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 nine months ended November 30, 2021 and November 30, 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. 4. Creation and deployment new solutions such as ‘RAD Light My Way’, which allows end user personnel to activate RAD security devices to improve their security, situational awareness, deploy a unique deterrent and connect to monitoring security staff as may be available. 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. - 32 - Management Discussion and Analysis Selected Results Per Quarter for Fiscal 2021 Q3 Q2 Q1 Three Months Ended Three Months Ended Three Months Ended November 30, 2021 August 31, 2021 May 31, 2021 Revenues $ 373,897 $ 141,572 $ 560,334 Gross profit 230,473 99,618 449,408 Operating expenses 5,118,000 3,383,990 2,600,954 Loss from operations (4,887,527 ) (3,284,372 ) (2,151,546 ) Other income (expense), net (2,206,915 ) (1,548,001 ) (33,753,372 ) Net income (loss) $ (7,094,442 ) $ (4,832,373 ) $ (35,904,918 ) Sales grew by 166% in Q3 over Q2. This is due to direct sales of new products increasing by $190,347 and device rental activities increasing by $41,978. Q1 sales were higher due to large direct sales during that quarter of $434,342. This sales growth is a result of an expansion of our customer base and product line and our ability to ramp up production to meet demand. We expect to continue this growth trend in the fourth quarter and in our next fiscal year as projects accelerate through the sales funnel. We expect an increase to the rate of growth in 2023 as we start to deliver on new products. Operating expense increases considerably in Q3 and Q2 mostly as a result of $1,979,500 in equity awards and the new production facility which commenced in May 2021 of this fiscal year. Other expenses increased due to the Series F Preferred Stock and debt settlements that have been occurring throughout the fiscal year. Results of Operations for the Three Months Ended November 30, 2021 and 2020 The following table shows our results of operations for the three months ended November 30, 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 November 30, 2021 Three Months Ended November 31, 2020 Dollars Percentage Revenues $ 373,897 $ 119,700 $ 254,197 212% Gross profit 230,473 95,018 135,455 143% Operating expenses 5,118,000 995,092 4,122,908 414% Loss from operations (4,887,527 ) (900,074 ) (3,987,453 ) 443% Other income (expense), net (2,206,915 ) 4,308,379 (6,515,294 ) (151% ) Net loss $ (7,094,442 ) $ 3,408,305 $ (10,502,747 ) (308% ) - 33 - The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change November 30, 2021 November 30, 2020 Dollars Percentage Device rental activities $ 165,353 $ 84,600 $ 80,753 95% Direct sales of goods and services 208,544 35,100 173,444 494% $ 373,897 $ 119,700 $ 254,197 212% Total revenue for the three-month period ended November 30, 2021 was $373,897 which represented an increase of $254,197 compared to total revenue of $119,700 for the three months ended November 30, 2020. This large increase is a result of increases in rental activities of $80,753 and direct sales of goods and services of $173,444 as the Company continues to grow its business. Gross profit Total gross profit for the three-month period ended November 30, 2021 was $230,473 which represented an increase of $135,455, compared to gross profit of $95,018 for the three months ended November 30, 2020. The increase resulted primarily from the increased revenues noted above. The gross profit % of 62% for the three-month period ended November 30, 2021 was lower than the margin of 79% for the prior year’s corresponding period due to different sales mix. Operating Expenses Period Change Three Months Ended November 30, 2021 Three Months Ended November 31, 2020 Dollars Percentage Research and development $ 982,446 $ 20,624 $ 961,822 4,664% General and administrative 3,964,512 941,323 3,023,189 321% Depreciation and amortization 67,927 30,145 37,782 125% Operating lease cost and rent 103,115 3,000 100,115 3,337% Operating expenses $ 5,118,000 $ 995,092 $ 4,122,908 414% 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 November 30, 2021 and November 30, 2020, were $5,118,000 and $995,092, respectively. The overall increase of $4,122,908 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $3,023,189. In comparing the three months ended November 30, 2021 and November 30, 2020 this significant increase was primarily due to increases in advertising and promotion by $47,250, professional fees by $184,908, wages and salaries by $1,765,645 (including bonus expense to CEO of $1,311,739), stock-based compensation by $957,500, and travel by $102,809 and with the remaining increase and offsets 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 $961,822 due to funding development of new products as well as upgrades of existing products. ● Depreciation and amortization increased by $37,782 due to increases in fixed assets and revenue earning devices. ● Operating lease cost and rent increased by $100,115 due to the three new leases including the new manufacturing facility for the three months ended November 30, 2021 as compared to a month-to-month lease of only office space for the three months ended November 30, 2020. - 34 - Other Income (Expense) Other income (expense) during the three months ended November 30, 2021 and November 30, 2020, was ($2,206,915) and $4,308,379, respectively. The $ 6,515,294 increase 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 November 30, 2021 and the three months ended November 30, 2020, the change in fair value of derivative liabilities decreased by $5,354,622 was solely the change in fair value for the three months ended November 30, 2020y due to the re-valuation of the derivative liability on convertible notes and accrued interest based on the change in the market price of the Company’s common stock. The valuation of the derivatives associated with our convertible notes and accrued interest of the notes is dependent upon a number of estimates developed by management. Included in those estimates are the timing and availability of common stock underlying the conversion of the notes and accrued interest. Our notes generally contain provisions such that the holders are barred from conversion of any amount of principal or interest should that conversion cause their ownership of common stock to exceed 4.99% of the then outstanding common stock of the Company. Because of this, the amount of the derivative can at times be limited due to this factor. In the quarter ended November 30, 2020, the reduction of convertible notes and accrued interest through conversions as well as an increase in the subsequent redemption assumption due to the settlement arrangements describe in Note 8. The result of this was a significant decrease in the liability reported as of November 30, 2020 and an increase in the change in fair value of derivative liabilities. ● Interest expense increased by $973,979 due to a significant increase loans payable, most significantly new loans totaling over $19 million, including loans from the Series F preferred share exchanges, and other debt exchanges. ● Loss on settlement of debt was $156,661 for the quarter ended November 30, 2021 and a $30,032 gain in the prior year’s quarter. The company settled defaulted debt at a loss this quarter. Net loss We had a net loss of $7,094,442 for the three months ended November 30, 2021, compared to net income of $3,408,305 for the three months ended November 30, 2020. The change is primarily the result of the change in fair value of derivative liabilities and other items discussed above. Results of Operations for the Nine Months Ended November 30, 2021 and 2020 The following table shows our results of operations for the nine months ended November 30, 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 Nine Months Ended November 30, 2021 Nine Months Ended November 31, 2020 Dollars Percentage Revenues $ 1,075,803 $ 259,103 $ $816,700 315% Gross profit 779,499 189,120 590,379 312% Operating expenses 11,102,944 2,095,823 9,007,121 430% Loss from operations (10,323,445 ) (1,906,703 ) (8,416,742 ) 441% Other income (expense), net (37,508,288 ) (1,727,957 ) (35,780,331 ) (2,071% ) Net loss $ (47,831,733 ) $ (3,634,660 ) $ (44,197,073 ) (1,216% ) - 35 - The following table presents revenues from contracts with customers disaggregated by product/service: Nine Months Ended Nine Months Ended Change November 30, 2021 November 30, 2020 Dollars Percentage Device rental activities $ 383,434 $ 214,803 $ 168,631 79% Direct sales of goods and services 692,369 44,300 648,069 1,463% $ 1,075,803 $ 259,103 $ 816,700 315% Total revenue for the nine-month period ended November 30, 2021 was $1,075,803 which represented an increase of $816,700 compared to total revenue of $259,103 for the nine months ended November 30, 2020. This large increase in direct sales is a result of unit sales which includes sales of new units totaling $575,813 with the remaining increases in training revenue. Rental activities increased by 79% as well as the Company continues to grow its business. Gross profit Total gross profit for the nine-month period ended November 30, 2021 was $779,499 which represented an increase of $590,379, compared to gross profit of $189,120 for the nine months ended November 30, 2020. The increase resulted primarily from the increased revenues noted above. The gross profit % of 72% for the nine-month period ended November 30, 2021 which was consistent with the 73% gross profit for the prior year’s corresponding period. Operating Expenses Period Change Nine Months Ended November 30, 2021 Nine Months Ended November 31, 2020 Dollars Percentage Research and development $ 2,316,383 $ 211,025 $ 2,105,358 998% General and administrative 8,455,224 1,780,824 6,674,400 375% Depreciation and amortization 153,261 88,621 64,640 73% Operating lease cost and rent 207,201 14,800 192,401 1,300% (Gain) loss on disposal of fixed assets (29,125 ) 553 (29,678 ) 5,367% Operating expenses $ 11,102,944 $ 2,095,823 $ 9,007,121 430% 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 nine-month period ended November 30, 2021 and November 30, 2020, were $11,102,944 and $2,095,823, respectively. The overall increase of $9,007,121 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $6,674,400. In comparing the nine months ended November 30, 2021 and November 30, 2020 this significant increase was primarily due to increases in professional fees by $719,576, wages and salaries $2,994,796 (including bonus to CEO of $1,311,739), stock-based compensation $1,795,966, health insurance $87,303, investor relations $71,250, payments under deferred variable payment obligation $126,492, duty and freight $182,843, office expenses $148,847, advertising and promotion $77,908, bad debts expense $103,900 , software and technology $97,350,warehouse expense $73,362, and travel $278,883 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 year 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 $2,105,358 due to funding development of new products as well as upgrades of existing products. ● Depreciation and amortization increased by $64,640 due to increases in fixed assets and revenue earning devices. ● Operating lease cost and rent increased by $192,401 due to the three new leases including seven months of the new manufacturing facility for the nine months ended November 30, 2021 as compared to a month-to-month lease of office space for the nine months ended November 30, 2020. ● (Gain) loss on disposal of fixed assets decreased by $29,678 due to a vehicle sold this current quarter. - 36 - Other Expense Other expense during the nine months ended November 30, 2021 and November 30, 2020, was $37,508,288 and 1,727,957, respectively. The $ 35,780,331 increase in other income was attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt. ● In comparing the nine months ended November 30, 2021 and the nine months ended November 30, 2020, the change in fair value of derivative liabilities decreased by $654,826 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 nine months of fiscal 2022. ● Interest expense increased by $2,027,160 due to a significant increase loan payable, most significantly new loans totaling over $19 million, including loans from the Series F preferred share exchanges, and other debt exchanges. ● Loss on settlement of debt was $33,068,313 the quarter ended November 30, 2021 and a gain of $30,032 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 $47,831,733 for the nine months ended November 30, 2021, compared to a net loss of $3,634,660 for the nine months ended November 30, 2020. The change is primarily the result of the loss on settlement in the nine months ended November 30, 2021 as well as the large increase in operating cost attributable to the new factory and payroll increases and other items discussed above. 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 nine months ended November 30, 2021, we have generated revenue and are trying to achieve positive cash flows from operations As of November 30, 2021, we had a cash balance of $4,103,864, share proceeds receivable of $ 1,007,349, accounts receivable of $281,007, device parts inventory of $1,336,065 and $7,418,470 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: November 30, 2021 February 28, 2021 Current assets $ 7,120,096 $ 1,207,033 Current liabilities (1) 7,418,470 4,410,710 Working capital $ (298,374 ) $ (3,203,677 ) __________ (1) As of November 30, 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. - 37 - As of November 30, 2021 and February 28, 2021, we had a cash balance of $4,103,864 and $1,044,418, respectively. Nine Months Ended November 30, 2021 Nine Months Ended November 30, 2020 Net cash used in operating activities $ (10,434,762 ) $ (1,446,075 ) Net cash used in investing activities $ (46,751 ) $ (76,577 ) Net cash provided by financing activities $ 13,540,949 $ 1,758,642 Net cash used in operating activities. Net cash used in operating activities for the nine months ended November 30, 2021 was ($10,434,762), which included a net loss of ($47,831,733), non-cash activity such as the loss on settlement of debt of $33,068,313, revenue earning device sold and expensed in cost of sales $3,410, bad debts expense $107,022, reduction of right of use asset of $75,609, accretion of lease liability $86,350, stock based compensation of $2,158,050, change in fair value of derivative liabilities of ($372,502), gain on disposal of fixed assets ($29,125) change in operating assets of ($773,791), amortization of debt discount of $2,700,233, increase in related party accrued payroll and interest of $220,140 and depreciation and amortization of $153,261 to derive the uses of cash in operations. Net cash used in investing activities. Net cash used in investing activities for the nine months ended November 30, 2021 was ($46,751), which was the purchase of fixed assets of ($34,534), acquisition of trademarks ($26,327), proceeds on disposal of fixed assets of $30,000 and ($15,880) paid for security deposits. Net cash provided by financing activities. Net cash provided by financing activities was $13,540,949 for the nine months ended November 30, 2021. This consisted of share proceeds net of issuance costs of $7,463,654, proceeds from loans payable of $9,426,146, reduced by net repayments from loan payable – related party of $812,234, settlement of convertible debt $65,000, repayments on loans payable of $471,617, dividend on redemption on cancelled issuable Series F preferred shares ($500,000) , and Series G preferred shares redeemed as payment on incentive plan ($1,500,000). 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 nine months ended November 30, 2021, the Company repaid net advances of $812,234 from its loan payable-related party. For the nine months ended November 30, 2020 the Company repaid net advances of $344,618. At November 30, 2021, the loan payable-related party was $134,234 and $904,806 at February 28, 2021. Included in the balance due to the related party at November 30, 2021 is $54,000 of deferred salary and interest, $54,000 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 November 30, 2021 and November 30, 2020 was $540 and $84,418, respectively. Pursuant to the amended Employment Agreement with its Chief Executive Officer in Note 14, the Company accrued $1,979,500 of stock-based compensation with a corresponding adjustment to incentive compensation plan payable due to the vesting cost of the equity awards. These awards are payable through the issuance of Series G Preferred Shares which are redeemable at the Company’s option at $1,000 per share. The Company will classify these awards granted as Series G Preferred Shares as a liability accordingly because of those terms. The Company issued and redeemed 1500 Series G Preferred Shares for $1,500,000 as payment on achieved equity awards. - 38 - During the three and nine months ended November 30, 2021 the Company was charged $1,041,788 and $562,837, respectively in consulting fees for research and development by a company partially owned by a principal shareholder. The principal shareholder with a minority interest in the related party has received no compensation from the related party company. During the three and nine months ended November 30, 2020, the Company was charged $10,157 and $121,973, respectively for consulting fees for research and development by a company owned by a principal shareholder, who received no compensation from the related party company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for a smaller reporting company.