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 ended May 31, 2022 and May 31, 2021 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, 2022, as filed on May 27, 2022 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. - 26 - Management Discussion and Analysis Results of Operations for the Three Months Ended May 31, 2022 and 2021 The following table shows our results of operations for the three months ended May 31, 2022 and 2021. The historical results presented below are not necessarily indicative of the results that may be expected for any future period. Period Three Months Ended Three Months Ended Change May 31, 2022 May 31, 2021 Dollars Percentage Revenues $ 385,157 $ 560,334 $ (175,177 ) (31% ) Gross profit 91,433 449,408 (357,975 ) (80% ) Operating expenses 3,588,089 2,600,954 987,135 38% Loss from operations (3,496,656 ) (2,151,546 ) (1,345,110 ) 63% Other income (expense), net (1,175,030 ) (33,753,372 ) 32,578,342 97% Net loss $ (4,671,686 ) $ (35,904,918 ) $ 31,233,232 87% Revenue The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change May 31, 2022 May 31, 2021 Dollars Percentage Device rental activities $ 239,805 $ 125,992 $ 113,813 90% Direct sales of goods and services 145,352 434,342 (288,990 ) (67% ) $ 385,157 $ 560,334 $ (175,177 ) (31% ) Total revenue for the three-month period ended May 31, 2022 was $385,157 which represented a decrease of $175,177 compared to total revenue of $560,334 for the three months ended May 31, 2021. This decrease is a result of unusually high unit sales in the previous year’s quarter. Rental activities increased by 90% over the prior year’s quarter as the Company continues to grow its core business. Gross profit Total gross profit for the three-month period ended May 31, 2022 was $91,433 which represented a decrease of $357,975 compared to gross profit of $449,408 for the three months ended May 31, 2021. The decrease resulted primarily from inventory adjustments totaling $177,475 broken down as $152,475 in inventory adjustments due to shrinkage and obsolescence and a $25,000 increase in the inventory provision to account for obsolescence. The gross profit % of 24% for the three-month period ended May 31, 2022 was lower than the gross profit % of 80% for the prior year’s corresponding period due to inventory adjustments previously mentioned. After accounting for those inventory adjustments totaling $177,475, the adjusted gross profit for the three months ended May 31, 2022 would be 70%. Operating Expenses Period Three Months Ended Three Months Ended Change May 31, 2022 May 31, 2021 Dollars Percentage Research and development $ 1,023,735 $ 634,645 $ 389,090 61% General and administrative 2,400,392 1,899,792 500,600 26% Depreciation and amortization 93,995 37,643 56,352 150% Operating lease cost and rent 69,967 28,874 41,093 142% Operating expenses $ 3,588,089 $ 2,600,954 $ 987,135 38% - 27 - 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 May 31, 2022 and May 31, 2021, were $3,588,089 and $2,600,954, respectively. The overall increase of $987,135 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $500,600. In comparing the three months ended May 31, 2022 and May 31, 2021 this increase was primarily due to increases in wages and salaries of $587,855 due to staffing of new manufacturing facility and increases in office and management staff , stock based compensation of $92,150, insurance of $102,815 due to health plan for new employees and increased liability and property insurance due to new manufacturing facility, office expenses of $35,947, travel $175,538 and advertising , marketing of $55,604 and bad debts expense due to a general provision of $105,000 on slow payers due to present economic factors. These increases were partially offset by decreases in production supplies by $183,904 due to better inventory management, professional fees of $292,374 mostly due to the severance costs of a former director in the prior year’s quarter, software and technology costs of $50,642 and subcontractor fees of $117,228 due to increase in staffing. ● Research and development increased by $389,090 due to funding development of new products as well as upgrades of existing products. ● Depreciation and amortization increased by $56,352 due to the acquisition of ERP computer software, and computer equipment and 34 new revenue earning devices. ● Operating lease cost and rent increased by $41,093 due to a new office lease for the 3 months ended May 31, 2022 leases and only one month of the new manufacturing facility for the three months ended May 31, 2021 as compared to a three full months for the three months ended May 31, 2022. Other Income (Expense) Other income (expense) consisted of the change of fair value of derivative instruments, loss on settlement of debt and interest. Other income (expense) during the three months ended May 31, 2022 and May 31, 2021, was ($1,175,030) and ($33,753,372), respectively. The $32,578,342 increase in other income was primarily attributable to the loss on settlement of debt realized in the prior year’s quarter. ● In comparing the three months ended May 31, 2022 and the three months ended May 31, 2021, the change in fair value of derivative liabilities decreased by $179,439. This represents the change in fair value for the three months ended May 31, 2021. There was no change in fair value of derivative liabilities for the three months ended May 31, 2022 as most of the underlying convertible debt has been repaid with only $3,500 remaining. The change in fair value of derivative liabilities in 2021 was 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. ● Interest expense increased by $226,580 due to an increase in both debt amortization expense and interest expense because of increases in loans payable ● Loss on settlement of debt was $32,984,361 the quarter ended May 31, 2021 and nil in the quarter ended May 31, 2022. The amendment of the deferred variable payment obligation during the prior year’s quarter led to a $33,015,215 loss which was partially offset by gains from accrued liabilities settlements. This loss on settlement of debt was non-cash and had no effect on the cash flows of the Company. Net incomes We had a net loss of $4,671,686 for the three months ended May 31, 2022, compared to a net loss of $35,904,918 for the three months ended May 31, 2021. The change is primarily the result of the loss on settlement in the three months ended May 31, 2021 as well as and other items discussed above. - 28 - 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 three months ended May 31, 2022, we have generated revenue and are trying to achieve positive cash flows from operations. As of May 31, 2022, we had a cash balance of $921,629, accounts receivable of $364,720, device parts inventory of $1,609,248 and $2,597,804 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: May 31, 2022 February 28, 2022 Current assets $ 3,215,766 $ 7,050,436 Current liabilities 2,597,804 4,547,718 Working capital $ 617,972 $ 2,502,718 As of May 31, 2022 and February 28, 2022, we had a cash balance of $921,629 and $4,648,146, respectively. Summary of Cash Flows Three Months Ended May 31, 2022 Three Months Ended May 31, 2022 Net cash used in operating activities $ (3,621,572 ) $ (3,040,776 ) Net cash used in investing activities $ (88,214 ) $ (31,242 ) Net cash (used in) provided by financing activities $ (16,731 ) $ 4,975,810 Net cash used in operating activities. Net cash used in operating activities for the three months ended May 31, 2022 was $3,621,572, which included a net loss of $4,671,686, non-cash activity such as the bad debts expense of $105,000, inventory provision $25,000, reduction of right of use asset of $30,046, accretion of lease liability $36,355, stock based compensation of $161,500, change in operating assets of $179,948, amortization of debt discount of $415,029, increase in related party accrued payroll and interest of $3,240 and depreciation and amortization of $93,995 to derive the uses of cash in operations. Net cash used in investing activities. Net cash used in investing activities for the three months ended May 31, 2022 was $88,214, which was the purchase of fixed assets, Net cash used in financing activities. Net cash used in financing activities was $16,731 for the three months ended May 31, 2022. This consisted of share proceeds net of issuance costs of $1,645,222, reduced by repayments on loans payable of $1,661,953. Off-Balance Sheet Arrangements None. - 29 - 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, 2022, as filed on May 27, 2022. Related Party Transactions For the three months ended May 31, 2022, the Company had no repayments of net advances from its loan payable-related party. For the three months ended May 31, 2021 the Company repaid net advances of $121,147. At May 31, 2022, the loan payable-related party was $196,796 and $193,556 at February 28, 2022. Included in the balance due to the related party at May 31, 2022 is $113,940 of deferred salary and interest, $108,000 of which bears interest at 12%. At February 28, 2022, included in the balance due to the related party is $110,700 of deferred salary and interest, $90,000 of which bears interest at 12%. The accrued interest included in loan at May 31, 2022 and May 31, 2021 was $5,940 and $138,858, respectively. Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months ended May 31, 2022 the Company accrued $161,500 of incentive compensation plan payable with a corresponding recognition of stock based compensation due to the expectation of additional awards being met. This will be payable in Series G Preferred Shares which are redeemable at the Company’s option at $1,000 per share. At May 31, 2022 and February 28, 2022 there was $641,000 and $479,500 of incentive compensation payable. During the three months ended May 31, 2022 and 2021, the Company was charged $1,001,734 and $478,951, respectively for consulting fees for research and development from a company partially owned by a principal shareholder. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for a smaller reporting company.