viii. any monetary judgment, writ or similar final process shall be entered or filed against the Corporation, any subsidiary or any of their respective property or other assets for more than $50,000 (provided that amounts covered by the Corporation’s insurance policies are not counted toward this $50,000 threshold), and such judgment, writ or similar final process shall remain unvacated, unbonded or unstayed for a period of thirty (30) Trading Days;
ix. the electronic transfer by the Corporation of shares of Common Stock through the Depository Trust Company or another established clearing corporation once established subsequent to the date of this Certificate of Designation is no longer available or is subject to a ‘freeze” and/or “chill”;
x. the Corporation shall no longer be DWAC eligible ; or
xi. any “Event of Default,” as defined in the Purchase Agreement.
b) Upon the occurrence of a Triggering Event, each Holder shall (in addition to all other rights it may have hereunder or under applicable law) have the right, exercisable at the sole option of such Holder, to require the Corporation to (A) redeem all of the Preferred Stock then held by such Holder for a redemption price, in cash, equal to the Triggering Redemption Amount, or (B) at the option of each Holder either (i) redeem all of the Preferred Stock then held by such Holder though the issuance to such Holder of such number of shares of Common Stock equal to the quotient of (x) the Triggering Redemption Amount, divided by (y) the lowest of (1) the Conversion Price, and (2) 80% of the lowest traded price of the Common Stock during the fifteen (15) Trading Days immediately prior to the date of election hereunder, and (ii) increase the dividend rate on all of the outstanding Preferred Stock held by such Holder retroactively to the initial Closing Date to 12% per annum thereafter. The Triggering Redemption Amount, whether payable in cash or in shares, shall be due and payable or issuable, as the case may be, within five (5) Trading Days of the date on which the notice for the payment therefor is provided by a Holder (the “Triggering Redemption Payment Date”). If the Corporation fails to pay in full the Triggering Redemption Amount hereunder on the date such amount is due in accordance with this Section (whether in cash or shares of Common Stock), the Corporation will pay interest thereon at a rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law, accruing and compounding daily from such date until the Triggering Redemption Amount, plus all such interest thereon, is paid in full.
Section 11. Registration Rights.
a) If at any time on or after the issuance date of the Preferred Stock, there is no effective registration statement registering, or no current prospectus available for, the resale of the Conversion Shares by the Holder, and the Company proposes to file any Registration Statement with respect to any offering of equity securities, or securities or other obligations exercisable or exchangeable for, or convertible into, equity securities, by the Company for its own account or for shareholders of the Company for their account (or by the Company and by shareholders of the Company), other than a Registration Statement in connection with a merger or acquisition, then the Company shall (x) give written notice of such proposed filing to the Holders as soon as practicable but in no event less than ten (10) days before the anticipated filing date of the Registration Statement, which notice shall describe the amount and type of securities to be included in such Registration Statement, the intended method(s) of distribution, and the name of the proposed managing underwriter or underwriters, if any, of the offering, and (y) offer to the Holders the opportunity to register the sale of such number of Preferred Stock as such Holders may request in writing within five (5) days following receipt of such notice (a “Piggy-Back Registration”). The Company shall cause such Preferred Stock to be included in such registration and shall cause the managing underwriter or underwriters of a proposed underwritten offering to permit the Preferred Stock requested to be included in a Piggy-Back Registration on the same terms and conditions as any similar securities of the Company and to permit the sale or other disposition of such Preferred Stock in accordance with the intended method(s) of distribution thereof. All Holders proposing to distribute their Preferred Stock through a Piggy-Back Registration that involves an underwriter or underwriters shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such Piggy-Back Registration.
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b) Any Holder may elect to withdraw such Holder’s request for inclusion of Preferred Stock in any Piggy-Back Registration by giving written notice to the Company of such request to withdraw prior to the effectiveness of the Registration Statement. The Company (whether on its own determination or as the result of a withdrawal by persons making a demand pursuant to written contractual obligations) may withdraw a Registration Statement at any time prior to the effectiveness of such Registration Statement. Notwithstanding any such withdrawal, the Company shall pay all expenses incurred by the Holders in connection with such Piggy-Back Registration (including but not limited to any legal fees).
c) The Company shall notify the Holders at any time when a prospectus relating to such Holder’s Securities is required to be delivered under the Securities Act, upon discovery that, or upon the happening of any event as a result of which, the prospectus included in such Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. At the request of such Holder, the Company shall also prepare, file and furnish to such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of the Preferred Stock, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing. The Holders shall not offer or sell any Preferred Stock covered by the Registration Statement after receipt of such notification until the receipt of such supplement or amendment.
d) the Company may request a Holder to furnish the Company such information with respect to such Holder and such Holder’s proposed distribution of the Preferred Stock pursuant to the Registration Statement as the Company may from time to time reasonably request in writing or as shall be required by law or by the Commission in connection therewith, and such Holders shall furnish the Company with such information.
e) All fees and expenses incident to the performance of or compliance with this Section 11 by the Company shall be borne by the Company whether or not any Preferred Stock are sold pursuant to a Registration Statement. The fees and expenses referred to in the foregoing sentence shall include, without limitation, (i) all registration and filing fees (including, without limitation, fees and expenses of the Company’s counsel and independent registered public accountants) (A) with respect to filings made with the Commission, (B) with respect to filings required to be made with any Trading Market on which the Common Stock are then listed for trading, (C) in compliance with applicable state securities or Blue Sky laws reasonably agreed to by the Company in writing (including, without limitation, fees and disbursements of counsel for the Company in connection with Blue Sky qualifications or exemptions) and (D) with respect to any filing that may be required to be made by any broker through which a Holder intends to make sales of Preferred Stock with FINRA, (ii) printing expenses, (iii) messenger, telephone and delivery expenses, (iv) fees and disbursements of counsel for the Company, (v) Securities Act liability insurance, if the Company so desires such insurance, and (vi) fees and expenses of all other persons or entities retained by the Company in connection with the consummation of the transactions contemplated by this Section 11.
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f) The Company and its successors and assigns shall indemnify and hold harmless each purchaser, each Holder, the officers, directors, members, partners, agents and employees (and any other individuals or entities with a functionally equivalent role of a person holding such titles, notwithstanding a lack of such title or any other title) of each of them, each individual or entity who controls each purchaser or any such Holder (within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act) and the officers, directors, members, stockholders, partners, agents and employees (and any other individuals or entities with a functionally equivalent role of a person holding such titles, notwithstanding a lack of such title or any other title) of each such controlling individual or entity (each, an “Indemnified Party”), to the fullest extent permitted by applicable law, from and against any and all losses, claims, damages, liabilities, costs (including, without limitation, reasonable attorneys’ fees) and expenses (collectively, “Losses”), as incurred, arising out of or relating to (1) any untrue or alleged untrue statement of a material fact contained in a Registration Statement, any related prospectus or any form of prospectus or in any amendment or supplement thereto or in any preliminary prospectus, or arising out of or relating to any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein (in the case of any such prospectus or supplement thereto, in light of the circumstances under which they were made) not misleading or (2) any violation or alleged violation by the Company of the Securities Act, the Exchange Act or any state securities law, or any rule or regulation thereunder, in connection with the performance of its obligations under this Section 11, except to the extent, but only to the extent, that such untrue statements or omissions are based upon information regarding a purchaser or such Holder furnished to the Company by such party for use therein. The Company shall notify each purchaser and each Holder promptly of the institution, threat or assertion of any proceeding arising from or in connection with the transactions contemplated by this Section 11 of which the Company is aware. If the indemnification hereunder is unavailable to an Indemnified Party or insufficient to hold an Indemnified Party harmless for any Losses, then the Company shall contribute to the amount paid or payable by such Indemnified Party, in such proportion as is appropriate to reflect the relative fault of the Company and Indemnified Party in connection with the actions, statements or omissions that resulted in such Losses as well as any other relevant equitable considerations. The relative fault of the Company and Indemnified Party shall be determined by reference to, among other things, whether any action in question, including any untrue or alleged untrue statement of a material fact or omission or alleged omission of a material fact, has been taken or made by, or relates to information supplied by, the Company or the Indemnified Party, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such action, statement or omission. The amount paid or payable by a party as a result of any Losses shall be deemed to include any reasonable attorneys’ or other fees or expenses incurred by such party in connection with any proceeding to the extent such party would have been indemnified for such fees or expenses if the indemnification provided for herein was available to such party in accordance with its terms. It is agreed that it would not be just and equitable if contribution pursuant to this Section 11(f) were determined by pro rata allocation or by any other method of allocation that does not take into account the equitable considerations referred to in the immediately preceding sentence. Notwithstanding the provisions of this Section 11(f), neither the purchaser nor any Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the net proceeds actually received by such party from the sale of all of their Registrable Securities pursuant to such Registration Statement or related prospectus exceeds the amount of any damages that such party has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.
Section 12. Miscellaneous.
a) Notices. Any and all notices or other communications or deliveries to be provided by the Holders hereunder including, without limitation, any Notice of Conversion, shall be in writing and delivered personally or sent by a nationally recognized overnight courier service and by facsimile or e-mail, addressed to the Corporation, at 10800 Galaxie Avenue, Ferndale, Michigan 48220; Attention: Chief Executive Officer, e-mail [ ], or such other e-mail or address as the Corporation may specify for such purposes by prior written notice to the Holders delivered in accordance with this Section 12. Any and all notices or other communications or deliveries to be provided by the Corporation hereunder shall be in writing and delivered personally, by facsimile, or sent by a nationally recognized overnight courier service addressed to each Holder at the facsimile number or address of such Holder appearing on the books of the Corporation, or if no such facsimile number or address appears on the books of the Corporation, at the principal place of business of such Holder, as set forth in the Purchase Agreement. Any notice or other communication or deliveries hereunder shall be deemed given and effective on the earliest of (i) the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth in this Section prior to 5:30 p.m. (New York City time) on any date, (ii) the next Trading Day after the date of transmission, if such notice or communication is delivered via facsimile at the facsimile number set forth in this Section on a day that is not a Trading Day or later than 5:30 p.m. (New York City time) on any Trading Day, (iii) the second Trading Day following the date of mailing, if sent by U.S. nationally recognized overnight courier service, or (iv) upon actual receipt by the party to whom such notice is required to be given.
b) Absolute Obligation. Except as expressly provided herein, no provision of this Certificate of Designation shall alter or impair the obligation of the Corporation, which is absolute and unconditional, to pay liquidated damages, accrued dividends and accrued interest, as applicable, on the shares of Preferred Stock at the time, place, and rate, and in the coin or currency, herein prescribed.
c) Lost or Mutilated Preferred Stock Certificate. If a Holder’s Preferred Stock certificate shall be mutilated, lost, stolen or destroyed, the Corporation shall execute and deliver, in exchange and substitution for and upon cancellation of a mutilated certificate, or in lieu of or in substitution for a lost, stolen or destroyed certificate, a new certificate for the shares of Preferred Stock so mutilated, lost, stolen or destroyed, but only upon receipt of evidence of such loss, theft or destruction of such certificate, and of the ownership hereof reasonably satisfactory to the Corporation.
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d) Governing Law. All questions concerning the construction, validity, enforcement and interpretation of this Certificate of Designation shall be governed by and construed and enforced in accordance with the internal laws of the State of Nevada, without regard to the principles of conflict of laws thereof. Each party agrees that all legal proceedings concerning the interpretation, enforcement and defense of the transactions contemplated by any of the Transaction Documents (whether brought against a party hereto or its respective Affiliates, directors, officers, stockholders, employees or agents) shall be commenced in the state and federal courts sitting in the Borough of Manhattan, New York, New York, (the “New York Courts”). Each party hereto hereby irrevocably submits to the exclusive jurisdiction of the New York Courts for the adjudication of any dispute hereunder or in connection herewith or with any transaction contemplated hereby or discussed herein (including with respect to the enforcement of any of the Transaction Documents), and hereby irrevocably waives, and agrees not to assert in any suit, action or proceeding, any claim that it is not personally subject to the jurisdiction of such New York Courts, or such New York Courts are improper or inconvenient venue for such proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such suit, action or proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) to such party at the address in effect for notices to it under this Certificate of Designation and agrees that such service shall constitute good and sufficient service of process and notice thereof. Nothing contained herein shall be deemed to limit in any way any right to serve process in any other manner permitted by applicable law. Each party hereto hereby irrevocably waives, to the fullest extent permitted by applicable law, any and all right to trial by jury in any legal proceeding arising out of or relating to this Certificate of Designation or the transactions contemplated hereby. If any party shall commence an action or proceeding to enforce any provisions of this Certificate of Designation, then the prevailing party in such action or proceeding shall be reimbursed by the other party for its attorneys’ fees and other costs and expenses incurred in the investigation, preparation and prosecution of such action or proceeding.
e) Waiver. Any waiver by the Corporation or a Holder of a breach of any provision of this Certificate of Designation shall not operate as or be construed to be a waiver of any other breach of such provision or of any breach of any other provision of this Certificate of Designation or a waiver by any other Holders. The failure of the Corporation or a Holder to insist upon strict adherence to any term of this Certificate of Designation on one or more occasions shall not be considered a waiver or deprive that party (or any other Holder) of the right thereafter to insist upon strict adherence to that term or any other term of this Certificate of Designation on any other occasion. Any waiver by the Corporation or a Holder must be in writing.
f) Severability. If any provision of this Certificate of Designation is invalid, illegal or unenforceable, the balance of this Certificate of Designation shall remain in effect, and if any provision is inapplicable to any Person or circumstance, it shall nevertheless remain applicable to all other Persons and circumstances. If it shall be found that any interest or other amount deemed interest due hereunder violates the applicable law governing usury, the applicable rate of interest due hereunder shall automatically be lowered to equal the maximum rate of interest permitted under applicable law.
g) Next Business Day. Whenever any payment or other obligation hereunder shall be due on a day other than a Business Day, such payment shall be made on the next succeeding Business Day.
h) Headings. The headings contained herein are for convenience only, do not constitute a part of this Certificate of Designation and shall not be deemed to limit or affect any of the provisions hereof.
i) Status of Converted or Redeemed Preferred Stock. Shares of Preferred Stock may only be issued pursuant to a Purchase Agreement. If any shares of Preferred Stock shall be converted, redeemed or reacquired by the Corporation, such shares shall resume the status of authorized but unissued shares of preferred stock and shall no longer be designated as Preferred Stock.
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RESOLVED, FURTHER, that the Chairman, the president or any vice-president, and the secretary or any assistant secretary, of the Corporation be and they hereby are authorized and directed to prepare and file this Certificate of Designation of Preferences, Rights and Limitations in accordance with the foregoing resolution and the provisions of Nevada law.
IN WITNESS WHEREOF, the undersigned have executed this Certificate this 29th day of April, 2024.
| /s/ Steven Reinharz | ||
| Name: | Steven Reinharz | |
| Title: | Chief Executive Officer | |
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ANNEX A
NOTICE OF CONVERSION
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF PREFERRED STOCK)
The undersigned hereby elects to convert the number of shares of Series B Convertible Preferred Stock indicated below into shares of common stock, par value $0.00001 per share (the “Common Stock”), of ARTIFICAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC., a Nevada corporation (the “ Corporation “), according to the conditions hereof, as of the date written below. If shares of Common Stock are to be issued in the name of a Person other than the undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as may be required by the Corporation in accordance with the Purchase Agreement. No fee will be charged to the Holders for any conversion, except for any such transfer taxes.
Conversion calculations: ___________________________________________________________________________
Date to Effect Conversion: ___________________________________________________________________________
Number of shares of Preferred Stock owned prior to Conversion:_______________________________________________
Number of shares of Preferred Stock to be Converted: ______________________________________________________
Stated Value of shares of Preferred Stock to be Converted:___________________________________________________
Dollar amount of Interest to be Converted: ______________________________________________________________
Other amounts owed to the Undersigned by the Corporation under the Certificate of Designation and/or any other Transaction Document to be Converted: ________________________________________________________________
Number of shares of Common Stock to be Issued: _________________________________________________________
Applicable Conversion Price: _________________________________________________________________________
Number of shares of Preferred Stock subsequent to Conversion: ______________________________________________
Address for Delivery: ________________________________________
Or
DWAC Instructions:
Broker no: ______________
Account no: ____________
| Name of Entity Holder______________ (Please Print) | ||
| By: | __________________________________________ | |
| Name: | ||
| Title: | ||
| Name of Individual Holder______________ (Please Print) | ||
| ______________________ (Signature of Individual Holder) | ||
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FORM OF CLOSING NOTICE
TO:
DATE: ___, 2024
We refer to the Securities Purchase Agreement, dated [ ], 2024 (the “Agreement”), entered into by and between ARTIFICAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC., and you. Capitalized terms defined in the Agreement shall, unless otherwise defined herein, have the same meaning when used herein.
We hereby:
1) Give you notice that we require you to purchase 300 shares of Series [ ] Preferred Stock; and
2) The purchase price per share, pursuant to the terms of the Agreement, is $1,000; and
3) Certify that, as of the date hereof, the conditions set forth in Section 2.3 of the Agreement, as related to the obligations of the Company, are satisfied.
Closing will occur in accordance with the terms and conditions of Section 2 of the Agreement.
| ARTIFICAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. | |||
| By: | |||
| Name: | |||
| Title: | |||
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Exhibit 23.2
Independent Registered Public Accounting Firm’s Consent
We consent to the inclusion in this Registration Statement on this Form S-1 Amendment #1 of our report, which includes an explanatory paragraph as to the Company’s ability to continue as a going concern, dated May 9, 2024, with respect to our audit of the consolidated financial statements of Artificial Intelligence Technology Solutions, Inc. and Subsidiaries as of February 29, 2024 and February 28, 2023 and for the years then ended, which appears in the Registration Statement of Artificial Intelligence Technology Solutions, Inc. in this Form S-1 Amendment #1. We also consent to the reference to our Firm under the heading “Experts” in such Prospectus.
| /s/ L J Soldinger Associates, LLC | |
| Deer Park, Illinois | |
| United States of America | |
| May 9, 2024 |