See notes to consolidated financial statements.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
1. Organization
Airline Intelligence Systems Inc. (“AIS”) was incorporated on December 7, 2005 under Delaware General Corporation Law. Since its inception, AIS’s efforts have been devoted to the development of the unique proprietary operating system jetEngine™, which management believed would be a new paradigm for strategic airline management that enables the integration and control of an airline’s schedule planning, revenue management, and irregular operations functions, amongst other things. AIS has two wholly owned Canadian subsidiaries Airline Intelligence Systems Corp. and AIS Services Canada Inc. The subsidiaries provide management services and corporate services to the parent company.
AIS completed a 2 for 1 stock split on June 11, 2007. All amounts shown and incorporated in these consolidated financial statements are shown on a post-split basis as if the stock split had occurred on the earliest reported date.
On March 19, 2010, AISystems, Inc. (the “Company”), formerly Wolf Resources Inc. (a publicly listed shell company), acquired AIS. In accordance with the Share Exchange Agreement, each issued and outstanding common share of AIS was converted for 0.95767068 common share of the Company and each issued and outstanding Series A preferred share of AIS was converted for one Series B preferred share of the Company (“reverse merger”). As a result of the transaction, the Company was no longer considered to be a shell company for reporting purposes.
The reverse merger has been accounted for as a recapitalization of the Company whereby the historical financial statements and operations of AIS became the historical financial statements of the Company, with no adjustment to the carrying value of the assets and liabilities. The accompanying consolidated financial statements reflect the recapitalization of the stockholder’s deficiency as if the transaction occurred as of the beginning of the first period presented. Accordingly, the Company has reflected the issuance of 38,754,000 common shares for the total net monetary liabilities of the shell company in the amount of $52,990 in the consolidated statement of changes in stockholders' deficiency.
On September 7, 2011, Dynamic Intelligence Inc. (“Dynamic”) provided the Company with a Notice of Non-Renewal, pursuant to an Intellectual Property Agreement (the “Agreement”) entered into by the parties on December 9, 2005. Pursuant to the terms of the provided notice of non-renewal at least ninety (90) days before the end of the then-current term. Due to Dynamic’s Notice of Non-Renewal, the Agreement ceased on December 9, 2011.
The Agreement provided the Company with an exclusive and perpetual license to Dynamic’s intellectual property, which permitted the Company to use proprietary technology to develop a unique proprietary business platform for the airline industry that is comprised of systems and mathematical algorithms capable of generating significant improvements in strategic planning capabilities, resource scheduling, revenue management and integrated operations. Since September 7, 2011, the Company has been seeking other business opportunities to acquire.
2. Going concern and management’s plans
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) which contemplate continuation of the Company as a going concern. The Company has yet to fully commercialize its technologies and consequently has incurred significant losses since its inception. At December 31, 2011, the Company’s deficit accumulated during the development stage is approximately $72.5 million, and the Company had utilized cash in operating activities of approximately $29.8 million. The Company has funded these losses and cash flows through the sale of equity securities, the issuance of debt and from credit granted by vendors. The Company is also in arrears to certain creditors and in default under certain agreements which may have a material adverse effect on operations or lead to the ceasing of operations.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
2. Going concern and management’s plans, continued
There is no assurance that the Company will be able to raise the necessary funds to continue operations as envisioned or that such funds can be raised on favorable terms to existing stockholders. This could result in significant dilution or a loss of investment to any current or future stockholders. Any funds raised will be used to engage potential customers, to fund product development, to provide working capital, to repay debt and for other corporate purposes. If the Company is unable to raise sufficient funds on the required timelines its ability to implement its vision will be hindered and this could result in the entire loss of any investment in the Company.
These factors raise substantial doubt about the ability of the Company to continue as a going concern. There can be no assurance that the Company will have adequate capital resources to fund planned operations or that any additional funds will be available to the Company when needed, or if available, will be available on favorable terms in the amounts required by the Company. If the Company is unable to obtain adequate capital resources to fund operations, it may be required to delay, scale back or eliminate some or all of its operations, which may have a material adverse effect on the Company’s business, results of operations and ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.
3. Summary of significant accounting policies
Development Stage Company
The Company complies with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 915 (SFAS 7) for its characterization of the Company as a development stage company. Furthermore, the Company complies with FASB ASC 720-15-25 (SOP-98-5), “Reporting on the Costs of Start-Up Activities,” under which start-up costs and organizational costs are expensed as incurred.
Principles of consolidation
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, and include the accounts of the Company and its wholly owned subsidiaries, namely Airline Intelligence Systems Inc. (AIS), Airline Intelligence Systems Corp. and AIS Canada Services Inc. All inter-company accounts and transactions have been eliminated on consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reported periods. Actual results could differ from these estimates.
Revenue recognition
The Company follows the provisions of FASB ASC 985-605 (SOP 97-2), “Software Revenue Recognition” and Staff Accounting Bulletin (SAB) 104, “Revenue Recognition in Financial Statements.” Revenue is recognized from the sale of product and software licenses when delivery has occurred based on purchase orders, contracts or other documentary evidence, provided that collection of the resulting receivable is deemed probable by management.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
3. Summary of significant accounting policies, continued
Deferred revenue at December 31, 2010 represents unearned income associated with the Aeromexico Software License Agreement (see Note 8). Upon expiration of this agreement on June 7, 2011, the Company recognized the $1,000,000 initial fee collected from Aeromexico as revenue.
Interest income is recognized when earned.
Restricted cash
The Company sets funds aside in a separate bank account related to the certain contractual obligations. Such amounts are termed Restricted Cash (Note 4).
Property and equipment
Property and equipment is stated at cost and is depreciated using the declining balance method over the estimated useful lives of the assets which range from three to five years. Maintenance and repairs are charged to expense as incurred.
Intellectual property
Under FASB ASC 350 (SFAS 142), “Goodwill and Other Intangible Assets”, goodwill and intangible assets with indefinite useful lives are not amortized. These standards require that these assets be reviewed for impairment at least annually, or whenever there is an indication of impairment. Intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment in accordance with FASB ASC 350-30-35 (SFAS 144), “Accounting for the Impairment or Disposal of Long-Lived Assets”.
The Company’s intellectual property at December 31, 2010 consisted of the exclusive worldwide and perpetual license to exploit certain intellectual property (“Dynamic Intellectual Property”), solely in the airline field, acquired from Dynamic Intelligence Inc., the controlling shareholder. The intellectual property had been recorded at its cost of $10, which was written down to $0 upon receipt of Dynamic’s Notice of Non-Renewal on September 7, 2011 (see Note 1).
Impairment of long-lived assets
Management reviews long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Income taxes
The Company accounts for income taxes under the provisions of FASB ASC 740 (SFAS 109), “Accounting for Income Taxes”. Under FASB ASC 740 (SFAS 109), deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry forwards. 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 operations in the period that includes the enactment date. A valuation allowance is required to the extent any deferred tax assets may not be realizable.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
3. Summary of significant accounting policies, continued
As of December 31, 2011 and 2010, the Company did not have any amounts recorded pertaining to uncertain tax positions. The Company files federal and provincial income tax returns in Canada and federal, state and local income tax returns in the U.S., as applicable. The Company may be subject to a reassessment of federal and provincial income taxes by Canadian tax authorities for a period of three years from the date of the original notice of assessment in respect of any particular taxation year. In certain circumstances, the U.S. federal statute of limitations can reach beyond the standard three year period. U.S. state statutes of limitations for income tax assessment vary from state to state. Tax authorities of Canada and U.S. have not audited any of the Company‘s, or its wholly-owned subsidiaries’ income tax returns for the years ended December 31, 2011 and 2010.
The Company recognizes interest and penalties related to uncertain tax positions in tax expense. During the years ended December 31, 2011and 2010, there were no charges for interest or penalties.
Stock-based compensation
The Company accounts for stock-based compensation in accordance with FASB ASC 718 (SFAS 123R), “Share-Based Payment”, that addresses the accounting for stock-based payment transactions in which an enterprise receives employee services in exchange for equity instruments of the enterprise.
Stock-based compensation expense recognized during the period is based on the fair value of the portion of stock-based payment award that is ultimately expected to vest. Stock-based compensation expense recognized in the consolidated statements of operations includes compensation expense for the stock-based payment awards based on the grant date fair value estimated in accordance with FASB ASC 718 (SFAS 123R), as stock-based compensation expense recognized in the consolidated statements of operations is based on awards ultimately expected to vest, reduced for estimated forfeitures. These standards require forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. When estimating forfeitures, the Company considers historic voluntary termination behaviors as well as trends of actual option forfeitures. The forfeiture rate utilized in the years ended December 31, 2011 and 2010 was 15% and 15% respectively.
The fair value of options at the date of the grant is accrued and charged to operations, with an offsetting credit to additional paid in capital, on a straight line basis over the vesting period. If the stock options are ultimately exercised, the applicable amounts of additional paid in capital are transferred to share capital. The fair value of options is calculated using the Black-Scholes option pricing model.
Foreign currency translation
The Company has chosen the US dollar as its reporting currency. The functional currency of the Company and its subsidiaries is also the US dollar.
Transactions denominated in other currencies are recorded in the applicable functional currencies at the rates of exchange prevailing when the transactions occur. Monetary assets and liabilities denominated in other currencies are translated into the applicable functional currencies at rates of exchange in effect at the balance sheet dates. Exchange gains and losses are recorded in the consolidated statements of operations.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
3. Summary of significant accounting policies, (continued)
Loss per share
The Company computes net loss per share in accordance with ASC 260, Earnings Per Share, which requires presentation of both basic and diluted earnings per share (EPS) on the face of the income statement. Basic 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 gives 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 in determining the number of shares assumed to be purchased from the exercise of stock options or warrants. Diluted EPS excludes all dilutive potential shares if their effect is anti dilutive.
Financial instruments
Financial assets and liabilities, including derivative instruments, are initially recognized and subsequently measured based on their classification as "held-for-trading", "available-for-sale" financial assets, "held-to-maturity" investments, "loans and receivables", or "other" financial liabilities.
Held-for-trading financial instruments are measured at their fair value with changes in fair value recognized in operations for the period. Available-for-sale financial assets are measured at their fair value and changes in fair value are included in other comprehensive income (loss) until the asset is removed from the balance sheet or until impairment is assessed as other than temporary. Held-to-maturity investments, loans and receivables and other financial liabilities are measured at amortized cost using the effective interest rate method. Loans receivable for employees are classified as loans and receivables and are recorded at amortized cost. Accounts payable and accrued liabilities, notes payable and loans payable to controlling stockholder are classified as other financial liabilities and are recorded at amortized cost.
Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation. These reclassifications had no impact on previously reported net loss or cash flows.
Recent accounting pronouncements
Changes to accounting principles generally accepted in the United States of America (U.S. GAAP) are established by the Financial Accounting Standards Board (FASB) in the form of accounting standards updates (ASU’s) to the FASB’s Accounting Standards Codification.
The Company considers the applicability and impact of all ASU’s. ASU’s has been assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.
4. Restricted cash
Restricted cash has included amounts held by a bank as a collateral security for a letter of credit issued in favor of the lessor of its factor Kirkland facility and an escrow required pursuant to a loan guarantee agreement. In 2010, the funds were used to settle amounts owed under the agreements.
Pursuant to the Aeromexico Software License Agreement (see Note 3), the Company was required to hold in escrow ten percent of all payments received from the customer as restricted cash while the contract existed to satisfy its indemnification obligations to the customer pursuant to the contract. For the period from December 7, 2005 (inception) to December 31, 2010, the Company was not in compliance with this term of the customer contract.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
5. Property and equipment
Property and equipment consists of:
| | | December 31, 2011 | | | December 31, 2010 | |
| Computer equipment | | $ | 905,117 | | | $ | 905,117 | |
| Office equipment | | | 265,379 | | | | 265,379 | |
| Vehicle | | | 28,706 | | | | 28,706 | |
| Computer software | | | 115,042 | | | | 115,042 | |
| Total | | | 1,314,244 | | | | 1,314,244 | |
| Less: accumulated depreciation and impairment | | | (1,304,244 | ) | | | (1,015,895 | ) |
| Net | | $ | 10,000 | | | $ | 298,349 | |
In 2011, due to the September 7, 2011 notice of non-renewal from Dynamic Intelligence Inc. (“Dynamic”), the November 9, 2011 assignment of its lease, and the inability to sell the respective assets, the Company recorded a loss from impairment of property and equipment of $201,183 to reduce the net book value of property and equipment to $10,000, the estimated recovery amount of the respective assets at December 31, 2011.
Depreciation expense was $87,167 and $186,546 for the years ended December 31, 2011 and 2010, respectively.
6. Notes payable
Loans payable to controlling stockholder
The loans payable to the controlling stockholder, Dynamic, at December 31, 2011 and 2010 are $1,032,774 and $1,009,627, respectively. The loans carry an interest rate of 5% and are unsecured, with no fixed terms of repayment.
Interest expense on these loans was $35,147 and $38,900 for year ended December 31, 2011 and 2010.
In addition, the Company owes Dynamic loans payable of $1,200,000 which are included in the notes payable to stockholders.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
6. Notes payable, continued
Notes Payable consisted of:
AISystems, Inc.:
| | | December 31, 2011 | | | December 31, 2010 | |
Convertible promissory note due to accredited investor entity, interest rate of 10% per annum, was due on March 5, 2012 and is convertible in whole or in part into Company common stock at a Variable Conversion price equal to 58% of the market price (defined as the average of the lowest three closing prices for the common stock during the ten trading day period ending on the latest complete trading day prior to the conversion date. Reflected net of unamortized debt discount related to beneficial conversion feature aggregating $96,470 as of December 31, 2011. | | $ | 345,792 | | | $ | - | |
| | | | | | | | | |
Convertible promissory note due to accredited investor entity, interest at a rate of 10% per annum (22% default rate), was due on March 5, 2012 and is convertible in whole or in part into Company common stock at a Variable Conversion price equal to 58% of the market price (defined as the average of the lowest three closing prices for the common stock during the ten trading day period ending on the latest complete trading day prior to the conversion date. Reflected net of unamortized debt discount related to beneficial conversion feature aggregating $28,602 as of December 31, 2011. | | | 121,398 | | | | - | |
| | | | | | | | | |
Convertible promissory note due to Asher Enterprises, Inc., interest at a rate of 8% per annum (22% default rate), was due on June 13, 2011 and was convertible in whole or in part into Company common stock at a Variable Conversion price equal to 58% of the market price (defined as the average of the lowest three closing prices for the common stock during the ten trading day period ending on the latest complete trading day prior to the conversion date. | | | - | | | | 184,500 | |
Airline Intelligence Systems, Inc.
| Promissory notes issued between October 2008 and September 2011 due to various investors, interest ranging from 5% to 8% per annum (default rate ranging from 12% to 22%), maturity dates ranging from August 2009 to September 2010, past due and in default (including $1,200,000 payable to Dynamic, the Company’s controlling stockholder. | | | 3,596,051 | | | | 4,611,313 | |
| Total | | $ | 4,188,313 | | | $ | 4,795,813 | |
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
7. Lease obligations, commitments and Contingencies
(A) Lease obligations
The Company previously leased office space in Kirkland, Washington (to April 2011), Bellevue, Washington (to May 2011), and Toronto, Ontario. Total lease expense was $101,431 and $780,870 for the years ended December 31, 2011 and 2010, respectively. In April 2011, the Company terminated its Kirkland lease and agreed to a settlement amount of $180,000 payable in monthly installments over a 36 payment period starting in July 2011. The Company is currently in default under the conditions of this settlement agreement.
On November 9, 2011, the Company entered into an agreement with a third party (with the consent of the landlord) to assign its rights relating to its Toronto office lease for the remaining term through May 2014 at the same monthly rate of approximately $7,810 per month. The assignment provides that, in the event that the third party is unable to meet the rent obligations, the Company will continue to be responsible for the amounts due under the original lease (aggregating $226,478 at December 31, 2011).
The total future minimum lease payments by year for the remaining operating lease is as follows:
| | | | |
| Lease obligations | | | |
| | | | |
| December 31, | | Total | |
| | | | |
| 2012 | | | 93,715 | |
| 2013 | | | 93,715 | |
| 2014 | | | 39,048 | |
| Thereafter | | | - | |
| | | $ | 226,478 | |
(B) Contingencies
Except as noted below, there are no outstanding judgments against the Company or any consent decrees or injunctions to which the Company is subject or by which its assets are bound and there are no claims, proceedings, actions or lawsuits in existence, or to the Company’s knowledge threatened or asserted, against the Company or with respect to any of the assets of the Company that would materially and adversely affect the business, property or financial condition of the Company, including but not limited to environmental actions or claims. However, from time to time, the Company is involved in various lawsuits and legal proceedings which arise in the ordinary course of business. Litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
In 2010, AI Systems entered into consulting agreements with various investor relations firms and business development service firms in exchange for fees and/or common shares of the Company to be issued subsequent to December 31, 2010.
Disputes arose between the parties and the Company never issued any shares to these firms in 2011. To date, these firms have not brought any action against the Company to obtain such shares. The Company believes that such potential claims are not likely.
On July 13, 2011, a Settlement Agreement was reached between AIS and an employment agency and an individual for approximately $72,000, AIS paid approximately $42,000 and is in default for the remaining $30,000. AIS has been notified by these two parties that a Judgment may be filed in respect to this action.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
7. Lease obligations, commitments and Contingencies, (continued)
On October 14, 2011 AIS terminated all of its remaining employees except for its CEO/CFO as it was unable to meet payroll commitments. Based on the notice of termination on October 14, 2011, AIS is responsible for approximately $50,000 in severance payments by virtue of employment agreements with 4 key employees that provide for one month salary in lieu of notice requirements. However, none of the effected employees have made any claims against the Company or AIS to date and the Company believes that such potential claims are not likely.
8. Deferred and Recognized Revenue
The Company entered into a contract with an airline customer in June 2007, wherein the customer provided the Company with a $1,000,000 initial fee. The Company deferred recognition of revenue for this initial fee until deployment and acceptance of its product. The contract terms of the jetEngine Software License Agreement with this customer ended effective June 7, 2011 at which point, the initial fee of $1,000,000 was recognized as revenue as there were no further obligations to deliver any products or services.
9. Stockholders’ deficiency
The authorized capital of the Company consisted of: (i) 300,000,000 common shares (as amended on March 25, 2010), 166,266,955 shares of which were issued and outstanding at December 31, 2011 (December 31, 2010 – 147,732,455) and (ii) 20,000,000 shares of preferred stock of the Company, of which 2,400,000 shares have been designated as Series B Preferred Stock (“Series B Preferred”), with 2,329,905 issued at December 31, 2011 (December 31, 2010 – 2,329,905) and 1 share has been designated as Series C Preferred Stock (“Series C Preferred”), with 1 share issued at December 31, 2011 (December 31, 2010 – 0).
Each share of Series B Preferred Stock entitled the holder to 400 votes on all matters submitted to a vote of stockholders of the Company. The holders of Series B Preferred shares are not convertible into common shares and are not entitled to receive dividends. The holders of Series B Preferred shares are entitled to receive prior and in preference to any distribution of any assets of the Company to the holders of common stock or any series of preferred stock that is not expressly senior to or Pari-Passu with the Series B Preferred Share, by reason thereof, an amount per share equal to $0.001 per share, as adjusted for stock splits, stock dividends and reclassifications. The Series B Preferred Shares holders upon notice to the Company may have their shares redeemed subject to certain notice provisions (as described in the certificate of designation) at a redemption price of $0.001 per share. At December 31, 2011, the outstanding Series B Preferred Stock had a total of 931,962,000 voting rights.
On September 15, 2011 the Company issued 1 share of its newly designated Series C Preferred Stock to Dynamic Intelligence Inc. (Dynamic), its controlling stockholder and a debtholder (see Note 6). The transaction has been reflected as other expense in the amount of $100,000 in the consolidated statement of operations for the years ended December 31, 2011. Series C Preferred Stockholders are entitled to 3 times Y votes (3xY) where Y equals the sum of all shares issued at the time of voting. The Series C Preferred Stock is redeemable at the option of the Preferred Stockholders at a price of $0.001 per share. At December 31, 2011, the outstanding Series C Preferred Stock had a total of 498,800,865 voting rights.
The holders of C Preferred Stock are not entitled to receive any dividends with respect to their shares of Series C Preferred Stock. In the event of liquidation, the holders of the Series C Preferred Stock are entitled to receive $0.001 per share in preference to any distribution of any of the assets of the Corporation to the holders of Common Stock or any other series of Preferred Stock that is not expressly senior to or Pari-Passu with the Series C Preferred Stock.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
9. Stockholders’ deficiency, (continued)
| Subscription advances (receivables), net, consists of: | | | | | | |
| | | December 31, | |
| | | | 2,011 | | | | 2010 | |
| Subscription receivables at $0.10 per share | | $ | (85,858 | ) | | $ | (85,858 | ) |
| Subscription receivables at $0.16 per share | | | (15,676 | ) | | | - | |
| Subscription receivables at $0.20 per share | | | (40,000 | ) | | | - | |
| Total subscription receivables | | | (141,534 | ) | | | (85,858 | ) |
| Subscription advances without issuance of common stock | | | | | | | | |
| 6,530,408 total shares committed to be issued) | | | 759,235 | | | | - | |
| Net | | $ | 617,701 | | | $ | (85,858 | ) |
Exchange Right Agreement
In January 2010, the Company and Merus Capital I, L.P. (“Merus”) entered into an exchange right agreement (the “Agreement”), whereby Merus provided funding to the Company in exchange for, amongst other things, a right in liquidation for Merus to exchange common shares held by Merus at the time of the conversion (“Merus Securities”) into an unsecured promissory note with aggregate principal up to $5,000,000 paying interest at a rate of 5.00% per annum. The term of the Agreement is the earlier of: (i) 36 months following a Going Public Transaction (as defined in the Agreement); (ii) Merus receiving the Note after exercising their rights under the Agreement; and (iii) Merus transferring any of the Merus Securities without the prior authorization of the Company. Management has reviewed the terms of the exchange right agreement and has determined that permanent equity classification is appropriate because all conditions under which the exchange right could be enforced are solely within the control of the Company.
2005 Shareholder Transactions
Issuance of Common Shares for Cash
From the date of inception, December 7, 2005 to December 31, 2005, the Company issued 1,312,698 (pre conversion - 1,370,720) common shares for $0.25 per common share and received total proceeds of $342,680.
Issuance of Common Shares for Intellectual Property from a related party
On December 9, 2005, 19,153,414 (20,000,000 pre conversion) common shares were issued to Dynamic pursuant to the Intellectual Property Agreement.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
2006 Shareholder Transactions
Issuance of Common Shares for Cash
From January 1, 2006 to March 9, 2006, the Company issued 699,100 (pre conversion - 730,000) common shares for $0.25 per share and received total proceeds of $182,500.
From March 10, 2006 to October 26, 2006, the Company issued 5,289,981 (pre conversion -5,523,800) common shares for $0.50 per share and received total proceeds of $2,761,900.
From October 27, 2006 to December 31, 2006, the Company issued 529,592 (pre conversion - 553,000) common shares for $1.00 per common share and received total proceeds of $553,000.
Issuance of Common Shares for Intellectual Property from a related party
On October 11, 2006, 7,661,365 (pre conversion - 8,000,000) common shares were issued to Dynamic pursuant to the Intellectual Property Agreement, as amended.
Issuance of Common Shares upon the exercise of stock options.
In 2006, the Company issued 162,804 (pre conversion - 170,000) shares pursuant to the exercise of stock options for total proceeds of $42,500.
2007 Shareholder Transactions
Issuance of Common Shares for Cash
From March 1, 2007 to June 7, 2007, the Company issued 5,729,169 (pre conversion - 5,982,400) common shares for $1.00 per share and received total proceeds of $5,982,400.
From September 7, 2007 to December 31, 2007, the Company issued 534,859 (pre conversion - 558,500) common shares for $5.00 per share and received total proceeds of $2,792,500.
2008 Shareholder Transactions
Issuance of Common Shares for Cash
From February 6, 2008 to May 13, 2008, the Company issued 1,514,428 (pre conversion - 1,581,366) common shares for $5.00 per common share and received total proceeds of $7,906,830. From May 23, 2008 to May 28, 2008, the Company issued 103,776 (pre conversion - 108,363) common shares for $5.00 per common share and received total proceeds of $541,815.
Issuance of Common Shares for Intellectual Property from a related party
In May 2008, 1,915,341 (pre conversion - 2,000,000) common shares were issued to Dynamic, pursuant to the Intellectual Property Agreement, as amended. The shares were returned as cancelled in 2009 pursuant to the cancellation of the further amendment.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
9. Stockholders’ deficiency, (continued)
Series A Preferred Stock
In 2008, the Company declared a dividend on its common shares in the form of the issuance of 2,329,905 Series A preferred shares to each record holder of common shares as of May 30, 2008. For each 20 common shares then-held by such holder the holder is entitled to one preferred share. The preferred shares (1) entitle the holder thereof to four hundred (400) votes on all matters submitted to a vote of the stockholders of the Company; (2) are not convertible into common shares; (3) may not be transferred except in accordance with applicable Securities Laws; (4) may be redeemed by the Company at any time for a per share redemption price of $0.001; (5) has a liquidation preference of $0.001 per share; and (6) other than with respect to such liquidation preference, does not share in the assets of the Company upon a liquidation. Other than voting and liquidation rights, the Series A preferred shares have no other material rights or preferences and have nominal economic value.
Issuance of Common Shares upon the exercise of stock options.
In May 2008, the Company issued 19,153 (pre conversion - 20,000) common shares upon the exercise of options and received total proceeds of $20,000.
Stock Warrants
In the fourth quarter of 2008, the Company authorized 700,000 common shares to be reserved for issuance pursuant to the potential exercise of warrants to purchase common shares pursuant to the Company’s closed offering of up to $3,500,000 in aggregate principal amount of indebtedness. As at December 31, 2008 489,772 (pre conversion - 511,420) common share warrants were issued of which 29,707 (pre conversion - 31,020) were converted to common shares, leaving in 480,400 outstanding. During the first quarter of 2009, an additional 145,000 warrants were issued in conjunction with an increase in the notes payable of $725,000.
Shareholder Side Agreement
The Company entered into a contractual agreement (the “Side Letter”), dated February 15, 2008 with Merus Capital I LP (“Merus”) in connection with a certain purchase by Merus of Company common shares (“Shares”) whereby Merus obtains the contractual right to: (i) access to the Company’s books and records; (ii) notice of certain transfers of the Company’s common stock (“Transfers”); (iii) the right to participate in such Transfers; (iv) the right to participate in future offerings, if any, of the Company’s preferred stock and (v) anti-dilution protection regarding certain shares issuances by the Company. The Side Letter terminates the earlier of: (a) Merus holding less than 500,000 common shares of the Company; (b) immediately prior to the Company completing an initial public offering; (c) the date the Company first becomes subject to reporting requirements under Sections 13 or 15(d) of the Securities Exchange Act of 1934, as amended; and (d) a reorganization, merger or consolidation of the Company or a sale, lease or other disposition of all or substantially all of the assets of the Company pursuant to which the Company receives cash or publicly tradable securities in exchange for the Shares. Pursuant to this Side Agreement, Merus was issued 3,000,000 common share warrants of the Company at nominal consideration for anti-dilution. The Company is not required to issue any further warrants in the future in respect of the anti-dilution clause contained in this Side Letter.
2009 Shareholder Transactions
Issuances of Common Shares for Cash
From January 2009 to June 2009, the Company issued 552,256 (pre conversion - 576,666) common shares at $0.75 per share for total consideration of $ 432,499 of which $432,499 was received in cash.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
9. Stockholders’ deficiency, (continued)
From September 2009 to December 2009, the Company issued 14,679,904 (pre conversion - 15,328,760) common shares at $0.10 per share for total consideration of $1,532,876 of which $1,333,466 was received in cash and $199,410 was received in services.
From October 2009 to December 2009, the Company offered for sale shares to potential investors at $0.25 per share. Under this program the Company issued 3,972,480 (pre conversion - 4,148,065) common shares for total consideration of $1,037,016 of which $725,000 was received in cash and $312,016 was received in services.
Issuance of Common Shares in Exchange for Notes Payable
In March 2009, the Company offered holders of 8% notes payable the right to exchange their debt for common stock at the then market value of $0.75 per share. From March 2009 to May 2009, $1,734,328 of note holders opted into this program and the Company issued 2,214,553 (pre conversion - 2,312,437) Common shares.
Issuance of Common Shares pursuant to anti-dilution agreements
In 2009, the Company reserved 6,459,189 (pre conversion - 6,744,687) common shares for the issuance of common share warrants. The warrants were issued to all common shareholders who previously acquired common stock in excess of $1.25 per share. All warrants were converted to common shares as at December 31, 2009.
Issuance of Common Shares to management and consultants for services
In April 2009, the Company reserved 4,309,518 (pre conversion - 4,500,000) common shares for restricted stock awards. The common shares were granted to management and consultants for services rendered. In respect of 3,500,000 shares, 50% of such common shares vested on April 7, 2009 with 5% vesting at the end of each month commencing at the end of April 2009. In respect of the remaining 1,000,000 shares all such shares vested on June 6, 2009. The Company valued these share at the market value of $0.75 per share and recorded additional stock based compensation expense in the statement of operations of $3,219,482.
In October 2009, the Company issued 4,788,353 (pre conversion - 5,000,000) common shares. The common shares were granted to consultants, directors, and management for services rendered. The Company valued these shares at market value of $0.10 per share and recorded an additional stock based compensation expense in the statement of operations of $500,000.
Cancellation of Common Shares pursuant to rescission of amended Intellectual Property Agreement
In 2009, the Company cancelled 1,915,341 (pre conversion - 2,000,000) common shares previously issued to Dynamic in conjunction with the rescission of the amendment of the Intellectual Property Agreement dated in May 2008, as described in Note 7.
Common Shares reserved for Issuance of Common Stock Warrants
In 2009, the Company reserved 10,640,586 common shares (pre-conversion) for the issuance of common stock warrants. The warrants were issued in conjunction with the raising of short term notes totaling $5,782,100. These warrants have a strike price of $0.001 and expire at the earlier of a public listing, or a corporate reorganization. In 2010, 4,906,239 shares were issued in connection with the exercise of warrants.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
9. Stockholders’ deficiency, (continued)
On January 28, 2010, the Company and Merus Capital I, L.P. (“Merus”) entered into an exchange right agreement (the “Agreement”), whereby Merus provided funding to the Company in exchange for, amongst other things, a right in liquidation for Merus to exchange common shares held by Merus at the time of the conversion (“Merus Securities”) into an unsecured promissory note with aggregate principle up to $5,000,000 paying interest at a rate of 5.00% per annum. The Agreement terminates on the date that is the earlier of: (i) 36 months following a Going Public Transaction (as defined in the Agreement); (ii) Merus receiving the Note after exercising their rights under the Agreement; and (iii) Merus transferring any of the Merus Securities without the prior authorization of the Company. Management has reviewed the terms of the exchange right agreement and has determined that permanent equity classification is appropriate because all conditions under which the exchange right could be enforced are solely within the control of the Company.
2010 Shareholder Transactions
From January 1, 2010 to February 28, 2010, the Company issued 1,781,267 common shares for gross proceeds of $465,000.
From March 1, 2010 to March 19, 2010, the Company issued 10,651,151 common shares for gross proceeds of $912,193 and subscription receipts of $191,534.
On March 19, 2010, AISystems, Inc., formerly Wolf Resources Inc. (the “Company”) acquired Airline Intelligence Systems Inc.(“AIS”), a development stage company based in the State of Washington, focused on software development for the airline industry. In accordance with the Share Exchange Agreement, each issued and outstanding common share of AIS was converted for 0.95767068 common share of the Company and each issued and outstanding Series A preferred share of AIS was converted for one Series B preferred share of the Company. As a result of the transaction, the business is no longer considered to be a shell company for reporting purposes.
The transaction was accounted for by the Company as a reverse merger. For accounting purposes, AIS was the acquirer in the reverse merger transaction, and consequently, the financial results have been reported on a historical basis as if AIS had acquired the Company. As the acquisition of the net monetary liabilities of the Company did not constitute a business, the transaction was accounted for as a reverse merger (i.e. capital transaction). Accordingly, the Company has reflected the issuance of 38,754,000 shares for the total net monetary liabilities of the shell company in the amount of $52,990 in the consolidated statement of changes in stockholders' equity.
During the 2010, the Company has entered into various service agreements in exchange for common shares. Shares issued during 2010 are 7,303,745. The Company accounts for these issuances for services based on the trading price of the shares on the date the shares are issued. The amounts are then expensed over the terms of the contracts.
2011 Shareholder Transactions
During the year, the Company issued 2,040,000 common shares for gross proceeds of $366,000.
During the year, the Company issued 15,553,273 common shares for debt conversions totaling $732,982. The Company also committed to issue 3,802,764 common shares for the conversion of debt totaling $105,880.
During the year, the Company issued 645,820 common shares due to accredited investors for previous subscriptions for total proceeds of $120,100.
During the year, the Company issued 1 share of Series C preferred stock valued at $100,000.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
10. Income taxes
The Company has made no provision for income taxes since inception and for the periods presented as the Company has incurred net losses. Based on statutory rates, the Company’s expected income tax benefit from these losses based on the accounting loss for the year ended December 31, 2011 and 2010 and for the period from December 7, 2005 (inception) to December 31, 2011 would be approximately $1,392,901, $2,362,027 and $24,424,227 respectively.
Income tax benefit differs from the expected statutory taxes of the Company, and its foreign subsidiaries, at the rate of 33.2% (2010: 33.7%) as follows:
| | | 2011 | | | 2010 | |
| Expected income tax benefit | | | 1,392,901 | | | | 2,362,027 | |
| Stock based compensation | | | (349,810 | ) | | | (182,139 | ) |
| Other permanent items | | | - | | | | (142,819 | ) |
| Other | | | - | | | | 39,225 | |
| Change in valuation allowance | | | (1,043,091 | ) | | | (2,076,294 | ) |
| Actual income tax benefit | | | - | | | | - | |
The deferred tax consequences of differences in reporting items for financial statement and income tax purposes are recognized, if appropriate. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Company's ability to generate taxable income within the net operating loss carry forward period. Management has considered these factors and noted that the realization of the future tax benefit is uncertain. Accordingly, the Company has recorded a valuation allowance to reduce the deferred tax asset for financial reporting purposes, which primarily consists of the following:
| | | 2011 | | | 2010 | |
| Net operating loss carry-forwards | | | 11,845,163 | | | | 10,802,072 | |
| Temporary differences | | | 1,184,217 | | | | 1,184,217 | |
| Less: valuation allowance | | | (13,029,380 | ) | | | (11,986,228 | ) |
| Net deferred income tax asset | | | - | | | | - | |
The Company’s subsidiaries operate in Canada and are therefore subject to the Canadian tax laws and regulations. The Canadian combined federal and provincial statutory income tax rate is 31% (2010: 31%). The Company has net operating loss carry-forwards, including from its Canadian subsidiaries, which are available to offset future taxable income.
The Company does not have an accrual for uncertain tax positions as of December 31, 2011 and 2010.
The future benefit of net operating loss carry forwards to the Company may be limited by on an annual basis and in total by Section 382 of the United States Internal Revenue Code as a result of prior ownership changes and depending on the future ownership changes.
11. Stock option plans
The Company has issued stock options to employees, consultants and advisors under two Stock Option Plans, (i) The 2005 Stock Option Plan and (ii) The 2008 Stock Option Plan. The Company has also issued Non-Plan stock options to certain consultants and advisors.
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
The Company’s 2005 Stock Option Plan, dated December 8, 2005 (as amended from time to time) has reserved 6,000,000 Common Shares for issuance and the Company’s 2008 Stock Option Plan, dated May 30, 2008, has reserved 5,000,000 Common Shares for issuance. Additionally, the Company has reserved 841,500 Common Shares for outstanding non-plan stock options.
The Board of Directors administers the Company’s Plans. The exercise prices of the options granted are determined by the Board of Directors and are generally established at the estimated market value of the Company’s common shares at the date of grant. The Board of Directors determines the term of each option, the number of shares for which each option is granted and the rate at which each option is exercisable. Options are granted with terms not to exceed five years under the 2005 Plan and 10 years under the 2008 Plan.
The fair value of each option award is estimated on the date of grant using a Black Scholes option pricing model using the assumptions as disclosed herein. The expected volatility is based on similar public entities for which share price information is available.
The Company uses historical data to estimate option exercise and employee termination to determine the appropriate inputs to the model. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.
For those option awards that have performance conditions, the fair value is estimated on the date of grant using the same model and assumes that performance goals will be achieved. If such goals are not met, no compensation cost is recognized and any recognized compensation cost is reversed. The inputs for expected volatility, expected dividends, and risk-free rate used in estimating those options’ fair value are the same as those noted for options granted without performance conditions.
Stock Plan Curtailment/Modification in 2007
On June 11, 2007, the Company modified its 2005 Stock Option Plans to amend certain rights and obligations of the stock options plans. In accordance with FASB ASC 718 (SFAS 123R), the Company has accounted for these changes as a Plan Curtailment/Modification. To implement the change from an accounting standpoint, the Company is deemed to have effectively repurchased the original award and issued a new award at the time of the Plan Curtailment/Modification. Incremental compensation cost is measured as the excess, if any, of the fair value of the modified award over the fair value of the original award immediately before its terms are modified, measured based on the share price and other pertinent factors at that date. The modifications to the plan included amongst other things and allowed the following:
| · | Right to exercise – the option holder now has the right to exercise the option after vesting (no longer dependent on a triggering event). |
| · | Stock-split – the options will now be automatically adjusted to reflect the impact of a stock-split or stock-consolidation. |
| · | Upon termination, the holder has 90 days to make a decision to either exercise or forfeit any vested options; previously there was no timeline. |
| · | First right of refusal (terminated employees) – The Company has the first right of refusal to buy back the shares of any terminated employees, executed at fair value. |
| · | First right of refusal (share transfers) – The Company has the first right of refusal to buy back the shares of any proposed share transfers, executed at fair value. |
In December 2009, the Company undertook a re-pricing of stock options outstanding under the 2005 Employee option plan, the 2008 Employee stock option plan and with non-plan options, whether vested or unvested to the
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
11. Stock option plans, (continued)
lessor of (i) $0.75 per option and (ii) the current conversion price, provided the optionee had a continuing involvement with the Company at the time of the re-pricing. An amount of 2,208,750 options were re-priced from the various Stock Option Plans under this re-pricing.
In April 2009, the Company issued 2,285,000 of stock options with a strike price of $0.75 per share.
In October 2009, the Company granted 1,825,000 stock options at a strike price of $0.10 per common share to management and advisors with vesting over key future performance milestones.
In December 2009, the Company undertook a re-pricing of stock options outstanding under the 2005 Employee option plan, the 2008 Employee stock option plan and with non-plan options, whether vested or unvested to the lessor of (i) $0.25 per option and (ii) the current conversion price, provided the optionee had a continuing involvement with the Company at the time of the re-pricing. An amount of 4,091,500 options were re-priced from the various Stock Option Plans under this re-pricing.
In 2010, the Company granted 5,871,025 stock options with strike prices ranging from $0.25 to $0.50 per common share to management and advisors with vesting over key future performance milestones.
In 2011, the Company granted 993,068 stock options with strike prices ranging from $0.10 to $0.25 per common share and fair values ranging from $0.03 to $0.06 to employees. The fair values of these options get expensed over their vesting periods through 2014.
Also, in 2011, the Company granted 14,050,000 stock options with strike prices ranging from $0.10 to $0.25 per common share and fair values ranging from $0.01 to $0.06 to management and advisors. The fair values of these options are expensed over their vesting periods through 2014.
The Company has recorded stock based compensation expense, relating to the stock options and restricted stock awards, of $655,525, $530,863, and $28,207,134 for the years ended December 31, 2011 and 2010 and for the period from December 7, 2005 (inception) to December 31, 2011 respectively.
(A) Consolidated Schedule of Stock Option Plans
A summary of the Company’s stock options from December 7, 2005 (inception) to December 31, 2011 is presented below:
| | | Shares under option | | | Weighted Average Exercise Price | | | Average Remaining Contractual Life (Years) | | | Weighted Average Grant Date Fair Value | |
| | | | | | | | | | | | | |
| Outstanding at December 7, 2005 (inception) | | | | | | | | | | | | |
| Granted | | | - | | | $ | - | | | | - | | | $ | - | |
| Exercised | | | - | | | $ | - | | | | - | | | $ | - | |
| Forfeited | | | - | | | $ | - | | | | - | | | $ | - | |
| Outstanding at December 31, 2005 | | | - | | | $ | - | | | | - | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 2,443,750 | | | $ | 0.66 | | | | 4.20 | | | $ | 0.17 | |
| Exercised | | | (85,000 | ) | | $ | 0.50 | | | | - | | | $ | - | |
| Forfeited | | | (187,500 | ) | | $ | 0.97 | | | | - | | | $ | 0.25 | |
| Outstanding at December 31, 2006 | | | 2,171,250 | | | $ | 0.64 | | | | 4.20 | | | $ | 0.17 | |
| Exercisable at December 31, 2006 | | | - | | | $ | - | | | | - | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Granted - plan modification | | | 4,230,000 | | | $ | 0.33 | | | | 3.15 | | | $ | 4.61 | |
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
| Exchanged - plan modification | | | (2,171,250 | ) | | $ | 0.64 | | | | - | | | $ | 0.17 | |
| Granted | | | 822,500 | | | $ | 2.74 | | | | 4.53 | | | $ | 1.02 | |
| Exercised | | | - | | | $ | - | | | | - | | | $ | - | |
| Forfeited | | | (125,000 | ) | | $ | 1.96 | | | | - | | | $ | 0.51 | |
| Outstanding at December 31, 2007 | | | 4,927,500 | | | $ | 0.69 | | | | 3.36 | | | $ | 4.09 | |
| Exercisable at December 31, 2007 | | | 3,572,250 | | | $ | 0.36 | | | | 3.14 | | | $ | 4.54 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 2,760,250 | | | $ | 5.69 | | | | 6.19 | | | $ | 1.65 | |
| Exercised | | | (20,000 | ) | | $ | 1.00 | | | | - | | | $ | - | |
| Forfeited | | | (349,000 | ) | | $ | 1.98 | | | | - | | | $ | 0.19 | |
| Outstanding at December 31, 2008 | | | 7,318,750 | | | $ | 2.53 | | | | 4.60 | | | $ | 3.43 | |
| Exercisable at December 31, 2008 | | | 4,499,873 | | | $ | 0.51 | | | | 1.88 | | | $ | 4.23 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 4,755,000 | | | $ | 0.25 | | | | 9.48 | | | $ | 0.10 | |
| Exercised | | | - | | | $ | - | | | | - | | | $ | - | |
| Cancelled | | | (1,185,000 | ) | | $ | 0.25 | | | | - | | | $ | 1.04 | |
| Forfeited | | | (1,485,750 | ) | | $ | 0.24 | | | | - | | | $ | 1.94 | |
| Outstanding at December 31, 2009 | | | 9,403,000 | | | $ | 0.25 | | | | 5.20 | | | $ | 2.18 | |
| Exercisable at December 31, 2009 | | | 6,144,331 | | | $ | 0.25 | | | | 5.00 | | | $ | 2.54 | |
| | | | | | | | | | | | | | | | | |
| Outstanding at December 31, 2009 (post conversion) | | | 9,004,977 | | | $ | 0.26 | | | | 5.20 | | | $ | 2.18 | |
| Exercisable at December 31, 2009 (post conversion) | | | 5,884,246 | | | $ | 0.26 | | | | 5.00 | | | $ | 2.54 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 5,871,025 | | | $ | 0.27 | | | | 9.23 | | | $ | 0.07 | |
| Exercised | | | - | | | $ | - | | | | - | | | $ | - | |
| Cancelled | | | (3,607,784 | ) | | $ | 0.26 | | | | - | | | $ | | |
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
| Forfeited | | | - | | | | | | | $ | - | | | $ | | |
| Outstanding at December 31, 2010 | | | 11,268,218 | | | $ | 0.27 | | | | 5.80 | | | $ | 1.67 | |
| Exercisable at December 31, 2010 | | | 9,168,806 | | | $ | 0.27 | | | | 5.02 | | | $ | 1.86 | |
| | | | | | | | | | | | | | | | | |
| Granted | | | 15,043,068 | | | $ | 0.13 | | | | 9.24 | | | $ | 0.03 | |
| Exercised | | | - | | | $ | - | | | | - | | | $ | - | |
| Cancelled | | | (550,000 | ) | | $ | 0.38 | | | | 8.83 | | | $ | 0.07 | |
| Forfeited | | | (4,595,000 | ) | | $ | 0.24 | | | | 8.33 | | | $ | 0.06 | |
| Outstanding at December 31, 2011 | | | 16,216,286 | | | $ | 0.11 | | | | 7.25 | | | $ | 1.15 | |
| Exercisable at December 31, 2011 | | | 15,506,286 | | | $ | 0.11 | | | | 7.15 | | | $ | 1.20 | |
| | | | | | | | | | | | | | | | | |
AISYSTEMS, INC. (A development stage company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2011 and 2010
12. Financial instruments
The Company, as part of its operations, carries a number of financial instruments. The Company is not exposed to significant interest, credit or currency risks arising from these financial instruments except as otherwise disclosed.
The Company’s financial instruments, including cash, accounts payable and accrued liabilities, notes payable and loans payable to controlling stockholder are carried at values that approximate their fair values due to their relatively short maturity periods.
13. Subsequent events
On March 13, 2012, the Company divested its subsidiary AIS pursuant to a Stock Transfer Agreement (the “STA”) with Rocmar Farms Limited (“Rocmar”). The STA provided for the Company’s delivery of all of its AIS shares to Rocmar in exchange for Rocmar’s delivery of a promissory note payable to the Company in the amount of $100,000. The STA also provided that the Company agreed to be responsible for certain liabilities (approximately $3,130,000 of notes and loans payable, including approximately $1,976,000 due to the controlling stockholder of the Company, and approximately $2,004,000 of accrued compensation) of AIS. The Company expects to recognize a gain from this disposition of AIS in the three months ended March 31, 2012.
On April 5, 2012, the Company increased its authorized shares of common stock, $0.001 par value, from 300,000,000 shares to 750,000,000 shares.
On April 19, 2012, the Company entered into a Letter of Intent with Kool Telecom Ltd. (“Kool”). Pursuant to the Letter of Intent, the Company and Kool are to negotiate a share exchange agreement whereby the Company will acquire 100% of the shares of Kool for a certain number of shares of the Company’s common stock. The Letter of Intent may be terminated at the earlier of (a) mutual written consent of both the Company and Kool or (b) July 19, 2012.
On April 20, 2012, the Company received proceeds of $70,000 from the issuance of a $70,000 convertible promissory note to Dynamic, the Company’s controlling stockholder. The note bears interest at 5%, is due April 20, 2013, and is convertible into Company common stock at a variable conversion price equal to 80% of the market price (as defined) for the ten trading days prior to the conversion date.
From January 1, 2012 to May 9, 2012, the Company issued a total of 300,512,263 shares of its common stock to three convertible note holders in satisfaction of debt totaling approximately $430,000.
