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 and six months ended August 31, 2022 and August 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. - 29 - Table of Contents Management Discussion and Analysis Results of Operations for the Three Months Ended August 31, 2022 and 2021 The following table shows our results of operations for the three months ended August31, 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 August 31, 2022 August 31, 2021 Dollars Percentage Revenues $ 267,484 $ 141,572 $ 125,912 89% Gross profit 233,270 99,618 133,652 134% Operating expenses 3,411,702 3,383,990 27,712 1% Loss from operations (3,178,432 ) (3,284,372 ) 105,940 (3% ) Other income (expense), net (994,433 ) (1,548,001 ) 553,568 36% Net income (loss) $ (4,172,865 ) $ (4,832,373 ) $ 659,508 14% Revenue The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change August 31, 2022 August 31, 2021 Dollars Percentage Device rental activities $ 228,214 $ 123,375 $ 104,839 85% Direct sales of goods and services 39,270 18,197 21,073 116% $ 267,484 $ 141,572 $ 125,912 89% Total revenue for the three-month period ended August 31, 2022 was $267,484 which represented an increase of $125,912 compared to total revenue of $141,572 for the three months ended August 31, 2021. This increase is a result of higher rental sales in the current year’s quarter. Rental activities increased by 85% over the prior year’s quarter as the Company continues to grow its core business. Direct sales was driven by an increase in training revenue and grew by 116% over last year’s quarter. Gross profit Total gross profit for the three-month period ended August 31, 2022 was $233,270, which represented an increase of $133,652 compared to gross profit of $99,618 for the three months ended August 31, 2021. The gross profit increased due to the higher sales and inventory changes. The gross profit % of 87% for the three-month period ended August 31, 2022 was higher than the gross profit % of 70% for the prior year’s corresponding period. Operating Expenses Period Three Months Ended Three Months Ended Change August 31, 2022 August 31, 2021 Dollars Percentage Research and development $ 963,786 $ 699,292 $ 264,494 38% General and administrative 2,238,442 2,590,920 (352,478 ) (14% ) Depreciation and amortization 145,793 47,691 98,102 206% Operating lease cost and rent 63,681 75,212 (11,531 ) (15% ) Gain loss on disposal of fixed assets — (29,125 ) (29,125 ) 100% Operating expenses $ 3,411,702 $ 3,383,990 $ 27,712 1% - 30 - Table of Contents 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, 2022 and August 31, 2021, were $3,411,702 and $3,383,990, respectively. The overall increase of $27,712 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses decreased by $352,478. In comparing the three months ended August 31, 2022 and August 31, 2021 this decrease was primarily due to these changes increases in the following: wages and salaries of $350,555 due to staffing of new manufacturing facility and increases in office and management staff , insurance of $75,282 due to health plan for new employees and increased liability and property insurance due to new manufacturing facility, advertising , sales and marketing of $158,699, office expenses of $36,400 and bad debts expense due to a general provision of $40,000 on slow payers due to present economic factors. These increases offset these following decreases: stock based compensation of $949,700 for prior charges based on CEO incentive plan and travel $41,983 . ● Research and development increased by $264,494 due to funding development of new products as well as upgrades of existing products. Included in that increase is the increase in research and development paid to a related party of $394,557. ● Depreciation and amortization increased by $98,102 due to the acquisition of ERP computer software, computer equipment tooling, and 18 new revenue earning devices. ● Operating lease cost and rent decreased by $11,531 due to one less office lease for the three months ended August 31, 2022 comparing to the three months ended August 31, 2021 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 August 31, 2022 and August 31, 2021, was ($994,433) and ($1,548,001), respectively. The $553,568 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 August 31, 2022 and the three months ended August 31, 2021, the change in fair value of derivative liabilities decreased by $189,468. The change in fair value of derivative liabilities 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. As there was no derivative liabilities resulting from the conversion features of the convertible debt at August 31, 2022 the corresponding change in fair value was significantly lower when comparing the prior year’s quarter. ● Interest expense decreased by $811,753 due to a decrease in debt amortization expense. The three months ended August 31, 2021 had higher amortization due to debt settlements. ● Gain on settlement of debt was $3,992 the quarter ended August 31, 2022 and $72,709 in the quarter ended August 31, 2022. Net loss We had a net loss of $4,172,865 for the three months ended August 31, 2022, compared to a net loss of $4,832,373 for the three months ended August 31, 2021. The decrease in net loss of $659,508 is primarily as a result higher revenues and lower other expense in the three months ended August 31, 2022 as well as and other items discussed above. - 31 - Table of Contents Results of Operations for the Six Months Ended August 31, 2022 and 2021 The following table shows our results of operations for the six months ended August 31, 2022 and 2021. The historical results presented below are not necessarily indicative of the results that may be expected for any future period. Revenue Period Six Months Ended Six Months Ended Change August 31, 2022 August 31, 2021 Dollars Percentage Revenues $ 652,641 $ 701,906 $ (49,265 ) (7% ) Gross profit 324,703 549,026 (224,323 ) (41% ) Operating expenses 6,999,791 5,984,944 1,014,847 17% Loss from operations (6,675,088 ) (5,435,918 ) (1,239,170 ) 23% Other income (expense), net (2,169,463 ) (35,301,373 ) 33,131,910 94% Net loss $ (8,844,551 ) $ (40,737,291 ) $ 31,892,740 78% The following table presents revenues from contracts with customers disaggregated by product/service: Six Months Ended Six Months Ended Change August 31, 2022 August 31, 2021 Dollars Percentage Device rental activities $ 468,019 $ 218,081 $ 249,938 115% Direct sales of goods and services 184,622 483,825 (299,203 ) (62% ) $ 652,641 $ 701,906 $ (49,265 ) (7% ) Total revenue for the six-month period ended August 31, 2022 was $652,641 which represented a decrease of $49,265 compared to total revenue of $701,996 for the six months ended August 31, 2021. The small decrease was a result of unusually large unit sales which includes sales of new units totaling $434,342 which occurred in the six months ended August 31, 2021 .This was partially offset by a 115% increase in rental activities increased as the Company continues to grow its rental business. Gross profit Total gross profit for the six-month period ended August 31, 2022 was $324,703 which represented a decrease of $224,323, compared to gross profit of $549,026 for the six months ended August 31, 2021. The decrease resulted both from lower revenues noted above as well as cost of sales increases in 2022 due to inventory changes. The gross profit percentage of 50% for the six-month period ended August 31, 2022 was lower than the margin of 78% for the prior year’s corresponding period was primarily due to inventory adjustments due to shrinkage and obsolescence totaling $152,475, which occurred in the first quarter. Before these adjustments the gross profit % for the six months ended August 31, 2022 would have been a comparable 73%. Operating Expenses Period Six Months Ended Six Months Ended Change August 31, 2022 August 31, 2021 Dollars Percentage Research and development $ 1,987,521 $ 1,333,937 $ 653,584 49% General and administrative 4,638,834 4,490,712 148,122 3% Depreciation and amortization 239,788 85,334 154,454 181% Operating lease cost and rent 133,648 104,086 29,562 28% (Gain) loss on disposal of fixed assets — (29,125 ) 29,125 (100% ) Operating expenses $ 6,999,791 $ 5,984,944 $ 1,014,847 17% - 32 - Table of Contents 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, 2022 and August 31, 2021, were $6,999,791 and $5,984,944, respectively. The overall increase of $1,014,847 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $148,122. In comparing the six months ended August 31, 2022 and August 31, 2021 may be partially explained by the following increases: wages and salaries by $1,004,437, sales and marketing by $231,205, travel by $97,118, insurance by $178,077, duty and freight by $29,837, and office expense by $78,308. These were partially offset by decreases in the following accounts: production supplies by $109,037, professional fees by $408,682, subcontractor fees $100,294 and stock-based compensation $857,550. ● Research and development increased by $653,584 due to funding development of new products as well as upgrades of existing products. Included in that increase is the increase in research and development paid to a related party of $917,341. ● Depreciation and amortization increased by $154,454 due to the acquisition of ERP computer software, computer equipment tooling, and 54 new revenue earning devices. ● Operating lease cost and rent increased by $29,562 due the manufacturing facility lease, six full months for the six months ended August 31, 2022 compared to only 4 months for the six months ended August 31, 2021. ● (Gain) loss on disposal of fixed assets increase by $29,125 due to a vehicle sold in the prior year. Other Income (Expense) Other income (expense) during the six months ended August 31, 2022 and August 31, 2021, was ($2,169,463) and ($35,301,373), respectively. The $33,131,910 increase 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, 2022 and the six months ended August 31, 2021, the change in fair value of derivative liabilities decreased by $368,907 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. ● Interest expense increased by $585,173 due to increases in loan and convertible notes payable ● Gain (loss) on settlement of debt was $3,992 the six months ended August 31, 2022 and ($32,911,652) in six months ended August 31, 2022. This current period the gain was a result of the reduction of the derivative liability , the prior year’s period has an amendment of the deferred variable payment obligation that led to a $33,015,215 loss which was partially offset by gains from accrued liabilities settlements and the debt exchange for common shares. This loss on settlement of debt was non-cash and has no effect on the cash flows of the Company. Net loss We had a net loss of $8,844,551 for the six months ended August 31, 2022, compared to a net loss of $40,737,291 for the six months ended August 31, 2021. 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. 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. - 33 - Table of Contents As of August 31, 2022, we had a cash balance of $363,073, accounts receivable of $442,652, device parts inventory of $1,640,891 and $3,466,248 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, 2022 February 28, 2022 Current assets $ 3,296,568 $ 7,050,436 Current liabilities 3,466,248 4,547,718 Working capital $ (169,680 ) $ 2,502,718 As of August 31, 2022 and February 28, 2022, we had a cash balance of $363,073 and $4,648,146, respectively. Summary of Cash Flows Summary of Cash Flows Six Months Ended August 31, 2022 Six Months Ended August 31, 2021 Net cash used in operating activities $ (6,754,462 ) $ (6,096,978 ) Net cash used in investing activities $ (207,197 ) $ (18,042 ) Net cash provided by financing activities $ 2,676,586 $ 7,465,991 Net cash used in operating activities. Net cash used in operating activities for the six months ended August 31, 2022 was $6,754,462, which included a net loss of $8,844,551, non-cash activity such as the bad debts expense of $145,000, inventory provision $70,000, reduction of right of use asset of $56,854, accretion of lease liability $72,090, stock based compensation of $343,000, change in value of derivative liabilities of ($3,595), gain on settlement of debt of ($3,992) , change in operating assets of $492,871, amortization of debt discount of $671,594, increase in related party accrued payroll and interest of $6,480 and depreciation and amortization of $239,786 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, 2022 was $207,197, which was the purchase of fixed assets, Net cash provided by financing activities. Net cash provided by financing activities was $2,676,586 for the six months ended August 31, 2022. This consisted of share proceeds net of issuance costs of $3,255,289,procees from convertible notes payable of $619,250, proceeds from loans payable of $500,000, reduced by repayments on loans payable of $1,697,953. 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, 2022, as filed on May 27, 2022. - 34 - Table of Contents Related Party Transactions For the six months ended August 31, 2022, the Company had no repayments of net advances from its loan payable-related party. For the six months ended August 31, 2021 the Company repaid net advances of $118,342. At August 31, 2022, the loan payable-related party was $200,036 and $193,556 at February 28, 2022. Included in the balance due to the related party at August 31, 2022 is $123,504 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 August 31, 2022 and August 31, 2021 was $9,180 and $160,536 respectively. Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months and six ended August 31, 2022, the Company accrued $63,000 and $224,500 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 August 31, 2022 and February 28, 2022, there was $704,000 and $479,500 of incentive compensation payable. During the three months ended August 31, 2022 and 2021, the Company was charged $957,395 and $562,837, respectively for fees for research and development from a company partially owned by a principal shareholder. During the six months ended August 31, 2022 and 2021, the Company was charged $1,959,129 and $1,041,788, respectively for 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.