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 nine months ended November 30, 2022 and November 30, 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 Artificial Intelligence Technology Solutions Inc. (“we”, “our, “us”, “AITX” or the “Company”) was incorporated in Florida on March 25, 2010 as On the Move Systems Inc. and was quoted on OTC Pinks as ‘OMVS’. We reincorporated in Nevada on February 17, 2015. Our fiscal year end is February 28 (February 29 during leap year). We are located at 10800 Galaxie Ave., Ferndale, Michigan 48220, and our telephone number is 877-767-6268. We completed a stock ticker change to AITX in 2018. Steve Reinharz became our Chief Executive Officer in March 2021 and is the founder of our primary wholly owned subsidiary, Robotic Assistance Devices, Inc. (RAD). We have a 3-year executive compensation agreement with our CEO. Our mission is to apply artificial intelligence (AI) technology to solve enterprise security-related problems categorized as expensive, repetitive, difficult to staff, dangerous, and outside of the core competencies of the client organization. For example: ● 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. ● Integrated hardware/software with AI-driven responses simulating and expanding on what legacy or manned solutions could perform. ● Performance of difficult, rare, and high value tasks such as firearm detection and immediate response whether autonomously or with human assistance. ● Automation of common access control functions through technology utilizing facial recognition and machine vision, leapfrogging over most legacy solutions in use today. ● Patrol and response of commercial, industrial and government areas requiring heightened security work to be completed via autonomous mobile robotics devices. RAD solutions are unique due to their functionalities, as follows: ● Start with an AI-driven autonomous response utilizing cellular-optimized communications, while easily connecting to a human operator for a manned response, as needed. ● Use RAD’s exclusive hardware and software, purpose-built by for delivery of these solutions. Various form factors have been customized to deliver this new functionality, both mobile and stationary. ● 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. ● Perform workflow functions via purpose-built fixed and mobile devices with unique technology and methodology. - 30 - Table of Contents Through our subsidiary, Robotic Assistance Devices, Inc. (RAD), AITX is redefining the $25 billion (US) security and guarding services industry through its broad lineup of innovative, AI-driven Solutions-as-a-Service business model. RAD solutions are specifically designed to provide a cost savings to businesses of between 35% and 80% when compared to the industry’s existing and costly manned security guarding and monitoring model. RAD delivers this costs savings via a suite of stationary and mobile robotic security solutions that complement, and at times, directly replace the need for human personnel in environments better suited for machines. At the beginning of the prior fiscal year ended February 28, 2022, AITX began its 10-year lease at its 29,316 sq ft manufacturing facility outside of Detroit, Michigan, hired the employees, and acquired the infra-structure to support it. This facility, referred to by RAD as ‘the REX’ positions AITX to achieve its growth objectives and meet future sales demands. As of January 16, 2023, there were approximately 300 RAD units deployed with approximately 290 units on backorder, in production or en route to deployment. Additionally, RAD has reported a total authorized dealer count of 55. RAD distributes its products through a combination of direct sales to end-users and opportunities developed through its dealer channel. Our 85 employees as of January 16, 2023 constitute our workforce that supports the necessary infrastructure (Engineering, Production, Business Development, Marketing, Administration) built to achieve our growth objectives and meet future sales demands. We strive for rapid growth and creation/expansion of our departments and teams; however, this creates significant challenges that if unsuccessful will negatively impact our results of operations. We and our subsidiaries have launched several new solutions during the 3 rd quarter of the current fiscal year (FY2023), including: ● RIO™, a portable, solar-powered, wide-area security device. RIO was formally introduced to the security industry at one of its premier trade shows, GSX 2022 in Atlanta in September 2022. ● ROSA-P, a switched-powered security and safety solution that powers RAD’s best-selling ROSA 3.x where power does not currently exist in the industry at night. ● RADDOG™, the security industry’s purpose-built mobile robot dog. ● ROSS™, a software solution which enables millions of IP security cameras presently deployed with the ability to connect with the RAD ecosystem (RADSoC). ROSS empowers these non-RAD cameras to run the same AI analytic capabilities as other RAD hardware solutions. ● Wholly owned subsidiary Robotic Assistance Devices Group, Inc. (RAD-G) announced the launch of a sales initiative targeting OEM markets. This market development endeavor marks our first of its kind and involves the placement of hardware and software solutions developed across all subsidiaries for use in other vertical markets through OEM suppliers. ● Wholly owned subsidiary Robotic Assistance Devices Mobile, Inc., is expected to make a new solution announcement sometime in FY2024. These solutions utilize the comprehensive RAD platform to offer unparalleled, all-in-one, security and safety solutions that can be implemented within a half hour. These solutions include cutting-edge features such as the detection of firearms, deterrents for trespassing, peripheral surveillance, management of visitors, and more. RAD’s sales funnel has experienced substantial growth in both volume and value. RAD is working towards adding the following deployments to be in place by February 29, 2024: ● 25 ROAMEOs, the robust mobile-patrolling security robot. The current schedule, subject to engineering development timelines, parts availability and manufacturing, has these ROAMEO units available to ship to clients and start billing as soon as August 2023. We expect to deploy 5-10 a month beginning in August. Pre-selling has begun with the goal of exceeding 25 units for FY2024. ● 150 RIOs, portable solar-powered, wide-area security devices. RAD’s largest dealer is expected to add this to their line card by May 2023 which we can reasonably expect will drive significant volume. Management expects RIO revenue to begin significance towards the end of Q2 FY2024. - 31 - Table of Contents ● 350 ROSAs / ROSA-Ps, stationary security and safety solutions. This number of ROSA & ROSA P units is roughly at the same run rate as the last few months of calendar year 2022 and is considered by management to be easily achievable. Management expects a minimum of 30 units being added monthly to recurring monthly revenue beginning March 1, 2023. ● 100 AVAs, an autonomous access control / vehicle access device. AVA 3.0 units hit 10 deployed units by mid-January. Early indications of market reception are positive and it’s expected that dealers will begin ordering in greater quantities as management gathers more case studies and references. ● 15 RADDOG™, the security industry’s purpose-built robot dog. RADDOG version 1.0 was first publicly displayed on December 7, 2022 at the Company’s Investor Open House and Technology Reveal. As was stated at that time all of our tests were successful and we are moving forward with a larger, stronger version to commercialize. This version will be shown at the ISC West trade show in Las Vegas at the end of March and will be available to ship to clients in the May time frame. The projected number of 15 is considered conservative by management for FY2024. ● 5000 IP camera integrations via ROSS. These are expected to be ‘take-over’ or ‘side-by-side’ type deployments featuring pre-existing LAN connected IP security cameras. ‘Take-over’ deployments would replace the pre-existing Video Management System and ‘side-by-side’ deployments would leave the existing systems in place and use secondary camera feeds through ROSS. ● 35 TOM autonomous visitor management devices. TOM, an acronym for ‘The Office Manager’ is the evolution and replacement for Wally™. ‘TOM+’ is scheduled for development and release in FY2024. Currently RAD’s largest single client has deployed TOM units throughout the US and at two European locations. Given monthly sales orders it is expected that this 35 unit target could be met entirely by this one client. We are discussing rolling the product out to its dealer channel as at the moment it is only available to this single client. The realization of the deployments, if successful and if within a 10% range of standard RAD dealer pricing, will result in our recurring monthly revenues reaching approximately $800,000, and if achieved, would enable us to attain positive cash flow. As such, we will continue to focus on improving existing team members’ efficiency and productivity with a focus on retention. Achievement of the sales goals listed herein will require approximately 5% to 10% headcount growth in the production and deployment teams which could push back the goals of positive cash flow. Several significant new clients are expected to receive their deployments in FY2024 and are expected to be public. Security is generally a private corporate function and we note that prior clients that have been publicized have been inundated with shareholder phone calls looking for further verification. It is for these reasons that we will continue to rarely pursue publicization of end users. FY2024 will feature balancing efforts on cost savings with accelerated growth in order to increase probability of achieving targeted positive cash flow targets. Management Discussion and Analysis Results of Operations for the Three Months Ended November 30, 2022 and 2021 The following table shows our results of operations for the three months ended November 30, 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 November 30, 2022 November 30, 2021 Dollars Percentage Revenues $ 402,399 $ 373,897 $ 28,502 8% Gross profit 276,439 230,473 45,966 20% Operating expenses 3,090,941 5,118,000 (2,027,059 ) (40% ) Loss from operations (2,814,502 ) (4,887,527 ) 2,073,025 42% Other income (expense), net (1,271,158 ) (2,206,915 ) 935,757 42% Net income (loss) $ (4,085,660 ) $ (7,094,442 ) $ 3,008,782 42% - 32 - Table of Contents Revenue The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change November 30, 2022 November 30, 2021 Dollars Percentage Device rental activities $ 154,628 $ 165,353 $ (10,725 ) (6% ) Direct sales of goods and services 247,771 208,544 39,227 19% $ 402,399 $ 373,897 $ 28,502 8% Total revenue for the three-month period ended November 30, 2022 was $402,399 which represented an increase of $28,502 compared to total revenue of $373,897 for the three months ended November 30, 2021. This increase is a result of higher direct sales in the current year’s quarter. Gross profit Total gross profit for the three-month period ended November 30, 2022 was $276,439, which represented an increase of $45,966 compared to gross profit of $230,473 for the three months ended November 30, 2021. The gross profit increased due to the higher sales and variations in product mix sales. The gross profit % of 69% for the three-month period ended November 30, 2022 was higher than the gross profit % of 62% for the prior year’s corresponding period. Operating Expenses Period Three Months Ended Three Months Ended Change November 30, 2022 November 30, 2021 Dollars Percentage Research and development $ 813,313 $ 982,446 $ (169,133 ) (17% ) General and administrative 2,123,768 3,964,512 (1,840,744 ) (46% ) Depreciation and amortization 92,855 67,927 24,928 37% Operating lease cost and rent 61,005 103,115 (42,110 ) (41% ) Operating expenses $ 3,090,941 $ 5,118,000 $ (2,027,059 ) (40% ) 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, 2022 and November 30, 2021, were $3,090,941 and $5,118,000, respectively. The overall decrease of $2,027,059 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses decreased by $1,840,744. In comparing the three months ended November 30, 2022 and November 30, 2021 this decrease was primarily due to the following decreases: stock based compensation of $819,500 for higher prior year charges based on the CEO incentive plan, wages and salaries for prior year bonuses paid, bad debts expense of $25,785 and professional fees of $126,435. These decreases were offset by the following increases: insurance of $51,485 due to health plan for new employees and increased liability and property insurance due to new manufacturing facility, advertising , sales and marketing of $82,893, subcontractor fees of $13,802, travel of $18,004, duty and freight of $36,230 and bad debts expense due to a general provision of $40,000 on slow payers due to present economic factors. ● Research and development decreased by $169,133 due to higher activity in the prior year in R&D design and equipment for the development of new products such as ROAMEO and AVA, as well as upgrades of existing products. That decrease was partially offset by an increase in research and development paid to a related party of $146,995. ● Depreciation and amortization increased by $24,928 due to the acquisition of computer equipment and new revenue earning devices. ● Operating lease cost and rent decreased by $42,110 due to one less office lease for the three months ended November 30, 2022 comparing to the three months ended November 30, 2021. - 33 - Table of Contents 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 November 30, 2022 and November 30, 2021, was ($1,271,158) and ($2,206,915), respectively. The $935,757 decrease in other expense, net was primarily attributable to reduced interest expense. ● Interest expense decreased by $779,096 due to a decrease in debt amortization expense. The three months ended November 30, 2021 had higher amortization due to debt settlements. ● Loss on settlement of debt was $0 the quarter ended November 30, 2022 and $156,661 in the quarter ended November 30, 2022. Net loss We had a net loss of $4,085,660 for the three months ended November 30, 2022, compared to a net loss of $7,094,442 for the three months ended November 30, 2021. The decrease in net loss of $3,008,782 is due to a number of factors: higher gross profit and lower general and administrative and other expense in the three months ended November 30, 2022. Results of Operations for the Nine Months Ended November 30, 2022 and 2021 The following table shows our results of operations for the nine months ended November 30, 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 Nine Months Ended Nine Months Ended Change November 30, 2022 November 30, 2021 Dollars Percentage Revenues $ 1,055,040 $ 1,075,803 $ (20,763 ) (2% ) Gross profit 601,142 779,499 (178,357 ) (23% ) Operating expenses 10,090,732 11,102,944 (1,012,212 ) (9% ) Loss from operations (9,489,590 ) (10,323,445 ) 833,855 (8% ) Other income (expense), net (3,440,621 ) (37,508,288 ) 34,067,667 91% Net loss $ (12,930,211 ) $ (47,831,733 ) $ 34,901,522 73% The following table presents revenues from contracts with customers disaggregated by product/service: Nine Months Ended Nine Months Ended Change November 30, 2022 November 30, 2021 Dollars Percentage Device rental activities $ 622,647 $ 383,434 $ 239,213 62% Direct sales of goods and services 432,393 692,369 (259,976 ) (38% ) $ 1,055,040 $ 1,075,803 $ (20,763 ) (2% ) Total revenue for the nine-month period ended November 30, 2022 was $1,055,040 which represented a decrease of $20,763 compared to total revenue of $1,075,803 for the nine months ended November 30, 2021. The small decrease was a result of unusually large unit sales which includes sales of new units totaling $692,369 which occurred in the nine months ended November 30, 2021. This was partially offset by a 62% increase in rental activities increased as the Company continues to grow its rental business. Gross profit Total gross profit for the nine-month period ended November 30, 2022 was $601,142 which represented a decrease of $178,357, compared to gross profit of $779,449 for the nine months ended November 30, 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 57% for the nine-month period ended November 30, 2022 was lower than the margin of 72% for the prior year’s corresponding period was primarily due to inventory adjustments due to shrinkage and obsolescence totaling $123,309, which occurred in the first quarter. Before these adjustments the gross profit % for the nine months ended November 30, 2022 would have been a comparable 69%. - 34 - Table of Contents Operating Expenses Period Nine Months Ended Nine Months Ended Change November 30, 2022 November 30, 2021 Dollars Percentage Research and development $ 2,800,834 $ 2,316,383 $ 484,451 21% General and administrative 6,762,602 8,455,224 (1,692,622 ) (20% ) Depreciation and amortization 332,643 153,261 179,382 117% Operating lease cost and rent 194,653 207,201 (12,548 ) (6% ) (Gain) loss on disposal of fixed assets — (29,125 ) 29,125 100% Operating expenses $ 10,090,732 $ 11,102,944 $ (1,012,212 ) (9% ) 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, 2022 and November 30, 2021, were $10,090,732 and $11,102,944, respectively. The overall decrease of $1,012,212 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses decreased by $1,692,622. In comparing the nine-months ended November 30, 2022 and November 30, 2021 may be partially explained by the following decreases: wages and salaries by $144,439, professional fees by $535,117, subcontractor fees $89,492 and stock-based compensation $1,677,050. These were partially offset by increases in the following accounts: sales and marketing by $314,098, travel by $115,122, insurance by $229,562, duty and freight by $66,067,bad debts expense $117,193, and office expense by $73,922. ● Research and development increased by $484,451 due to funding development of new products as well as upgrades of existing products that mostly took place in the first two quarters of 2022. Included in that increase is the increase in research and development paid to a related party of $1,064,636. This increase was partially offset by the higher development costs incurred in equipment and design on new products for the nine-month period ended November 30, 2021. ● Depreciation and amortization increased by $179,382 due to the acquisition of ERP computer software, computer equipment tooling, and 54 new revenue earning devices. ● Operating lease cost and rent decreased by $12,548 due to the expiration of one lease in early fiscal 2022. ● (Gain) loss on disposal of fixed assets increase by $29,125 due to a vehicle sold in the prior year. Other Income (Expense) Other income (expense) during the nine months ended November 30, 2022 and November 30, 2021, was ($ 3,440,621 ) and ($37,508,288), respectively. The $34,067,677 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 nine months ended November 30, 2022 and the nine months ended November 30, 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 decreased by $1,364,269 due to the decrease in debt amortization expense. The three months ended November 30, 2021 had higher amortization due to debt settlements. ● Gain (loss) on settlement of debt was $3,992 the nine months ended November 30, 2022 and ($33,068,313) in the nine months ended November 30, 2021. 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. - 35 - Table of Contents Net loss We had a net loss of $12,930,211 for the nine months ended November 30, 2022, compared to a net loss of $47,831,733 for the nine months ended November 30, 2021. The change is primarily the result of the loss on settlement in the nine months ended November 30, 2021 as well as the lower general and administrative expenses 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. As of November 30, 2022, we had a cash balance of $713,493, net accounts receivable of $464,044, net device parts inventory of $1,573,380 and $4,470,418 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, 2022 February 28, 2022 Current assets $ 3,423,711 $ 7,050,436 Current liabilities 4,470,418 4,547,718 Working capital $ (1,046,707 ) $ 2,502,718 As of November 30, 2022 and February 28, 2022, we had a cash balance of $713,493 and $4,648,146, respectively. Summary of Cash Flows Summary of Cash Flows Nine Months Ended November 30, 2022 Nine Months Ended November 30, 2021 Net cash used in operating activities $ (9,883,272 ) $ (10,434,762 ) Net cash used in investing activities $ (217,601 ) $ (46,741 ) Net cash provided by financing activities $ 6,166,220 $ 13,540,949 Net cash used in operating activities. Net cash used in operating activities for the nine months ended November 30, 2022 was $9,883,272, which included a net loss of $12,930,211, non-cash activity such as the bad debts expense of $224,215, inventory provision $90,000, reduction of right of use asset of $84,298, accretion of lease liability $107,187, stock based compensation of $481,000, change in value of derivative liabilities of ($3,595), gain on settlement of debt of ($3,992), amortization of debt discount of $1,094,388, increase in related party accrued payroll and interest of $9,720, depreciation and amortization of $332,643 and change in operating assets of $631,074, 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, 2022 was $217,601, which was the purchase of fixed assets. Net cash provided by financing activities. Net cash provided by financing activities was $6,166,220 for the nine months ended November 30, 2022. This consisted of share proceeds net of issuance costs of $4,657,979, proceeds from convertible notes payable of $619,250, proceeds from loans payable of $2,600,000, reduced by repayments on loans payable of $1,711,009. - 36 - Table of Contents 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. Related Party Transactions For the nine months ended November 30, 2022, the Company had no repayments of net advances from its loan payable-related party. For the nine months ended November 30, 2021 the Company repaid net advances of $812,234. At November 30, 2022, the loan payable-related party was $203,276 and $193,556 at February 28, 2022. Included in the balance due to the related party at November 30, 2022 is $126,744 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 November 30, 2022 and November 30, 2021 was $12,420 and $540 respectively. Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months and nine months ended November 30, 2022, the Company accrued $138,000 and $362,500 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 November 30, 2022 and February 28, 2022 there was $842,000 and $479,500 of incentive compensation payable. During the three months ended November 30, 2022 and 2021, the Company was charged $794,460 and $647.465, respectively for fees for research and development from a company partially owned by a principal shareholder. During the nine months ended November 30, 2022 and 2021, the Company was charged $2,735,589 and $1,689,253, 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.