Artificial Intelligence Technology Solutions Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements The following discussion of our financial condition and results of operations for the three months and six months ended August 31, 2021 and August 31, 2020 should be read in conjunction with our unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended February 28, 2021, as filed on June 1, 2021 with the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements. Unless expressly indicated or the context requires otherwise, the terms “AITX”, the “Company”, “we”, “us”, and “our” refer to Artificial Intelligence Technology Solutions Inc. Overview AITX was incorporated in Florida on March 25, 2010. AITX reincorporated into Nevada on February 17, 2015. AITX’s fiscal year end is February 28 (February 29 during leap year). AITX is located at 10800 Galaxie Ave., Ferndale Michigan, 48220, and our telephone number is 877-767-6268. AITX’s mission is to apply Artificial Intelligence (AI) technology to solve enterprise problems categorized as expensive, repetitive, difficult to staff, and outside of the core competencies of the client organization. A short list of basic examples include: 1. Typical security guard-related functions such as monitoring a parking lot during and after hours and responding appropriately. This scenario applies to perimeters, interior yard areas, and related similar environments. 2. Integrated hardware/software with AI-driven responses, simulating and expanding on what legacy or manned solutions could perform. 3. Automation of common access control functions through technology utilizing facial recognition and machine vision, leapfrogging most legacy solutions in use today. RAD solutions are unique because they: 1. Start with an AI-driven autonomous response utilizing cellular-optimized communications, while easily connecting to a human operator for a manned response, as needed. 2. Use unique hardware purpose-built by RAD for delivery of these solutions. Various form factors have been customized to deliver this new functionality. 3. Deliver services through RAD-developed software and cloud services, allowing enterprise IT groups to focus on core competencies instead of maintenance of complex video and security platforms. - 31 - Management Discussion and Analysis Results of Operations for the Three Months Ended August 31, 2021 and 2020 The following table shows our results of operations for the three months ended August 31, 2021 and 2020. The historical results presented below are not necessarily indicative of the results that may be expected for any future period. Revenue Period Change Three Months Ended August 31, 2021 Three Months Ended August 31, 2020 Dollars Percentage Revenues $ 141,572 $ 76,082 $ 65,490 86% Gross profit 99,618 40,071 59,547 149% Operating expenses 3,383,990 707,969 2,676,021 378% Loss from operations (3,284,372 ) (667,898 ) (2,616,474 ) 392% Other income (expense), net (1,548,001 ) (8,350,343 ) 6,802,342 (81% ) Net loss $ (4,832,373 ) $ (9,018,241 ) $ 4,185,868 (46% ) The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change August 31, 2021 August 31, 2020 Dollars Percentage Device rental activities $ 123,375 $ 73,082 $ 50,293 69% Direct sales of goods and services 18,197 3,000 15,197 507% $ 141,572 $ 76,082 $ 65,490 86% Total revenue for the three-month period ended August 31, 2021 was $141,572 which represented an increase of $65,490 compared to total revenue of $76,082 for the three months ended August 31, 2020. This large increase is a result of increases in rental activities and training revenue as the Company continues to grow its business. Gross profit Total gross profit for the three-month period ended August 31, 2021 was $99,618 which represented an increase of $59,547, compared to gross profit of $40,071 for the three months ended August 31, 2020. The increase resulted primarily from the increased revenues noted above. The gross profit % of 70% for the three-month period ended August 31, 2021 was slightly higher than the margin of 53% for the prior year’s corresponding period due to the shift in sales mix, specifically higher training revenue in 2021. Operating Expenses Period Change Three Months Ended August 31, 2021 Three Months Ended August 31, 2020 Dollars Percentage Research and development $ 699,292 $ 108,678 $ 590,614 543% General and administrative 2,590,920 564,078 2,026,842 359% Depreciation and amortization 47,691 30,360 17,331 57% Operating lease cost and rent 75,212 4,300 70,912 1649% (Gain) loss on disposal of fixed assets (29,125 ) 553 (29,678 ) 5367% Operating expenses $ 3,383,990 $ 707,969 $ 2,676,021 378% - 32 - Our operating expenses were comprised of general and administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the three-month period ended August 31, 2021 and August 31, 2020, were $3,383,990 and $707,969, respectively. The overall increase of $2,676,021 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $2,026,842. In comparing the three months ended August 31, 2021 and August 31, 2020 this significant increase was primarily due to increases in production supplies by $182,579, professional fees by $29,967, wages and salaries $590,820, stock-based compensation $1,131,260, and travel $116,203 and with the remaining increase distributed amongst other G&A accounts. These large increases may be explained due to the large ramp up in costs this fiscal year to operate the new manufacturing facility and the hiring of 18 additional full-time employees. In addition, the expenses of the prior year’s corresponding quarter were also much lower due to the Covid 19 pandemic and the limited cash available at that time. ● Research and development increased by $590,614 due to funding development of new products as well as upgrades of existing products. ● Depreciation and amortization increased by $17,331 due to increases in fixed assets and revenue earning devices. ● Operating lease cost and rent increased by $70,912 due to the two new leases including three months of the new manufacturing facility for the three months ended August 31, 2021 as compared to a month-to-month lease of only office space for the three months ended August 31, 2020. ● (Gain) loss on disposal of fixed assets increase by $29,678 due to a vehicle sold this current quarter. Other Income (Expense) Other income (expense) during the three months ended August 31, 2021 and August 31, 2020, was ($1,548,001) and ($8,350,343), respectively. The $6,802,342 decrease in other expense was primarily attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt. ● In comparing the three months ended August 31, 2021 and the three months ended August 31, 2020, the change in fair value of derivative liabilities increased by $7,363,848 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock as well as reductions in derivative liability as a result of settlements on the underlying debt. Fair value of derivatives was largely affected by the decrease in the market price of the Company’s common stock during the current period as well as the significant reduction in convertible debt and accrued interest that occurred at the end of fiscal 2021. ● Interest expense increased by $634,215 due to a significant increase loans payable, most significantly new loans totaling over $18 million , including loans from the Series F preferred share exchanges, and other debt exchanges. ● Gain on settlement of debt was $72,709 for the quarter ended August 31, 2021 and nil in the prior year’s quarter. The Debt exchange for common shares was partially offset by a loss on the convertible debt amendment which resulted in an overall gain this quarter. Net loss We had a net loss of $4,832,373 for the three months ended August 31, 2021, compared to a net loss of $9,018,241 for the three months ended August 31, 2020. The change is primarily the result of the change in fair value of derivative liabilities and other items discussed above. - 33 - Results of Operations for the Six Months Ended August 31, 2021 and 2020 The following table shows our results of operations for the six months ended August 31, 2021 and 2020. The historical results presented below are not necessarily indicative of the results that may be expected for any future period. Revenue Period Change Six Months Ended August 31, 2021 Six Months Ended August 31, 2020 Dollars Percentage Revenues $ 701,906 $ 139,403 $ 562,503 404% Gross profit 549,026 94,102 454,924 483% Operating expenses 5,984,944 1,100,731 4,884,213 444% Loss from operations (5,435,918 ) (1,006,629 ) (4,429,289 ) 440% Other income (expense), net (35,301,373 ) (6,036,336 ) (29,265,037 ) 485% Net loss $ (40,737,291 ) $ (7,042,965 ) $ (33,694,326 ) 478% The following table presents revenues from contracts with customers disaggregated by product/service: Six Months Ended Six Months Ended Change August 31, 2021 August 31, 2020 Dollars Percentage Device rental activities $ 218,081 $ 130,203 $ 87,878 67% Direct sales of goods and services 483,825 9,200 474,625 5,159% $ 701,906 $ 139,403 $ 562,503 404% Total revenue for the six-month period ended August 31, 2021 was $701,996 which represented an increase of $562,503 compared to total revenue of 139,403 for the six months ended August 31, 2020. This large increase is a result of unit sales which includes sales of new units totaling $434,342 with the remaining increases in training revenue. Rental activities increased by 67% as well as the Company continues to grow its business. Gross profit Total gross profit for the six-month period ended August 31, 2021 was $549,026 which represented an increase of $454,924, compared to gross profit of $94,102 for the six months ended August 31, 2020. The increase resulted primarily from the increased revenues noted above. The gross profit % of 78% for the six-month period ended August 31, 2021 was higher than the margin of 68% for the prior year’s corresponding period due to the shift in sales mix. Operating Expenses Period Change Six Months Ended August 31, 2021 Six Months Ended August 31, 2020 Dollars Percentage Research and development $ 1,333,937 $ 190,401 $ 1,143,536 601% General and administrative 4,490,712 844,001 3,646,711 432% Depreciation and amortization 85,334 58,476 26,858 46% Operating lease cost and rent 104,086 7,300 96,786 1,326% (Gain) loss on disposal of fixed assets (29,125 ) 553 (29,678 ) 5,367% Operating expenses $ 5,984,944 $ 1,100,731 $ 4,884,213 444% - 34 - Our operating expenses were comprised of general and administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the six-month period ended August 31, 2021 and August 31, 2020, were $5,984,944 and $1,100,731, respectively. The overall increase of $4,884,213 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $3,646,711. In comparing the six months ended August 31, 2021 and August 31, 2020 this significant increase was primarily due to increases in production supplies by $120,974, professional fees by $534,688, wages and salaries $882,904, subcontractor fees $58,812, stock-based compensation $1,200,550,investor relations $76,000, payments under deferred variable payment obligation $134,634, duty and freight $118,921, office expenses $79,523, advertising and promotion $37,660 , and travel $217,476 with the remaining increase distributed amongst other G&A accounts. These large increases may be explained due to the large ramp up in costs this quarter to operate the new manufacturing facility, the hiring of 18 additional full-time employees and the termination costs of the former director. In addition, the expenses of the prior year’s corresponding quarter were also much lower due to the Covid 19 pandemic and the limited cash available at that time. ● Research and development increased by $1,143,536 due to funding development of new products as well as upgrades of existing products. ● Depreciation and amortization increased by $26,858 due to increases in fixed assets and revenue earning devices. ● Operating lease cost and rent increased by $96,786 due to the two new leases including four months of the new manufacturing facility for the six months ended August 31, 2021 as compared to a month-to-month lease of office space for the six months ended August 31, 2020. ● (Gain) loss on disposal of fixed assets increase by $29,678 due to a vehicle sold this current quarter. Other Income (Expense) Other income (expense) during the six months ended August 31, 2021 and August 31, 2020, was ($35,301,373) and ($6,036,336), respectively. The $29,265,037 decrease in other income was primarily attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt. ● In comparing the six months ended August 31, 2021 and the six months ended August 31, 2020, the change in fair value of derivative liabilities increased by $4,699,796 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock as well as reductions in derivative liability as a result of settlements on the underlying debt. Fair value of derivatives was largely affected by the decrease in the market price of the Company’s common stock during the current period as well as the significant reduction in convertible debt and accrued interest that occurred at the end of fiscal 2021 and first six months of fiscal 2022. ● Interest expense increased by $1,053,181 due to a significant increase loan payable, most significantly new loans totaling over $18 million , including loans from the Series F preferred share exchanges, and other debt exchanges. ● Loss on settlement of debt was $32,911,652 the quarter ended August 31, 2021 and nil in the prior year’s quarter. The amendment of the deferred variable payment obligation referred to in Note 8 led to a $33,015,215 loss which was partially offset by gains from accrued liabilities settlements and the debt exchange for common shares which was partially offset by a loss on the convertible debt amendment that resulted in an overall gain this quarter. This loss on settlement of debt is non-cash and has no effect on the cash flows of the Company. Net loss We had a net loss of $40,737,291 for the six months ended August 31, 2021, compared to a net loss of $7,042,065 for the six months ended August 31, 2020. The change is primarily the result of the loss on settlement in the six months ended August 31, 2021 as well as the change in the fair value of the derivative liabilities and other items discussed above. - 35 - Liquidity, Capital Resources and Cash Flows Management believes that we will continue to incur losses for the immediate future. Therefore, we will need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern. For the six months ended August 31, 2021, we have generated revenue and are trying to achieve positive cash flows from operations As of August 31, 2021, we had a cash balance of $2,395,389, accounts receivable of $186,435, device parts inventory of $278,427 and $6,250,160 in current liabilities. At the current cash consumption rate, we will need to consider additional funding sources going forward. We are taking proactive measures to reduce operating expenses and drive growth in revenue. The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results. Capital Resources The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated: August 31, 2021 February 28, 2021 Current assets $ 3,618,161 $ 1,207,033 Current liabilities (1) 6,250,160 4,410,710 Working capital $ (2,631,999 ) $ (3,203,677 ) __________ (1) As of August 31, 2021 and February 28, 2021, current liabilities included approximately $7,299 and $444,466, respectively, of derivative liabilities that are expected to be settled in shares of the Company in accordance with the various conversion terms. As of August 31, 2021 and February 28, 2021, we had a cash balance of $2,395,389 and $1,044,418, respectively. Summary of Cash Flows Six Months Ended August 31, 2021 Six Months Ended August 31, 2020 Net cash used in operating activities $ (6,096,978 ) $ (903,374 ) Net cash used in investing activities $ (18,042 ) $ (50,731 ) Net cash provided by financing activities $ 7,465,991 $ 1,125,651 Net cash used in operating activities. Net cash used in operating activities for the six months ended August 31, 2021 was ($6,096,978), which included a net loss of ($40,737,291), non-cash activity such as the loss on settlement of debt of $32,911,652, revenue earning device sold and expensed in cost of sales $3,255,bad debts expense $2,022, reduction of right of use asset of $ 42,684, accretion of lease liability $49,656, stock based compensation of $1,200,550, change in fair value of derivative liabilities of ($372,502), change in operating assets of ($811,451), amortization of debt discount of $1,395,799, increase in related party accrued payroll and interest of $162,438 and depreciation and amortization of $85,334 to derive the uses of cash in operations. Net cash used in investing activities. Net cash used in investing activities for the six months ended August 31, 2021 was ($18,042), which was the purchase of fixed assets of ($32,162), proceeds on disposal of fixed assets of $30,000 and ($15,880) paid for a security deposit. Net cash provided by financing activities. Net cash provided by financing activities was $7,465,991 for the six months ended August 31, 2021. This consisted of proceeds from loans payable of $7,926,146, reduced by net repayments from loan payable – related party of $118,342, settlement of convertible debt $65,000, and repayments on loans payable of $276,813. - 36 - Off-Balance Sheet Arrangements None. Critical Accounting Policies and Estimates Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K for the year ended February 28, 2021 filed with the SEC on June 1, 2021. Related Party Transactions For the six months ended August 31, 2021, the Company repaid net advances of $118,342 from its loan payable-related party. For the six months ended August 31, 2020 the Company repaid net advances of $75,328. At August 31, 2021, the loan payable-related party was $910,095 and $904,806 at February 28, 2021. Included in the balance due to the related party at August 31, 2021 is $925,001 of deferred salary and interest, $762,000 of which bears interest at 12%. At February 28, 2021, included in the balance due to the related party is $883,710 of deferred salary and interest, $642,000 of which bears interest at 12%. The accrued interest included in loan at August 31, 2021 and August 31, 2020 was $160,536 and $80,410, respectively. Pursuant to the amended Employment Agreement with its Chief Executive Officer in Note 14, the Company accrued $1,022,000 of stock-based compensation with a corresponding adjustment to incentive compensation plan payable due to the vesting cost of the equity awards. During the three and six months ended August 31, 2021 the Company was charged $1,041,788 and $562,837, respectively in consulting fees for research and development to a company partially owned by a principal shareholder During the three and six months ended August 31, 2020, the Company was charged $61,121 and $111,816, respectively for consulting fees for research and development to a company owned by a principal shareholder. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for a smaller reporting company.