AISystems, Inc. - FORM 10-Q

Attached files

file	filename
EX-31.1 - CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - AISystems, Inc.	f10q0311ex31i_aisystems.htm
EX-31.2 - CERTIFICATIONS PURSUANT TO SECTION 302 OF SARBANES OXLEY ACT OF 2002 - AISystems, Inc.	f10q0311ex31ii_aisystems.htm
EX-32.2 - CERTIFICATIONS PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - AISystems, Inc.	f10q0311ex32ii_aisystems.htm
EX-32.1 - CERTIFICATIONS PURSUANT TO SECTION 906 OF SARBANES OXLEY ACT OF 2002 - AISystems, Inc.	f10q0311ex32i_aisystems.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

AISystems, Inc.

(Exact name of registrant as specified in its charter)

Nevada		000-52296		20-2414965
(State or other jurisdiction of incorporation)		(Commission File Number)		(I.R.S. Employer Identification No.)

55 University Avenue, Suite 910

Toronto, Ontario, Canada

M5J 2H7

(Address of principal executive offices) (Zip Code)

(416)-367-2544

(Registrant’s telephone number, including area code)

Not Applicable

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

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

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

Large Accelerated Filer £ Accelerated Filer £

Non-Accelerated Filer£ Smaller reporting company R

(Do not check if smaller reporting company)

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

As of May 16, 2011 there were 153,613,158 shares of common stock, $0.01 par value, outstanding.

TABLE OF CONTENTS

Part I.	Financial Information

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010	3

	Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2011 and 2010 and the period from December 7, 2005 (inception) to March 31, 2011	4

	Unaudited Condensed Consolidated Statement of Changes in Stockholders’ Equity for the period from December 7, 2005 (inception) to March 31, 2011	5

	Unaudited Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 and the period from December 7, 2005 (inception) to March 31, 2011	6

	Notes to Unaudited Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22

Item 4.	Controls and Procedures	22

Part II.	Other Information

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23

Item 3.	Defaults Upon Senior Securities	23

Item 4.	(Removed and Reserved)	23

Item 5.	Other Information	23

Item 6.	Exhibits	24

PART 1 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AISYSTEMS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF

	March 31,			December 31,
	2011			2010
	(Unaudited)
Assets
Current
Cash
Cash	$	71,571		$	11,261
Restricted cash		400			200
		71,971			11,461
Prepaid expenses and other current assets		716,129			1,073,752
Total Current Assets		788,100			1,085,213

Property and equipment,net		271,552			298,349
Intellectual Property		10			10

Total Assets	$	1,059,662		$	1,383,572

Liabilities and Shareholders' Deficit

Current
Accounts payable and accrued liabilities	$	6,159,051		$	5,720,388
Notes payable to Shareholders		4,354,415			4,795,813
Current portion of Loans payable to controlling shareholder
for Intellectual Property		1,019,352			1,009,627
Deferred revenue		1,000,000			1,000,000
Current portion of equipment loan		3,828			3,828
Total Current Liabilities		12,536,646			12,529,656

Deferred lease obligation		68,264			77,791

Total Liabilities		12,604,910			12,607,447

Shareholders' Deficit
Preferred Shares (Authorized 5,000,000 with 2,400,000
designated as Series B, Issued: 2,329,905 Series B)		2,330			2,330
Common shares (Authorized: 300,000,000)
Issued March 31 2011: 153,180,880 and 2010: 147,732,455 )		153,181			147,733
Additional paid-in capital		58,118,620			57,054,133
Subscription advance (receivable)		132,630			(85,858	)
Deficit accumulated during the development stage		(69,952,009	)		(68,342,213	)

Total Shareholders' Deficit		(11,545,248	)		(11,223,875	)
Total Liabilities and Shareholders' Deficit	$	1,059,662		$	1,383,572

AISYSTEMS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

	Three months ended March 31, 2011			Three months ended March 31, 2010			For the period from December 7, 2005 (inception) to March 31, 2011

	(Unaudited)			(Unaudited)			(Unaudited)
Operating expenses

Salaries and benefits	$	(506,548	)	$	(628,379	)	$	(17,311,189	)
Outside Services		(485,673	)		(687,945	)		(12,221,996	)
Travel, meals and entertainment		(40,061	)		(51,319	)		(2,660,816	)
Office and general expense		(73,795	)		(257,235	)		(5,069,064	)
	$	(1,106,077	)	$	(1,624,878	)	$	(37,263,065	)

Other expenses
Depreciation and amortization		(26,797	)		(44,956	)		(1,132,099	)
Stock Based Compensation		(226,075	)		(192,303	)		(27,777,684	)
	$	(252,872	)	$	(237,259	)	$	(28,909,783	)

Loss from operations	$	(1,358,949	)	$	(1,862,137	)	$	(66,172,848	)

Other income (expenses)
Interest (expense)		(205,177	)		(88,618	)		(3,846,497	)
Interest income		-			-			114,610
Other income (expense)		(45,670	)		(36,391	)		(47,276	)
	$	(250,847	)	$	(125,009	)	$	(3,779,163	)

Net loss for the period		(1,609,796	)		(1,987,146	)		(69,952,009	)

Deficit, beginning of the period		(68,342,213	)		(61,340,853	)		-

Deficit, end of the period	$	(69,952,009	)	$	(63,327,999	)	$	(69,952,009	)


Net loss per share attributable to common stockholders


Basic and fully diluted	$	(0.01	)	$	(0.02	)

Number of weighted average
common shares outstanding
basic and diluted		151,120,449			97,423,000

AISYSTEMS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN

STOCKHOLDERS’EQUITY (DEFICIT)

	Preferred stock - number of shares #			Preferred stock - amount $			Common stock - number of shares #			Common stock - amount $			Additional Paid in Capital $			Subscriptions Advanced (Receivable)			Deficit accumulated during the development stage $			Total $
Shares issued in consideration
of Intellectual Property ("IP")								19,153,414			19,153			(19,143	)								10
Shares issued for cash during
the year, net of issuance costs of NIL								1,312,698			1,313			341,367									342,680
Net loss																				(64,350	)		(64,350	)
Balance at December 31, 2005		-			-			20,466,112			20,466			322,224						(64,350	)		278,340
Shares issued in consideration of IP								7,661,365			7,661			(7,661	)								-
Special distribution in consideration of IP														(4,000,000	)								(4,000,000	)
Shares issued for cash during the year								6,518,673			6,519			3,490,881									3,497,400
Shares issued upon exercise of options								162,804			163			42,337									42,500
Stock based compensation														234,065									234,065
Net loss																				(2,899,295	)		(2,899,295	)
Balance at December 31, 2006		-			-			34,808,954			34,809			81,846						(2,963,645	)		(2,846,990	)
Shares issued for cash during the year								6,264,028			6,264			8,768,637									8,774,901
Stock based compensation														17,245,216									17,245,216
Net loss																				(24,382,325	)		(24,382,325	)
Balance at December 31, 2007		-			-			41,072,982			41,073			26,095,699						(27,345,970	)		(1,209,198	)
Shares issued in consideration of IP								1,915,341			1,915			(1,915	)								-
Shares issued for cash during the year								1,618,204			1,618			8,447,028									8,448,646
Issuance of preferred shares		2,329,905			2,330																		2,330
Dividend on common shares														(2,330	)								(2,330	)
Common share warrants issued in connection with debt														1,534,260									1,534,260
Shares issued in connection with exercise of warrants								29,707			30			280									310
Shares issued upon exercise of options								19,153			19			19,981									20,000
Stock based compensation														3,742,156									3,742,156
Net loss																				(16,343,658	)		(16,343,658	)
Balance at December 31, 2008		2,329,905			2,330			44,655,387			44,656			39,835,158						(43,689,628	)		(3,807,484	)
Shares issued $0.75 per share for cash during the year								552,256			552			431,948									432,499
Shares issued $0.10 per share for cash during the year								14,679,904			14,680			1,518,196									1,532,876
Shares issued $0.25 per share for cash during the year								3,972,480			3,972			1,033,044									1,037,016
Consideration received for cancellation of IP														800,000									800,000
Cancellation of shares issued for IP								(1,915,341	)		(1,915	)		1,915									(0	)
Conversion of warrants for anti dilution								6,459,189			6,459			(6,459	)								0
Share issued on conversion of debt								2,214,553			2,215			1,732,113									1,734,328
Common share warrants issued in connection with debt														1,179,347									1,179,347
Stock based compensation								9,097,871			9,098			5,790,211									5,799,309
Shares issued in connection with exercise of warrants								5,248,493			5,248			(3,891	)								1,357
Net loss																				(17,651,225	)		(17,651,225	)
Balance at December 31, 2009		2,329,905			2,330			84,964,792			84,965			52,311,582						(61,340,853	)		(8,941,976	)
Series A shares delivered (Note 1)		(2,329,905	)		(2,330	)																	(2,330	)
Series B shares issued (Note 1)		2,329,905			2,330																		2,330
Shares issued $0.25 for cash during the year								1,781,267			1,781			463,219									465,000
Shares issued $0.10 for cash during the year								8,735,810			8,736			903,457									912,193
Shares issued $0.20 for cash during the year								1,035,000			1,035			205,965									207,000
Subscriptions receivable								1,915,341			1,915			189,619			(191,534	)					0
Subscriptions advances																	105,676						105,676
Shares issued in connection with exercise of warrants								4,906,239			4,906			(91	)								4,815
Stock-based compensation														530,863									530,863
Acquisition of Wolf Resources Inc.								38,754,000			38,754			(91,744	)								(52,990	)
Shares issued $ 0.45 per share for services during the year								25,000			25			11,225									11,250
Shares issued $ 0.50 per share for services during the year								1,450,000			1,450			723,550									725,000
Shares issued $ 0.42 per share for services during the year								2,200,000			2,200			921,800									924,000
Shares issued $ 0.49 per share for services during the year								1,625,006			1,625			794,629									796,254
Shares issued $ 0.27 per share for services during the year								300,000			300			80,700									81,000
Shares issued $ 0.24 per share for services during the year								40,000			40			9,360									9,400
Net loss																				(7,001,360	)		(7,001,360	)
Balance at December 31, 2010		2,329,905			2,330			147,732,455			147,733			57,054,133			(85,858	)		(68,342,213	)		(11,223,875	)
Shares issued $0.20 for cash during the period								1,375,000			1,375			273,625									275,000
Shares issued $0.16 for cash during the period								95,406			95			15,581									15,676
Shares issued $0.15 for cash during the period								340,000			340			50,660									51,000
Shares issued $ 0.25 per share for services during the period								1,088,736			1,089			271,095									272,184
Shares issued $ 0.10 per share for services during the period								2,000,000			2,000			198,000									200,000
Shares issued $ 0.056 per share for services during the period								267,857			268			14,732									15,000
Shares issued $ 0.0533 per share for services during the period								281,426			281			14,719									15,000
Subscription advances																	218,488						218,488
Stock based compensation														226,075									226,075
Net loss																				(1,609,796	)		(1,609,796	)
Balance at March 31, 2011		2,329,905			2,330			153,180,880			153,181			58,118,620			132,630			(69,952,009	)		(11,545,248	)

AI SYSTEMS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three months ended March 31, 2011			Three months ended March 31, 2010			For the period from December 7, 2005 (inception) to March 31, 2011
	(Unaudited)			(Unaudited)			(Unaudited)
Operating activities
Net Loss	$	(1,609,796	)	$	(1,987,146	)	$	(69,952,009	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization		26,797			44,956			1,132,099
Accretion of discount on notes		-			15,478			2,476,135
Stock based compensation		226,075			192,303			27,777,683
Prepaid expenses and other current assets		(12,878	)		30,865			(36,003	)
Shares issued for services to be received		370,500			-			(680,126	)
Receivable from controlling shareholder		-			-			(32,454	)
Loan receivable from employees		-			(660	)		(445,675	)
Accounts payable and accrued liabilities		438,667			709,591			6,633,010
Deferred revenue		-			-			1,000,000
Deferred lease obligation		(9,527	)		(5,736	)		68,265
Interest expense on note payable to controlling shareholder		9,725			9,725			437,323
Conversion of debt for issuance of stock		(494,000	)		-			(494,000	)
Shares issued for services rendered		-			-			2,546,904
Net cash used in operating activities	$	(1,054,437	)	$	(990,624	)	$	(29,568,848	)

Investing activities
Licensing of intellectual property from
controlling shareholders		-			-		$	(10	)
Purchase of property and equipment		-			(1,881	)		(1,269,992	)
Net cash provided by (used in) investing activities	$	-		$	(1,881	)	$	(1,270,002	)

Financing activities
Proceed from issuance of common shares		1,062,348			1,075,644			26,374,128
Proceeds on (repayment of) notes payable to shareholders		52,599			(60,000	)		4,766,290
Repayment on notes payable to controlling shareholders		-			-			(130,138	)
Proceeds from loan to related party		-			-			44,444
Proceeds from (repayments of) loan		-			(1,435	)		9,532
Payment on obligation under capital lease		-			-			(153,437	)
Net cash provided by financing activities	$	1,114,947		$	1,014,209		$	30,910,821

Net increase in cash		60,510			21,704			71,971

Cash, beginning of period		11,461			652,081			-



Cash, end of period	$	71,971		$	673,785		$	71,971

AI SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the period ended March 31, 2011

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 believes will 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, 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 reverse merger has been accounted for as a recapitalization of the Company whereby the historical financial statements and operations of AIS become the historical financial statements of the Company, with no adjustment to the carrying value of the assets and liabilities. The accompanying condensed consolidated financial statements reflect the recapitalization of the stockholder’s equity 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 shares for the total net monetary liabilities of the shell company in the amount of $52,990 in the condensed consolidated statement of changes in stockholders' equity (deficit).

The Company also filed a Form 14C on April 7, 2010 wherein amongst other things; the Company changed its fiscal year-end to December 31, to coincide with the year-end of AIS.

2. Going concern and management’s plans

The accompanying unaudited condensed 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 March 31, 2011, the Company’s deficit accumulated during the development stage was approximately $ 69.9 million, and the Company had utilized cash in operating activities of $ 29.6 million. The Company has funded theses 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.

The Company aims to complete $5 million to $10 million in equity financing in 2011. The funds will be used to engage potential customers, to fund product development, for working capital purposes, for repayment of debt and for other corporate purposes. 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 shareholders. This could result in significant dilution or a loss of investment to any current or future shareholders. 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.

AISYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the period ended March 31, 2011

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 unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. In this regard, management is planning to raise necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.

3. Interim Financial Statements

These unaudited interim financial statements are as of March 31, 2011 and for the three months ended March 31, 2011 and 2010 and for the period from December 7, 2005 (inception) to March 31, 2011 and have been prepared in accordance with the instructions to quarterly reports on Form 10-Q. In the opinion of management, these unaudited interim financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position of the Company as at March 31, 2011, and the results of its operations and its cash flows for the three month periods ending March 31, 2011 and 2010 and for the period from December 7, 2005 (inception) to March 31, 2011. The financial data and other information disclosed in these notes to the interim financial statements related to these periods are unaudited and certain information and footnote data necessary for fair presentation of financial position and results of operations in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. Therefore it is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto, included in a Form 10-K filed April 15, 2011. The results for the three months ended March 31, 2011 are not necessarily indicative of the results to be expected for any subsequent quarter of the entire year ended December 31, 2011. The balance sheet as at December 31, 2010 has been derived from the audited financial statements at that date.

4. Significant accounting policies

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 not listed below were assessed and determined to be either not applicable or are expected to have minimal impact on our consolidated financial position and results of operations.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued a new accounting standard which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products’ essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards were effective for the Company beginning on January 1, 2011. The adoption of these standards did not have a material impact on the Company’s condensed consolidated financial statements.

AISYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the period ended March 31, 2011

5. Property and equipment


	March 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
		1,314,244			1,314,244
Less: accumulated depreciation		(1,042,692	)		(1,015,895	)
	$	271,552		$	298,349

Depreciation expense was $26,797 and $44,956 for the three months ended March 31, 2011 and 2010.

6. Notes payable

Notes payable to Dynamic Intelligence Inc. (“Dynamic”)

The notes payable to the controlling stockholder, Dynamic, at March 31, 2011 are $ 1,019,352 (December 31, 2010: $ 1,009,627). The notes carry an interest rate of 5% and are unsecured, with no fixed terms of repayment.

All accrued interest on these notes remains outstanding at March 31, 2011. Interest expense on these notes was $ 9,725 for each of the three months ended March 31, 2011 and 2010 respectively.

In addition, Dynamic has notes payable of $ 1,200,000 which are included in the notes payable to stockholders.

Notes payable with detachable warrants

The notes payable to stockholders with detachable warrants at March 31, 2011 are $3,773,750 (December 31, 2010: $3,773,750). The notes carry interest rates ranging from 5% to 18% and are unsecured.

All accrued interest on these notes remains outstanding at March 31, 2011.

Guarantee Notes

The Company entered into a bond agreement during 2009 with a third party to provide a guarantee of notes to be issued by the Company. Under this bond, the Company issued $150,000 of notes bearing interest of 18%, maturing in August 2010. These notes also included a total of 250,000 common stock warrants with a strike price of $0.001 and fair value of $39,894. Pursuant to guarantee agreement, the Company is required to set aside in a separate bank account 5% of all the future funds raised in excess of $1,000,000. On March 13, 2010, the Company paid $60,000 of the amounts owing under this note. On April 13, 2010, the Company paid an additional $60,000 of the amounts owing under this note.

Creditor Forbearance

In October 2009, the Company entered into a forbearance agreement to extend the maturity of debt to September 30, 2010 with certain debt holders whom collectively hold $2,467,500 of debt and accrued interest. In exchange for extending the described debt, the Company issued 2,467,500 warrants with an exercise price of $0.001 each, which expire at the earlier of a public listing, a corporate reorganization or specified expiry dates that range for the period from 2009 to 2014. The forbearance agreements were treated as a modification of the debt and accordingly the associated fees, representing the fair value of the warrants issued by the Company to the creditors, have been recorded as a discount on the debt and amortized over the new term to maturity with an additional charge to interest expense calculated in accordance with the interest method. Effective October 1, 2010, the company accrued interest at 12% on the $2,467,500 (previously accrued at 5% and 8%) in accordance with the forbearance agreement.

AI SYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the period ended March 31, 2011

Demand Loan

In 2010, the Company had issued $200,000 non interest bearing unsecured notes. These notes were converted to 2,000,000 of common stock of the corporation in January 2011.

In 2011, the Company converted $264,000 plus accrued interest of the 5% demand loans for 1,088,736 common stock.

In 2011, the Company converted $30,000 of the 8% demand loans for 549,283 common stock.

From January to March 2011, the Company issued $52,500 in 8% unsecured demand loans.

7. Lease obligations, commitments and Contingencies

(A) Lease obligations

The Company leases office space in Kirkland, Washington and Toronto, due to expire on October 2012 and May 2014 respectively. Total lease expense was $ 23,463 and $ 191,309 for the three months ended March 31, 2011 and 2010, respectively. In April 2011, the Company terminated its Kirkland Agreement and agreed to a settlement amount of $180,000 payable in monthly installments over a 36 payment period starting in July 2011.

In February 2011, the Company entered into a lease agreement to lease office space in Bellevue, Washington. The lease is for a period of 3.5 months, commencing on February 14, 2011 and ending May 31, 2011. Thereafter, the lease will revert to a month to month lease.

The Company also leases photocopiers, computer equipment and an apartment, expiring at various dates from 2011 to 2014.

The total future minimum lease payments by year for all operating leases are as follows:

Lease obligations


March 31,	Total


2011		106,673
2012		159,031
2013		159,031
2014		74,364
Thereafter		-
	$	499,099

(B) Commitments

The Company has a contractual obligation to pay a third party 2% of all revenue under its single customer contract for three years from signing. No amounts are owing under this agreement as at March 31, 2011and December 31, 2010.

The Company has committed to pay $ 7,500 and issue 160,000 common shares during 2011 in accordance with the terms of a consulting contract.

The Company has committed to issue 4,874,994 common shares during 2011 and 2012 in accordance with the terms of two consulting agreements.

AISYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the period ended March 31, 2011

7. Lease obligations, commitments and Contingencies (continued)

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. Compensation for such services is to be expensed over the respective terms of the agreements, as services are rendered.

In March 2011, Devon James Associates , Inc. and Colleen Aylward (the “Plaintiffs”) purport to have allegedly served the Company with a summons and complaint. The complaint does not appear to have been filed in any court. The complaint raises a variety of claims including breach of contract, violation of the Washington State Consumer Protection Act and unjust enrichment. The Plaintiffs allege that damages are in excess of $ 177,000 with interest, fees and costs accruing there upon. The Company believes it has meritorious defenses and intends to vigorously defend this litigation if the complaint is filed.

8. Unearned revenue

The Company entered into a contract with its single customer in June 2007, wherein the customer provided the Company with a $1,000,000 signing fee. The Company has deferred recognition of revenue for this signing fee until customer acceptance of its product is obtained. The customer or the Company may cancel the contract at anytime. There is no certainty that the customer will accept the Company’s product or that the company will deliver a working product for the customer.

9. Shareholders’ equity

The authorized capital of the Company consisted of: (i) 300,000,000 common shares (as amended on March 25, 2010), 153,180,881 shares of which were issued and outstanding at March 31, 2011 and (ii) 20,000,000 shares of preferred stock of the Company, which have been designated as Series B Preferred Stock (“Series B Preferred”), with 2,329,905 issued at March 31, 2011. The common shares issued to the former shareholders of AIS became free trading shares one year following the completion of the merger.

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 principle 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.

AISYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the period ended March 31, 2011

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 periods ended March 31, 2010 and 2009 and for the period from December 7, 2005(inception) to March 31, 2011 would be approximately $541,143 $1,367,377 and $23,664,738 respectively.

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 three Stock Option Plans, (i) The 2005 Stock Option Plan, (ii) The 2008 Stock Option Plan and (iii) The 2010 Equity Incentive Plan. The Company has also issued Non-Plan stock options to certain consultants and advisors.

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. The Company’s 2008 Stock Option Plan, dated May 30, 2008, has reserved 5,000,000 Common Shares for issuance and the Company’s 2010 Equity Incentive Plan dated October 4, 2010 has reserved 25,000,000 Common Shares for issuance. Additionally, the Company has reserved 841,500 Common Shares for outstanding non-plan stock options.

(A) Consolidated Schedule of Stock Option Plans

A summary of the Company’s stock options from December 31, 2010 to March 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 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		2,600,000		$	0.25		9.80	$	0.06
Exercised		-		$	-		-	$	-
Cancelled		(2,868,224	)	$	-		-	$	-
Forfeited		-		$	-		-	$	-
Outstanding at March 31, 2011		10,999,994		$	0.26		7.73	$	0.48
Exercisable at March 31, 2011		9,317,976		$	0.27		7.82	$	0.42

The fair value of stock options granted during the period ended March 31, 2011 was estimated using the Black-Scholes option pricing model with the assumption that no dividends are to be paid on common shares, a weighted average volatility factor for the Company’s share price of 20% (2010 – 20%), a weighted average risk free interest rate of 3.4% (2010 – 2.5%) over an expected term of 10 years (2010 - 10 years).

AISYSTEMS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the period ended March 31, 2011

12. Financial instruments

The Company, as part of its operations, carries a number of financial instruments. It is management’s opinion that 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, accounts payable and accrued liabilities are carried at values that approximate their fair values due to their relatively short maturity periods. The estimated fair value of related party loans is not practical to estimate, due to the related party nature of the underlying transactions.

Notes payable are carried at face value plus accrued interest in accordance to the agreements except where noted otherwise.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the period ended March 31, 2011

The following discussion and analysis should be read in conjunction with the information contained in the unaudited condensed consolidated financial statements of the Company and the related notes thereto, appearing elsewhere herein, and in conjunction with the Management’s Discussion and Analysis of Financial Condition and Results of Operations set forth in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the Securities and Exchange Commission (“SEC”) on April 15, 2011.

Forward Looking Information

This Quarterly Report on Form 10-Q (the “Report”) contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act of 1934, as amended, that are based on management’s exercise of business judgment as well as assumptions made by, and information currently available to, management. When used in this document, the words “may”, "will”, “anticipate”, “believe”, “estimate”, “expect”, “intend”, and words of similar import, are intended to identify any forward-looking statements. You should not place undue reliance on these forward-looking statements. These statements reflect our current view of future events and are subject to certain risks and uncertainties, as noted in the Company’s Annual Report on Form 10K for the year ended December 31, 2010 , filed with the SEC, and as noted below. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results could differ materially from those anticipated in these forward-looking statements. We undertake no obligation, and do not intend, to update, revise or otherwise publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof, or to reflect the occurrence of any unanticipated events. Although we believe that our expectations are based on reasonable assumptions, we can give no assurance that our expectations will materialize.

COMPANY OVERVIEW

On March 19, 2010, AISystems, Inc., formerly Wolf Resources Inc. (the “Company”) acquired Airline Intelligence Systems Inc.(“AIS”), a development stage software development company based in the State of Washington, focused on software for the airline industry. In accordance with the Share Exchange Agreement, assuming delivery of 100% of AIS stock, the Company will issue a total of 116,250,000 shares which would represent 75% of our issued and outstanding common stock on a fully diluted basis and a total of 2,329,905 shares or 100% of our issued and outstanding Series B preferred stock. As a result of the merger transaction, our business is no longer considered to be a shell company for reporting purposes.

The transaction has been accounted for by the Company as a reverse merger. For accounting purposes, AIS is the acquirer in the reverse acquisition transaction, and consequently, the financial results have been reported on a historical basis as if the AIS. had acquired the Company. As the acquisition of the net monetary liabilities of the Company did not constitute a business, the transaction has been accounted for as a reverse merger (i.e. capital transaction). Accordingly, the Company has reflected the issuance 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.

The exchange ratio on the merger was 0.95767068 Company shares for each share of AIS. The historical issuances of equity by AIS are reflected by applying the exchange ratio to the earliest reporting period.

The Company also filed a Form 14C on April 7, 2010 wherein amongst other things; the Company amended its year-end to December 31, to coincide with the year-end of AIS.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the period ended March 31, 2011 (continued)

Business History

Airline Intelligence Systems Inc. was incorporated in Delaware in December 2005. The business was initiated by Stephen Johnston and Roy Miller, with the intention of solving one of the most difficult planning and scheduling problems facing the commercial airline industry today enabling the integration and control of an airline’s Planning, Revenue Management and Operations functions in real time. Stephen Johnston remains as the Chief Executive Officer and has assumed the role of Chief Financial Officer as of June 23, 2010 until a successor has been elected and qualified.

Business background

The Company has the exclusive licensing right to develop and market a proprietary business platform called jetEngine™ (“jetEngine”) for the airline industry and is in the process of building a software program while simultaneously creating an infrastructure for sustainable growth prepared to enter the commercial stage of its business life cycle.

The core jetEngine system technology is the backbone of an integrated business platform solution that once completed and deployed by customers is expected to revolutionize the airline industry. jetEngine is a new paradigm for strategic airline management that will enable the integration and control of a commercial airline’s business planning, schedule planning, revenue management and integrated operations functions. The Company is at various stages of discussion with a number of airlines worldwide, implementation and channel partners regarding the development and deployment of jetEngine. The Company’s first beta customer, AeroMexico, was signed on June 7, 2007. AeroMexico is an international carrier with approximately 10 million annual transported passengers. AeroMexico recognized that The Company’s solution could dramatically change its business and the industry in which it competes. The Company may not be in compliance of its agreement with AeroMexico in connection with certain monies received from AeroMexico to be kept in escrow. AeroMexico has certain rights, including termination, for certain significant breaches of the agreement. Such non-compliance may be determined to be a significant breach and give AeroMexico the right to terminate its agreement with the Company and other rights. The Company does not currently expect any future revenues from AeroMexico.

The Company currently anticipates the implementation of its business plan will require additional investment capital. The Company aims to complete $5 million to $10 million in equity financing in 2011. The funds will be used to engage potential customers, to fund product development, for working capital purposes, for repayment of debt and for other corporate purposes. 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 shareholders. This could result in significant dilution or a loss of investment to any current or future shareholders. 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. The Company has limited resources at this time, in the annual financial statements a reference to the Company’s ability to continue as a going concern assumption is rendered, see Liquidity and Capital Resources section below.

Management has placed its initial efforts on gaining market share within the airline industry through the sale of its jetEngine Business Planning Suite (“BPS”). Through the Company’s experiences and discussions with airlines we have decided to focus development attention on launching the BPS in an attempt to get rapid market share and then to have a natural progression to the releases of jetEngine™ O/S which contains Schedule Planning, Crew, Revenue Management and Integrated Operations. Management anticipates that the speed and ease of deployment of the BPS, along with aggressive pricing will lead to a rapid penetration of the market. Management further believes that once an airline has had the opportunity to work with BPS, it will be interested in implementing the full capabilities of jetEngine through the purchase of the entire platform. At this time, the Company does not have any customers for its BPS product, it is possible that, 1) The Company will not complete sales with potential customers, 2) that those sales will not be completed on terms favorable to the Company 3) that the Company will not have sufficient or the appropriate resources to complete the development of its product 4) that a competitive product will address the needs of the market before the Company is able to commercialize thereby significantly reducing the expected market opportunity, 5) the product as envisioned and developed by the Company will not meet the needs of customer and therefore never get deployed or achieve acceptance in the market place.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the period ended March 31, 2011 (continued)

The Company plans to make extensive use of channel partners as a means of distribution and deployment of its products and has sought out several such companies that have airline customers. This strategy allows the channel partner to handle the deployment aspect of the product sale and allows the Company to focus on developing and producing world-class products. The Company is working on qualifying channel partners for distribution and deployment. Further organization of such partners may take longer and be more expensive than the Company anticipated at this time. This could have a material effect on the Company’s ability to be successful.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Critical Accounting Policies

Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States. This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates required for the preparation of the unaudited condensed consolidated financial statements included in Item 1 of this Report were those related to revenue recognition, stock based compensation,,deferred income tax assets, liabilities, notes payable issued with warrants and contingencies surrounding litigation. These estimates are considered significant because of the significance of the financial statement item to which they relate, or because they require judgment and estimation due to the uncertainty involved in measuring, at a specific point in time, events that are continuous in nature. Management bases its estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. On an on-going basis, management evaluates its estimates and judgments, including those related to intangible assets, contingencies, and litigation. Actual results could differ from these estimates.

The critical accounting policies used in the preparation of our interim condensed consolidated financial statements are discussed in our Form 10K for the year ended December 31, 2010 filed with the SEC on April 15, 2011. To aid in the understanding of our financial reporting, it is suggested that the interim condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto, included in a Form 10-K filed April 15, 2011.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the period ended March 31, 2011 (continued)

RESULTS OF OPERATIONS AND FINANCIAL CONDITION

Results of Operations for the three months ended March 31, 2011 and 2010 and for the period from December 7, 2005 (inception) to March 31, 2011.

The following tables set forth key components of our results of operations for the periods indicated in dollars. The discussion following the table is based on these unaudited results.

	Three months ended March 31, 2011			Three months ended March 31, 2010			For the period from December 7, 2005 (inception) to March 31, 2011

	(Unaudited)			(Unaudited)			(Unaudited)
Operating expenses

Salaries and benefits	$	(506,548	)	$	(628,379	)	$	(17,311,189	)
Outside Services		(485,673	)		(687,945	)		(12,221,996	)
Travel, meals and entertainment		(40,061	)		(51,319	)		(2,660,816	)
Office and general expense		(73,795	)		(257,235	)		(5,069,064	)
	$	(1,106,077	)	$	(1,624,878	)	$	(37,263,065	)

Other expenses
Depreciation and amortization		(26,812	)		(44,956	)		(1,132,114	)
Stock Based Compensation		(226,075	)		(192,303	)		(27,777,684	)
	$	(252,887	)	$	(237,259	)	$	(28,909,798	)

Loss from operations	$	(1,358,964	)	$	(1,862,137	)	$	(67,531,827	)

Other income (expenses)
Interest (expense)		(205,177	)		(88,618	)		(3,846,497	)
Interest income		-			-			114,610
Other income (expense)		(45,655	)		(36,391	)		(47,261	)
	$	(250,832	)	$	(125,009	)	$	(3,779,148	)

Net loss for the period		(1,609,796	)		(1,987,146	)		(69,952,009	)

Deficit, beginning of the period		(68,342,213	)		(61,340,853	)		-

Deficit, end of the period	$	(69,952,009	)	$	(63,327,999	)	$	(69,952,009	)

Net loss per share attributable to common stockholders

Basic and fully diluted	$	(0.01	)	$	(0.02	)

Number of weighted average
common shares outstanding
basic and diluted		151,120,449			97,423,000

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the period ended March 31, 2011 (continued)

Revenues.

The Company is a development stage company and has not earned any revenue from its inception in 2005 through March 31, 2011. The Company expects to commence earning revenue as it attracted customers and deploys software that is accepted by those customers. The Company expects to achieve first revenues in 2011. At this time, the Company’s product remains under development and the Company does not have any deployed products in the market place with potential customers.

On June 7, 2007, the Company signed AeroMexico as its first beta customer. The Company received $1 million in fees from AeroMexico which are recorded as deferred revenue in the Company’s financial statements as the Company has not met the criteria for recognition. The Company does not currently expect any future revenues from AeroMexico.

Operating Expenses

In the first quarter of 2011, the Company’s loss from operations was $1.6 million as compared to $2.0 million in the same period in 2010. The Company’s loss from operations from inception (December 7, 2005) through March 31, 2011 are $69.9 million. In the first quarter of 2011 loss from operations were lower than in the same period in 2010 as the Company downsized its business to align its business progress with financing available in the market to continue operations. Costs incurred in the first quarter of 2011 and in the comparative periods related primarily to staff, facilities, consultants, advisors, legal, travel and other costs associated with seeking customers, investors and the continued development of software as the Company aims to establish a market for its technology rights. Since inception, the Company has expanded and contracted based upon access to capital, the availability of key resources and traction with potential customers. The Company expects the loss from operations in 2011 to be in line with 2010.

In the first quarter of 2011, compensation expense was $0.5 million, a reduction from $0.1 million in the comparative period in 2010. The decrease was due to a reduction in staff in 2011 caused by reduced access to capital brought on by the economic downturn.

In 2011, outside services expense were $0.5 million compared to $0.7 million for the comparative period. The decrease was due to a reduction in consultants used caused by reduced access to capital.

In 2011, travel, meals and entertainment was $40,000 compared to $51,000 for the comparative period.

In 2011, office and general expenses were $0.07 million, down from $0.26 million in the comparative period. The company reduced spending in this area due to reduced access to capital.

In 2011, depreciation and amortization expenses was $27,000 compared to $45,000 in the comparative period as the Company continued to write off its capital equipment acquired since inception over their estimated useful life.

In 2011, stock based compensation was $0.2 million compared to $0.2 million in comparative period of 2010.

Other income (expenses)

Other expenses were $0.25 million in 2011 compared to $0.12 million in 2010. Other income (expenses) were primarily comprised of interest expense on debt issued by the Company related to financing operations and for the acquisition of intellectual property.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the period ended March 31, 2011 (continued)

Income tax expense

The income tax expense for the three months ended March 31, 2011 and 2010 was Nil as the Company has incurred operating losses since inception.

Net Loss

The Company’s net loss for the first quarter of 2011 was $1.6 million compared to $2.0 million in the comparative period for 2010.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the period ended March 31, 2011 (continued)

Equity Issuances in 2011

From January 1, 2011 to March 31, 2011, the Company issued 5,448,425 common shares for gross proceeds of $843,860. $55,676 of the proceeds relate to subscriptions advanced prior to this quarter, $286,000 were cash proceeds and $502,184 of the proceeds related to the conversion of debt.

As of March 31, 2011, the Company has collected $324,164 of proceeds in advance of shares being issued. $274,164 of this amount was collected from the period January to March 31, 2011.

LIQUIDITY AND CAPITAL RESOURCES

Capital required to Continue operations and Substantial doubt about ability to continue operations

The Company requires capital to continue operations. The Company is in arrears with its creditors and any of its creditors may petition the Company in receivership. In this regard, management is planning to raise necessary additional funds through loans and additional sales of its common stock. There is no assurance that the Company will be successful in raising additional capital.

The Company expects to raise $5 million to $10 million in equity in 2011, which will be used to fund operations, improve working capital and to reduce maturing and past due debt. Should the Company be unable to raise this amount of capital its operating plans to fund our business and financial performance could be adversely affected.

The Company has yet to fully commercialize its technologies and consequently has incurred significant losses since its inception.

At March 31, 2011, the Company’s deficit accumulated during the development stage was approximately $69.9 million, and the Company had utilized cash in operating activities of $29.6 million. The Company has funded theses 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.

Lease obligations

In May 2009, the Company extended the lease for its Toronto office space for 5 years.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS for the period ended March 31, 2011 (continued)

The Company also leases photocopiers, computer equipment and an apartment, expiring at various dates from 2011 to 2014.

The total future minimum lease payments by year for all operating leases are as follows:

Lease obligations


March 31,	Total

2011		106,673
2012		159,031
2013		159,031
2014		74,364
Thereafter		-
	$	499,099

Commitments

The Company has a contractual obligation to pay a third party 2% of all revenue under its single customer contract for three years from signing. No amounts were owing under this agreement as at March 31, 2011and December 31, 2010.

The Company has committed to pay $ 7,500 and issue 160,000 common shares during 2011 in accordance with the terms of a consulting contract.

The Company has committed to issue 4,874,994 common shares during 2011 and 2012 in accordance with the terms of two consulting agreements.

OFF-BALANCE SHEET ARRANGEMENTS

Exchange Right Agreement

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 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.

Inflation.

Inflation did not have a significant impact on our results during the quarter ended March 31, 2011.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Act of 1934 and are not required to provide the information under this item.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

As required by Rule 13a-15 under the Securities Exchange Act of 1934 (the “1934 Act”), as of March 31, 2011, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures. This evaluation was carried out under the supervision and with the participation of our Chief Executive Officer who serves as both our principal executive officer and principal financial officer. Based upon and as of the date of that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are not effective in timely alerting him to material information required to be included in our periodic reports filed with the Securities and Exchange Commission and to ensure that information required to be disclosed in such reports is accumulated and communicated to our management, including our Chief Executive Officer / Chief Financial Officer, to allow timely decisions regarding required disclosures. However, management believes that the financial statements included in this report present fairly, in all material respects, the Company’s consolidated financial position, results of operations and cash flows for the periods presented.

Our management intends to implement corrective actions where required to improve our disclosure controls and procedures and our internal controls. Specifically, the Company expects to hire additional personnel to help implement additional controls and procedures to improve the financial closing process and the process by which we accumulate and prepare the disclosure of the information in reports we file with the Securities and Exchange Commission. However, the material weakness will not be considered remedied until the applicable remedial controls operate for a sufficient period of time and management has concluded that these controls are operating effectively.

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the 1934 Act is accumulated and communicated to our management, including our principal executive officer and our principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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, 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.

ITEM 1A. RISK FACTORS

You should carefully consider the risks described below together with all of the other information included in this report before making an investment decision with regard to our securities. The statements contained in or incorporated herein that are not historic facts are forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by forward-looking statements. If any of the following risks actually occurs, our business, financial condition or results of operations could be harmed. In that case, you may lose all or part of your investment.

Other than as reported in our Form 8K, as filed with the SEC on March 19, 2010, there have been no significant changes to the risk factors.

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

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

Exhibit No.		Description

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted under Section 302 of the Sarbanes-Oxley Act of 2002

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

SIGNATURES

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

	AI SYSTEMS INC.

Date: May 16, 2011	By:	/s/ Stephen C. Johnston
		Stephen C. Johnston
		Chief Executive Officer Chief Financial Officer

AISystems, Inc. - FORM 10-Q - May 16, 2011

Attached files

AISystems, Inc. Reports