Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of our financial condition
and results of operations should be read in conjunction with the consolidated financial statements and the notes to those financial 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
the Risk Factors, Forward-Looking Statements and Business sections in this report. 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.
Overview
AITX was incorporated in Florida on March 25, 2010.
AITX reincorporated into Nevada on February 17, 2015. AITX’ 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.
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Results of Operations
The following table shows our results of operations
for the years ended February 28, 2022 and February 28, 2021. The historical results presented below are not necessarily indicative of
the results that may be expected for any future period.
Period
Year Ended
Year Ended
Change
February 28, 2023
February 28, 2022
Dollars
Percentage
Revenues
$
1,331,956
$
1,447,109
$
(115,153
)
(8%
)
Gross profit
653,883
974,183
(320,300
)
(33%
)
Operating expenses
13,344,563
14,346,069
(1,001,506
)
(7%
)
Loss from operations
(12,690,680
)
(13,371,886
)
681,206
(5%
)
Other income (expense), net
(5,418,777
)
(48,825,598
)
43,406,821
89%
Net loss
$
(18,109,457
)
$
(62,197,484
)
$
44,088,027
71%
The following table presents revenues from contracts
with customers disaggregated by product/service:
Year Ended
Year Ended
Change
February 28, 2023
February 28, 2022
Dollars
Percentage
Device rental activities
$
754,126
$
592,401
$
161,725
27%
Direct sales of goods and services
577,830
854,708
(276,878
)
(32%
)
$
1,331,956
$
1,447,109
$
(115,153
)
(8%
)
Revenue
Total revenue for the year ended February 28, 2023
was $1,331,956, which represented a decrease of $115,153 compared to total revenue of $1,447,109 for the year ended February 28, 2022.
This decrease was a result of higher unit sales in fiscal 2022 which were $688,180 as compared to unit sales of $376,546, this $311,634
increase was partially offset by increases in training revenue in 2023 so as to yield an overall decrease in direct sales of goods and
services of $ 276,878. Rental activities increased by $161,725 or 27%, as the Company continues to grow its product line and customer
base.
Gross profit
Total gross profit for the year ended February 28,
2023 was $ 653,883 , which represented a decrease of $ 320,300, compared
to total gross profit of $974,183 for the year ended February 28, 2022. The decrease is a result of the decrease in revenues above, higher
amount of overhead allocated to cost of sales in fiscal 2023 by approximately $ 257,000 due to full year’s allocation in 2023 partially
as compared to only a partial year’s allocation ion 2022. Although the factory lease started in May 2021 it took many months to
ramp up factory capacity and personnel. Cost of sales also increased due to more staff being allocated to production work overt R&D
work and a higher inventory provision in 2023.
Operating expenses
Operating expenses for the years ended February 28,
2023 and February 28, 2022 comprised of the following:
Period
Year Ended
Year Ended
Change
February 28, 2023
February 28, 2022
Dollars
Percentage
Research and development
$
3,625,468
$
2,961,394
$
664,074
(22%
)
General and administrative
8,980,709
10,905,129
(1,924,420
)
(18%
)
Depreciation and amortization
478,115
232,886
245,229
105%
Operating lease cost and rent
260,271
275,785
(15,514
)
(6%
)
(Gain) loss on disposal of fixed assets
—
(29,125
)
29,125
100%
Operating expenses
$
13,344,563
$
14,346,069
$
(1,001,506
)
(7%
)
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Our operating expenses were comprised of general and
administrative expenses, research and development, depreciation and amortization, operating lease and rent and a (gain) loss on disposal of
fixed assets. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries
and wages, travel expenses and rent. Our operating expenses during the years ended February 28, 2023 and February 28, 2022 were $13,344,563
and 14,346,069, respectively. The overall $ 1,001,506 de crease in operating expenses was primarily
attributable to the following changes in operating expenses:
●
Research and development expenses increased by $664,074 which was due funding development of new products,(such as the ROAMEO, RIO, RADDOG,and new RAD software solutions ) as well as upgrades of existing products.
●
General and administrative expenses decreased by $ 1,924,420 primarily due to the following changes:
—
For the year ended February 28, 2023 stock based compensation to CEO in equity awards was $499,500 with $118,500 fees paid to consultants, and a charge of $ 122,050 all totaling $740,050 compare with stock based compensation to CEO in equity awards was $2,048,850 with $109,200 fees paid to consultants all totaling $2,158,050 for the year ended February 28, 2022. This represents a decrease of $1,418,000 in stock based compensation.
—
Professional fees decreased by $401,687 due to decreases in financial reporting of $167,321, decrease in legal of $143,044, decrease in professional fees from former director of $282,946 with the remaining offsetting increase due to changes in regulatory, investor relations and consulting costs.
—
Wages, salaries and payroll levies decreased by $499,661 with a reduction in CEO compensation of $1,093,758 offset by the increase in staff .
—
Office expense increased by $113,610.
—
Freight, duty and brokerage increased by $84,725 due to higher purchases in 2023.
—
Insurance cost increase by $210,985 due to health plan and liability insurance increases.
—
Advertising and marketing costs increased by $385,919 as the Company increased efforts to promote its products.
—
Bad debts expense increased by $173,859 due to write off of uncollectible accounts.
—
Supplies decreased by $224,703 as a higher amount was used in manufacturing and part of capital cost of revenue earning devices in 2023.
—
Trade shows and travel increased by $133,098 as a result of promotional and business travel in fiscal 2023.
—
The remaining offsetting increases were distributed amongst other general and administrative accounts such as website design warehouse expense, repairs and maintenance, and utilities amongst others. In general, these increases in general and administrative expenses may be explained due to a ramp up in personnel and production and the full year of the manufacturing facility in 2023.
●
Operating lease cost and rent decreased by $15,514 due to the expiration of a lease in the current period.
●
Depreciation and amortization increased by $245,229 due to the increase in revenue earning devices and new computer equipment, tooling ,furniture and fixtures and manufacturing equipment in fixed assets.
●
(Gain) loss on disposal of fixed assets decreased by $29,125 due to a vehicle disposal in 2022 that yielded a gain.
Other income (expense)
Other income (expense) consisted of the change of
fair value of derivative instruments interest expense and gain on settlement of debt. Other income (expense) during the years ended February
28, 2023 and February 28, 2022, was ($5,418,777) and ($48,825,598), respectively.
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The change in other income (expense) was due to the
following:
●
Change in fair value of derivative liabilities decreased by $368,621 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 and the reduction in convertible notes payable through debt conversions to common stock and settlements. At February 28, 203 there was no longer any convertible debt.
●
Interest expense decreased by $10,703,135 due to lower amortization of debt discounts for the year ended February 28, 2023 of 1,980,033 (2022-$7,597,242). Interest expense in 2022 was higher due to interest expense related to the issuance of warrants for debt extensions of $5,415,000 for which there was no charge in 2023. Loans payable increased by approximately $5 million in 2023, with most of that increase occurring in the latter part of the year and related interest increased by approximately $570,000.
●
Gain on settlement of debt increased by $33,072,305 due to the fiscal 2022 valuation of Series F shares and warrants given in exchange for an amendment to a deferred variable payment obligation that resulted in a loss of $33,015,215. There was no corresponding charge for the year ended February 29, 2023. The difference can be attributed to smaller gains and losses on other debt settlements. In 2023 the $3,992 gain is resultant from the settlement of convertible notes.
The Company’s loss from operations for the year
ended February 28, 2023 was $12,690,680, which represented a decrease in loss of $ 681,206 compared
to a loss of $13 ,371,886 for the year ended February 28, 2022. The lower revenues and gross profit
in 2023 were offset by significantly lower operating expenses for the reasons set out above. Note that the Company had a net loss of $18,109,457
for the year ended February 28, 2023, as compared to net loss of $62,197,484 for the year ended February 28, 2022. This change is mostly
attributable to the loss on settlement of debt, decrease in interest expense and a decrease in general and administrative costs.
Going Concern
The accompanying consolidated financial statements
have been prepared assuming that the Company will continue as a going concern. The accompanying financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the possible inability of the Company to continue as a going concern.
For the year ended February 28, 2023, the Company
had negative cash flow from operating activities of $12,577,395. As of February 28, 2023 the Company has an accumulated deficit of $112,253,711
and negative working capital of $12,610,601. Management does not anticipate having positive cash flow from operations in the near future.
These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months following
the issuance of these financial statements.
The Company does not have the resources at this time
to repay all its credit and debt obligations, make any payments in the form of dividends to its shareholders or fully implement its business
plan. Without additional capital, the Company will not be able to remain in business. At the same time management points to its successful
history with maintaining Company operations and reminds all with reasonable confidence this will continue. Management has plans
to address the Company’s financial situation as follows:
Management is committed to raise either non-dilutive
funds or minimally dilutive funds. There is no assurance that these funds will be able to be raised nor can we provide assurance that
these possible raises may not have dilutive effects. In March 2023, the Company entered into an equity financing agreement whereby an
investor will purchase up to $30,000,000 of the Company’s common stock at a discount over a two year period. In March
and April the Company reduced personnel that were working on far-future solutions as well as other department reductions. Combined with
other cost cutting measures management estimates it reduced the monthly expense burn by $ 200,000 - $ 300,000 with little impact on short
and medium term operations. Management believes that it has the necessary support to continue operations by continuing its funding methods
in the following ways : growing revenues ,equity proceeds and non-convertible debt. Management has had many recent conversations with
the Company’s primary debt holder and believes that the non-convertible debt on the balance sheet will be extended. Management notes
that non-convertible debt on the books has been extended by this debt holder twice in the past and notes that this debt holder has been
a strong supporter of the Company.
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Capital Resources
The following table summarizes total current assets,
liabilities and working capital for the period indicated:
February 28, 2023
February 28, 2022
Current assets
$
3,438,992
$
7,050,436
Current liabilities (1)
16,049,593
4,547,718
Working capital
$
(12,610,601
)
$
2,502,718
__________
(1)
As February 28, 2023 and February 28, 2022, current liabilities included approximately $0 and $7,587, respectively, of derivative liabilities that are expected to be settled in shares of the Company in accordance with the various conversion terms.
As of February 28, 2023 and February 28, 2022, we
had a cash balance of $939,759 and $4,648,146, respectively.
Summary of Cash Flows
Year Ended
February 28, 2023
Year Ended
February 28, 2022
Net cash used in operating activities
$
(12,577,395
)
$
(14,825,442
)
Net cash used in investing activities
$
(308,402
)
$
(129,200
)
Net cash provided by financing activities
$
9,177,410
$
18,558,370
Net cash used in operating activities for the year
ended February 28, 2023 was $12,577,395, which included a net loss of $18,109,457, non-cash activity such as the change in fair value
of derivative liabilities of ($3,595), gain on settlement of debt of ($3,992), amortization of debt discount of $1,980,033, stock based
compensation of $740,050, reduction in right of use asset $112,396, accretion of lease liability $141,631, increase in related party accrued
payroll and interest $12,960, inventory provision of $130,000, bad debts expense $45,110, depreciation and amortization of $478,115 and
change in operating assets and liabilities of $1,899,354.
Net cash used in investing activities.
Net cash used in investing activities for the year
ended February 28, 2023 was $308,402. This consisted of the purchase of fixed assets and investment of $258,402 and $50,000, respectively..
Net cash provided by financing activities.
Net cash provided by financing activities was $9,177,410
for the year ended February 28, 2023. This consisted of share proceeds net of issuance costs of $7,771,169 ,and proceeds from loans payable
$3,300,000 and convertible notes payable of $619,250 offset by repayments of convertible notes payable and loans payable of $750,000 and
$1,763,009, respectively.
Off-Balance Sheet Arrangements
We do not have any outstanding off-balance sheet guarantees,
interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest
in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have
any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages
in leasing, hedging or research and development services with us.
Significant Accounting Policies
Use of Estimates
In order to prepare financial statements in conformity
with accounting principals generally accepted in the United States, management must make estimates , judgements and assumptions that affect
the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any , are disclosed in the
financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from resolution
currently anticipated by management and on which the financial statements are based. The most significant estimates included in these
consolidated financial statements are those associated with the assumptions used to value derivative liabilities.
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Revenue Earning Devices
Revenue earning devices are stated at cost. Depreciation
is provided on a straight-line basis over the estimated useful life of 48 months. The Company continually evaluates revenue earning devices
to determine whether events or changes in circumstances have occurred that may warrant revision of the estimated useful life or whether
the devices should be evaluated for possible impairment. The Company uses a combination of the undiscounted cash flows and market approaches
in assessing whether an asset has been impaired. The Company measures impairment losses based upon the amount by which the carrying amount
of the asset exceeds the fair value.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided
on the straight-line method based on the estimated useful lives of the respective assets which range from three to five years. Major repairs
or improvements are capitalized. Minor replacements and maintenance and repairs which do not improve or extend asset lives are expensed
currently.
Computer equipment
3 years
Furniture and fixtures
3 years
Office equipment
4 years
Warehouse equipment
5 years
Demo Devices
4 years
Vehicles
3 years
Leasehold improvements
5 years, the life of the lease
The Company periodically evaluates the fair value
of fixed assets whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. Upon retirement
or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain
or loss, if any, is recognized in income.
Research and Development
Research and development costs are expensed in the
period they are incurred in accordance with ASC 730, Research and Development unless they meet specific criteria related
to technical, market and financial feasibility, as determined by Management, including but not limited to the establishment of a clearly
defined future market for the product, and the availability of adequate resources to complete the project. If all criteria are met, the
costs are deferred and amortized over the expected useful life or written off if a product is abandoned. At February 28, 2022 and February
28, 2021, the Company had no deferred development costs.
Sales of Future Revenues
The Company has entered into transactions, as more
fully described in footnote 11, in which it has received funding from investors in exchange for which it will make payments to those investors
based on the level of sales of certain revenue categories, generally based on a percentage of sales for those certain revenues. The Company
determines whether these agreements constitute sales of future revenues or are in substance debt based on the facts and circumstances
of each agreement, with the following primary criteria determinative of whether the agreement constitutes a sale of future revenues or
debt:
●
Does the agreement purport, in substance, to be a sale
●
Does the Company have continuing involvement in the generation of cash flows due the investor
●
Is the transaction cancellable by either party through payment of a lump sum or other transfer of assets
●
Is the investors rate of return implicitly limited by the terms of the agreement
●
Does the Company’s revenue for a reporting period underlying the agreement have only a minimal impact on the investor’s rate of return
●
Does the investor have recourse relating to payments due
In the event a transaction is determined to be a sale
of future revenues, it is recorded as deferred revenue and amortized using the sum-of-the-revenue method. In the event a transaction is
determined to be debt, it is recorded as debt and amortized using the effective interest method. As of the date of these financial statements,
the Company has determined that all such agreements are debt.
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Revenue Recognition
ASU 2014-09, “Revenue from Contracts
with Customers (Topic 606)” , supersedes the revenue recognition requirements and industry specific guidance under Revenue
Recognition (Topic 605) . Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers
in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Topic 606 defines
a five-step process that must be evaluated and, in doing so, it is possible more judgment and estimates may be required within the revenue
recognition process than required under existing accounting principles generally accepted in the United States of America (“U.S.
GAAP”) including identifying performance obligations in the contract, estimating the amount of variable consideration to include
in the transaction price and allocating the transaction price to each separate performance obligation.
Distinguishing Liabilities from Equity
The Company relies on the guidance provided by ASC
Topic 480, Distinguishing Liabilities from Equity , to classify certain redeemable and/or convertible instruments. The Company
first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification
if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional
obligation that the Company must or may settle by issuing a variable number of its equity shares.
Once the Company determines that a financial instrument
should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability
section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification
if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the
Company accounts for the financial instrument as permanent equity.
Our CEO and Chairman holds sufficient shares of the
Company’s voting stock that give sufficient voting rights under the articles of incorporation and bylaws of the Company such that
the CEO and Chairman can at any time unilaterally vote to increase the number of authorized shares of common stock of the Company without
the need to call a general meeting of common shareholders of the Company
Initial Measurement
The Company records its financial instruments classified
as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.
Subsequent Measurement – Financial Instruments
Classified as Liabilities
The Company records the fair value of its financial
instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified
as liabilities are recorded as other income (expenses).
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and
Disclosures (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted
accounting principles.
ASC Topic 820 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on
market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions
developed based on the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels,
which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:
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●
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
●
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.
●
Level 3 – Inputs that are unobservable for the asset or liability.
Measured on a Recurring Basis
The following table presents information about our
liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements
fell:
Fair Value Measurement Using
Amount at
Fair Value
Level 1
Level 2
Level 3
February 28, 2023
Liabilities
Incentive compensation plan payable – revaluation of equity awards payable in Series G shares
$
979,000
$
—
$
—
$
979,000
February 28, 2022
Liabilities
Incentive compensation plan payable – revaluation of equity awards payable in Series G shares
$
479,500
$
—
$
—
$
479,500
Derivative liability – conversion features pursuant to convertible notes payable
$
7,587
$
—
$
—
$
7,587
The carrying amounts of the Company’s financial
assets and liabilities, such as cash, accounts receivable, prepaid expenses and advances, accounts payable and accrued expenses, approximate
their fair values because of the short maturity of these instruments.
Earnings (Loss) per Share
Basic earnings (loss) per share (“EPS”)
is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding
(denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding during the period using the
treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price
for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options and/or warrants. Diluted
EPS excluded all dilutive potential shares if their effect is anti-dilutive.
Basic loss per common share is computed based on the
weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss
per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the
potential to be issued by virtue of convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete
conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share.
Recently Issued Accounting Pronouncements
In September 2016, the FASB issued ASU 2016-13, Financial
Instruments-Credit Losses . ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on
financial instruments and changes the loss impairment methodology. ASU 2016-13 is effective for reporting periods beginning after December
15, 2019 using a modified retrospective adoption method. A prospective transition approach is required for debt securities for which an
other-than-temporary impairment had been recognized before the effective date. The standard did not materially impact our consolidated
net loss, accumulated deficit, and had no impact on cash flows. The Company has adopted this on March 1, 2020.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.