Artificial Intelligence Technology Solutions Inc. 10-Q

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MAY 31, 2023 OR [_] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______________ TO _______________ COMMISSION FILE NUMBER: 000-55079 ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. (Exact name of registrant as specified in its charter) Nevada 27-2343603 (State or other jurisdiction of Incorporation or organization) (I.R.S. Employer Identification Number) 10800 Galaxie Avenue Ferndale , MI 48220 (Address of principal executive offices) (Zip code) ( 877 ) 787-6268 (Registrant’s telephone number, including area code) not applicable (Former name, former address and former fiscal year, if changed since last report) Securities registered pursuant to Section 12(b) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [X] No [_] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X] Smaller reporting company [X] Emerging growth company [_] If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_] No [X] Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 6,561,173,249 shares of common stock were issued and outstanding as of July 14, 2023. Table of Contents PAGE PART I FINANCIAL INFORMATION ITEM 1. Financial Statements 3 Condensed Consolidated Balance Sheets as of May 31, 2023 and February 28, 2023 (Unaudited) 3 Condensed Consolidated Statements of Operations for the Three Months Ended May 31, 2023 and 2022 (Unaudited) 4 Condensed Consolidated Statements of Stockholders’ Deficit for the Three Months Ended May 31, 2023 and 2022 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2023 and 2022 (Unaudited) 6 Notes to the Consolidated Financial Statements (Unaudited) 7-24 ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 25 ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 28 ITEM 4. Controls and Procedures 29 PART II OTHER INFORMATION ITEM 1. Legal Proceedings 29 ITEM 1A. Risk Factors 29 ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 29 ITEM 3. Defaults Upon Senior Securities 29 ITEM 4. Mine Safety Disclosures 29 ITEM 5. Other Information 30 ITEM 6. Exhibits 30 SIGNATURES 30 - 2 - Table of Contents PART I – FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. CONDENSED CONSOLIDATED BALANCE SHEETS * May 31, 2023 February 28, 2023 * ASSETS Current assets: Cash $ 287,202 $ 939,759 Accounts receivable, net 391,823 265,024 Device parts inventory, net 1,489,429 1,637,899 Prepaid expenses and deposits 521,501 596,310 Total current assets 2,689,955 3,438,992 Operating lease asset 1,179,673 1,208,440 Revenue earning devices, net of accumulated depreciation of $ 902,680 and $ 778,839 , respectively 1,556,790 1,235,219 Fixed assets, net of accumulated depreciation of $ 227,103 and $ 182,002 , respectively 302,960 315,888 Trademarks 27,080 27,080 Investment at cost 50,000 50,000 Security deposit 21,239 21,239 Total assets $ 5,827,697 $ 62,96,858 LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Accounts payable and accrued expenses $ 1,336,023 $ 1,343,379 Advances payable- related party 1,594 1,594 Customer deposits 36,460 9,900 Current operating lease liability 244,169 248,670 Current portion of deferred variable payment obligation 604,811 542,177 Loan payable - related party 243,256 206,516 Incentive compensation plan payable 1,042,000 979,000 Current portion of loans payable, net of discount of $ 1,348,996 and $ 1,651,597 16,220,989 9,918,389 Vehicle loan - current portion 38,522 38,522 Current portion of accrued interest payable 4,741,347 2,761,446 Total current liabilities 24,509,171 16,049,593 Non-current operating lease liability 926,274 950,541 Loans payable, net of discount of $ 4,973,120 and $ 4,130,291 , respectively 9,884,241 15,554,069 Deferred variable payment obligation 2,525,000 2,525,000 Accrued interest payable 2,062,128 3,060,656 Total liabilities 39,906,814 38,139,859 Commitments and Contingencies Stockholders' deficit: Preferred Stock, undesignated; 15,545,650 shares authorized; no shares issued and outstanding at May 31, 2023 and February 28, 2023, respectively — — Series G Convertible Preferred Stock. $ 0.001 par value; 100,000 shares authorized, no shares issued and outstanding at May 31, 2023 and February 28, 2023, respectively — — Series E Preferred Stock, $ 0.001 par value; 4,350,000 shares authorized; 3,350,000 and 3,350,000 shares issued and outstanding, respectively 3,350 3,350 Series F Convertible Preferred Stock, $ 1.00 par value; 4,350 shares authorized; 2,533 and 2,533 shares issued and outstanding, respectively 2,533 2,533 Common Stock, $ 0.00001 par value; 7,225,000,000 shares authorized 6,129,670,689 and 5,848,741,599 shares issued, issuable and outstanding, respectively 61,298 58,489 Additional paid-in capital 82,563,520 80,247,252 Preferred stock to be issued 99,086 99,086 Accumulated deficit ( 116,808,904 ) ( 112,253,711 ) Total stockholders' deficit ( 34,079,117 ) ( 31,843,001 ) Total liabilities and stockholders' deficit $ 5,827,697 $ 6,296,858 * Derived from audited information The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. - 3 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) Three Months Ended May 31, 2023 Three Months Ended May 31, 2022 Revenues $ 385,208 $ 385,157 Cost of Goods Sold 91,511 293,724 Gross Profit 293,697 91,433 Operating expenses: Research and development (including related party charges of $ 882,015 (2022-$ 1,001,734 )) 891,757 1,023,735 General and administrative 2,120,433 2,400,392 Depreciation and amortization 167,942 93,995 Operating lease cost and rent 62,542 69,967 Total operating expenses 3,242,674 3,588,089 Loss from operations ( 2,948,977 ) ( 3,496,656 ) Other income (expense), net: Interest expense ( 1,606,216 ) ( 1,175,030 ) Total other income (expense), net ( 1,606,216 ) ( 1,175,030 ) Net income (loss) $ ( 4,555,193 ) $ ( 4,671,686 ) Net income (loss) per share - basic $ ( 0.00 ) $ ( 0.00 ) Net income (loss) per share - diluted $ ( 0.00 ) $ ( 0.00 ) Weighted average common share outstanding - basic 5,964,709,322 4,798,657,871 Weighted average common share outstanding - diluted 5,964,709,322 4,798,657,871 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. - 4 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S DEFICIT (Unaudited) Series E Series F Additional Total Preferred Stock Preferred Stock Common Stock Paid-In Accumulated Stockholders’ Shares Amount Shares Amount Shares Amount Capital Deficit Deficit Balance at February 28, 2022 3,350,000 $ 3,350 2,532 $ 101,618 4,735,210,360 $ 47,353 $ 73,015,576 $ ( 94,144,254 ) $ ( 20,976,357 ) Issuance of shares, net of $ 117,157 issuance costs — — — — 133,881,576 1,339 1,643,883 — 1,645,222 Relative fair value of Series F warrants issued with loans payable Rounding — — — — — — ( 1 ) — ( 1 ) Stock based compensation Net income — — — — — — — ( 4,671,686 ) ( 4,671,686 ) Balance at May 31, 2022 3,350,000 $ 3,350 2,532 $ 101,618 4,869,091,936 $ 48,692 $ 74,659,458 $ ( 98,815,940 ) $ ( 24,002,822 ) Balance at February 28, 2023 3,350,000 $ 3,350 2,533 $ 101,619 5,848,741,599 $ 58,489 $ 80,247,252 $ ( 112,253,711 ) $ ( 31,843,001 ) Issuance of shares, net of $ 81,285 issuance costs — — — — 280,929,190 2,809 1,316,100 — 1,318,909 Relative fair value of Series F warrants issued with loans payable — — — — — — 947,447 — 947,447 Rounding Stock based compensation — — — — — — 52,721 — 52,721 Net income — — — — — — — ( 4,555,193 ) ( 4,555,193 ) Balance at May 31, 2023 3,350,000 $ 3,350 2,533 $ 101,619 6,129,670,789 $ 61,298 $ 82,563,520 $ ( 116,808,904 ) $ ( 34,079,117 ) The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. - 5 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) Three Months Ended May 31, 2023 Three Months Ended May 31, 2022 CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ ( 4,555,193 ) $ ( 4,671,686 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 167,942 93,995 Bad debts expense 16,000 105,000 Inventory provision — 25,000 Reduction of right of use asset 28,767 30,046 Accretion of lease liability 33,775 36,355 Stock based compensation 115,721 161,500 Amortization of debt discounts 557,219 415,029 Increase in related party accrued payroll and interest 36,740 3,240 Changes in operating assets and liabilities: Accounts receivable ( 142,799 ) ( 40,251 ) Prepaid expenses and deposits on inventory 74,809 126,610 Device parts inventory ( 324,652 ) ( 283,209 ) Accounts payable and accrued expenses ( 7,354 ) 101,557 Customer deposits 26,560 ( 10,000 ) Operating lease liability payments ( 62,542 ) ( 66,401 ) Current portion of deferred variable payment obligations for payments 62,634 62,627 Accrued interest payable 981,370 289,016 Net cash used in operating activities ( 2,991,003 ) ( 3,621,572 ) CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of fixed assets ( 3,463 ) ( 88,214 ) Net cash (used in) investing activities ( 3,463 ) ( 88,214 ) CASH FLOWS FROM FINANCING ACTIVITIES: Share proceeds net of issuance costs 1,318,909 1,645,222 Proceeds from loans payable 1,050,000 — Repayment of loans payable ( 27,000 ) ( 1,661,953 ) Net cash provided by (used in) financing activities 2,341,909 ( 16,731 ) Net change in cash ( 652,557 ) ( 3,726,517 ) Cash, beginning of period 939,759 4,648,146 Cash, end of period $ 287,202 $ 921,629 Supplemental disclosure of cash and non-cash transactions: Cash paid for interest $ 1,375 $ 342,138 Cash paid for income taxes $ — $ — Noncash investing and financing activities: Transfer from device parts inventory to fixed assets $ 473,122 $ 179,,619 Discount applied to face value of loans $ 150,000 $ — Series F warrants issued as part of debt issuance $ 947,447 $ — The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. - 6 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. GENERAL INFORMATION Artificial Intelligence Technology Solutions Inc. (“AITX” or the “Company”) was incorporated in Florida on March 25, 2010 and reincorporated in Nevada on February 17, 2015. On August 24, 2018, Artificial Intelligence Technology Solutions Inc., changed its name from On the Move Systems Corp (“OMVS”). Robotic Assistance Devices, LLC (“RAD”), was incorporated in the State of Nevada on July 26, 2016 as an LLC. On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc., through the issuance of 10,000 common shares to its sole shareholder. On August 28, 2017, AITX completed the acquisition of RAD (the “Acquisition”), whereby AITX acquired all the ownership and equity interest in RAD for 3,350,000 shares of AITX Series E Preferred Stock and 2,450 shares of Series F Convertible Preferred Stock. AITX’s prior business focus was transportation services, and AITX was exploring the on-demand logistics market by developing a network of logistics partnerships. As a result of the closing of the Acquisition, AITX has succeeded to the business of RAD. As a result, AITX’s business going forward will consist of one segment activity which is the delivery of artificial intelligence and robotic solutions for operational, security and monitoring needs. The Acquisition was treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of AITX’s operations were disposed of as part of the consummation of the transaction. Therefore, no goodwill or other intangible assets were recorded by AITX as a result of the Acquisition. RAD is treated as the accounting acquirer as its stockholders control the Company after the Acquisition, even though AITX was the legal acquirer. As a result, the assets and liabilities and the historical operations that are reflected in these financial statements are those of RAD as if RAD had always been the reporting company. 2. GOING CONCERN The accompanying unaudited 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 three months ended May 31, 2023, the Company had negative cash flow from operating activities of $ 2,991,003 . As of May 31, 2023, the Company has an accumulated deficit of $ 116,808,904 , and negative working capital of $ 21,819,216 . Management does not anticipate having positive cash flow from operations in the near future. These factors raise a 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 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. 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 2023 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. 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. The Company this fiscal period through to June 30, 2023 has raised an additional $ 3.5 million net of issuance costs through the sale of its common shares. - 7 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. ACCOUNTING POLICIES Basis of Presentation and Consolidation The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and in conformity with the condensing instructions on Form 10-Q and Rule 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto in the Company’s latest Annual Report filed with the SEC on Form 10-K as filed on June 14, 2023. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Robotic Assistance Devices, Inc., Robotic Assistance Devices Group , Inc, Robotic Assistance Devices Mobile, Inc., On the Move Experience, LLC and On the OMV Transports, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations for the three months ended May 31, 2023 are not necessarily indicative of the results that may be expected for the entire year. Use of Estimates In order to prepare financial statements in conformity with accounting principles 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 preferred stock and derivative liabilities. Concentrations Loans payable At May 31, 2023 there were $ 32,427,346 of loans payable, $ 28,090,506 or 87 % of these loans to companies controlled by one individual. At February 28, 2023 there were $ 31,254,345 of loans payable $ 26,540,506 or 85 % of these loans to companies controlled by the same individual. Cash The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market instruments. The Company places its cash and cash equivalents with high-quality, U.S. financial institutions and, to date has not experienced losses on any of its balances. Accounts Receivable Accounts receivable are comprised of balances due from customers, net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances. There was an allowance of $ 16,000 and $ 39,000 provided as of May 31, 2023 and February 28, 2023, respectively. For the three months ended May 31, 2023 , two customers account for 51 % of total accounts receivable . For the three months ended May 31, 2022 , four customers account for 59 % of total accounts receivable. Device Parts Inventory Device parts inventory is stated at the lower of cost or net realizable value using the weighted average cost method. The Company records a valuation reserve for obsolete and slow-moving inventory, relying principally on specific identification of such inventory. The Company uses these device parts in the assembly of revenue earning devices (and demo devices) as well as research and development. Depending on use, the Company will transfer the parts to the corresponding asset or expense if used in research and development. A charge to income is taken when factors that would result in a need for an increase in the valuation, such as excess or obsolete inventory, are noted. As of both May 31, 2023 and February 28, 2023 there was a valuation reserve of $ 195,000 and $ 195,000 , respectively. - 8 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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. Fixed assets consisted of the following: Computer equipment and software 2 or 3 years Office equipment 4 years Manufacturing equipment 7 years Warehouse equipment 5 years Tooling 2 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 May 31, 2023 and February 28, 2023, the Company had no deferred development costs. Contingencies Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. Sales of Future Revenues The Company has entered into transactions, as more fully described in footnote 8, 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: - 9 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ● 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 is 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. 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. The Company adopted Topic 606 on March 1, 2018, using the modified retrospective method. Under the modified retrospective method, prior period financial positions and results will not be adjusted. There was no cumulative effect adjustment recognized as a result of this adoption. Refer to Note 4 – Revenue from Contracts with Customers for additional information. For the three months ended May 31, 2023 , three customers accounted for 57 % of total revenue. For the three months ended May 31, 2022, two customers accounted for 29 % of total revenue. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized when items of income and expense are recognized in the financial statements in different periods than when recognized in the tax return. Deferred tax assets arise when expenses are recognized in the financial statements before the tax returns or when income items are recognized in the tax return prior to the financial statements. Deferred tax assets also arise when operating losses or tax credits are available to offset tax payments due in future years. Deferred tax liabilities arise when income items are recognized in the financial statements before the tax returns or when expenses are recognized in the tax return prior to the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. ASC 740, Accounting for Income Taxes requires companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. The Company’s gross deferred tax assets were revalued based on the reduction in the federal statutory tax rate from 35% to 21%. A corresponding offset has been made to the valuation allowance, and any potential other taxes arising due to the Tax Act will result in reductions to the Company’s net operating loss carryforward and valuation allowance. The Company will continue to analyze the Tax Act to assess its full effects on the Company’s financial results, including disclosures, for the Company’s fiscal year ending February 28, 2023, but the Company does not expect the Tax Act to have a material impact on the Company’s consolidated financial statements Leases Lease agreements are evaluated to determine if they are sales/finance leases meeting any of the following criteria at inception: (a) transfer of ownership of the underlying asset; (b) purchase option that is reasonably certain of being exercised; (c) the lease term is greater than a major part of the remaining estimated economic life of the underlying asset; or (d) if the present value of the sum of lease payments and any residual value guaranteed by the lessee that has not already been included in lease payments in accordance with ASC 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset. - 10 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) If at its inception, a lease meets any of the four lease criteria above, the lease is classified by the Company as a sales/finance; and if none of the four criteria are met, the lease is classified by the Company as an operating lease. Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in liabilities. 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 preferred 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: - 11 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) ● 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 May 31, 2023 Liabilities Incentive compensation plan payable- revaluation of equity awards payable in Series G shares $ 1,042,000 $ — $ — $ 1,042,000 February 28, 2023 Liabilities Incentive compensation plan payable- revaluation of equity awards payable in Series G shares $ 979,000 $ — $ — $ 979,000 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 Recently Adopted Accounting Standards In December 2019, the Financial Accounting Standards Board (FASB) issued amended guidance on the accounting and reporting of income taxes. The guidance is intended to simplify the accounting for income taxes by removing exceptions related to certain intraperiod tax allocations and deferred tax liabilities; clarifying guidance primarily related to evaluating the step-up tax basis for goodwill in a business combination; and reflecting enacted changes in tax laws or rates in the annual effective tax rate. The Company adopted the new guidance effective February 1, 2021. There was no impact to the Company’s consolidated financial statements upon adoption. - 12 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) In January 2020, the FASB issued new guidance intended to clarify certain interactions between accounting standards related to equity securities, equity method investments and certain derivatives. The guidance addresses accounting for the transition into and out of the equity method of accounting and measuring certain purchased options and forward contracts to acquire investments. The Company adopted the new guidance effective February 1, 2021. There was no impact to the Company’s consolidated financial statements upon adoption. In August 2020, the FASB issued amended guidance on the accounting for convertible instruments and contracts in an entity’s own equity. The guidance removes the separation model for convertible debt instruments and preferred stock, amends requirements for conversion options to be classified in equity as well as amends diluted earnings per share (EPS) calculations for certain convertible debt instruments. The amended guidance is effective for interim and annual periods in 2022. The application of the amendments in the new guidance are to be applied either on a modified retrospective or a retrospective basis. We are currently assessing the effect that the adoption of this standard will have on the Company’s consolidated financial statements upon adoption. Recently Issued Accounting Standards Not Yet Adopted In March 2020, the FASB issued optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting and subsequently issued clarifying amendments. The guidance provides optional expedients and exceptions for accounting for contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference rate expected to be discontinued because of reference rate reform. The optional guidance is effective upon issuance and can be applied on a prospective basis at any time between January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of adoption on its consolidated financial statements. In October 2021, the FASB issued amended guidance that requires acquiring entities to recognize and measure contract assets and liabilities in a business combination in accordance with existing revenue recognition guidance. The amended guidance is effective for interim and annual periods in 2023 and is to be applied prospectively. Early adoption is permitted on a retrospective basis to the beginning of the fiscal year of adoption. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements for prior acquisitions; however, the impact in future periods will be dependent upon the contract assets and contract liabilities acquired in future business combinations. In November 2021, the FASB issued new guidance to increase the transparency of transactions with a government that are accounted for by applying a grant or contribution accounting model by analogy. The guidance requires annual disclosures of such transactions to include the nature of the transactions and the significant terms and conditions, the accounting treatment and the impact to the company’s financial statements. The guidance is effective for annual periods beginning in 2022 and is to be applied on either a prospective or retrospective basis. The Company is currently evaluating the impact of adoption on its consolidated financial statements. 4. REVENUE FROM CONTRACTS WITH CUSTOMERS Revenue is earned primarily from two sources: 1) direct sales of goods or services and 2) short-term rentals. Direct sales of goods or services are accounted for under Topic 606, and short-term rentals are accounted for under Topic 842 (which addresses lease accounting and was adopted on March 1, 2019). As disclosed in the revenue recognition section of Note 3 – Accounting Polices, the Company adopted Topic 606 in accordance with the effective date on March 1, 2018. Note 3 includes disclosures regarding the Company’s method of adoption and the impact on the Company’s financial statements. Revenue is recognized on direct sales of goods or services 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. After adopting Topic 842, also referred to above in Note 3, the Company is accounting for revenue earned from rental activities where an identified asset is transferred to the customer and the customer has the ability to control that asset. The Company recognizes revenue from its device rental activities when persuasive evidence of a contract exists, the performance obligations have been satisfied, the transaction price is fixed or determinable and collection is reasonably assured. Performance obligations associated with device rental transactions are satisfied over the rental period. Rental periods are short-term in nature. Therefore, the Company has elected to apply the practical expedient which eliminates the requirement to disclose information about remaining performance obligations. Payments are due from customers at the completion of the rental, except for customers with negotiated payment terms, generally net 30 days or less, which are invoiced and remain as accounts receivable until collected. - 13 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended May 31, 2023 Three Months Ended May 31, 2022 Device rental activities $ 238,149 $ 239,805 Direct sales of goods and services 147,059 145,352 Revenues $ 385,208 $ 385,157 5. LEASES We lease certain warehouses, and office space. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, we did not combine lease and non-lease components. There is no lease renewal. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise. Below is a summary of our lease assets and liabilities at May 31, 2023 and February 28, 2023. Leases Classification May 31, 2023 February 28, 2023 Assets Operating Operating Lease Assets $ 1,179,673 $ 1,208,440 Liabilities Current Operating Current Operating Lease Liability $ 244,169 $ 248,670 Noncurrent Operating Noncurrent Operating Lease Liabilities 926,274 950,541 Total lease liabilities $ 1,170,443 $ 1,199,211 Note: As most of our leases do not provide an implicit rate, we use our incremental borrowing rate of 10% which for the leases noted above was based on the information available at commencement date in determining the present value of lease payments. We compare against loans we obtain to acquire physical assets and not loans we obtain for financing. The loans we obtain for financing are generally at significantly higher rates and we believe that physical space or vehicle rental agreements are in line with physical asset financing agreements. CAM charges were not included in operating lease expense and were expensed in general and administrative expenses as incurred. Operating lease cost and rent was $ 62,542 and $ 69,967 for the three months ended May 31, 2023 and May 31, 2022, respectively. 6. REVENUE EARNING DEVICES Revenue earning devices consisted of the following: May 31, 2023 February 28, 2023 Revenue earning devices $ 2,459,470 $ 2,015,058 Less: Accumulated depreciation ( 902,680 ) ( 779,839 ) Total $ 1,556,790 $ 1,235,219 During the three months ended May 31, 2023 the Company made total additions to revenue earning devices of $ 444,412 which were transfers from inventory. During the three months ended May 31, 2022 the Company made total additions to revenue earning devices of $ 174,101 which were transfers from inventory. Depreciation expense was $ 122,841 and $ 71,414 for the three months ended May 31, 2023, and 2022 respectively. - 14 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 7. FIXED ASSETS Fixed assets consisted of the following: May 31, 2023 February 28, 2023 Automobile $ 101,680 $ 101,680 Demo devices 97,720 69,010 Tooling 101,322 101,322 Machinery and equipment 8,825 8,825 Computer equipment 150,387 150,387 Office equipment 15,312 15,312 Furniture and fixtures 21,225 21,225 Warehouse equipment 14,561 14,561 Leasehold improvements 19,031 15,568 530,063 497,890 Less: Accumulated depreciation ( 227,103 ) ( 182,002 ) $ 302,960 $ 315,888 During the three months ended May 31, 2023 the Company made additions of $ 32,173 of which $ 28,710 were transfers from inventory with remaining additions of $ 3,463 . During the three months ended May 31, 2022 the Company made additions of $ 93,730 of which $ 5,516 were transfers from inventory with remaining additions of $ 88,214 . Depreciation expense was $ 45,101 and $ 22,581 for the three months ended May 31, 2023, and 2021 respectively. 8. DEFERRED VARIABLE PAYMENT OBLIGATION On February 1, 2019 the Company entered into an agreement with an investor whereby the investor would pay up to $ 900,000 in exchange for a perpetual 9 % rate payment (Payments) on the Company’s reported quarterly revenue from operations excluding any gains or losses from financial instruments (Revenues). At February 29, 2020 the investor has advanced the full $900,000. On May 9, 2019 the Company entered into two similar arrangements with two investors: (1) The investor would pay up to $ 400,000 in exchange for a perpetual 4 % rate Payment on the Company’s reported quarterly Revenues. At February 29, 2020, $ 400,000 has been paid to the Company. (2) The investor would pay up to $ 50,000 in exchange for a perpetual 1.11 % rate Payment on the Company’s reported quarterly Revenues. At February 29, 2020, $ 50,000 has been paid to the Company. These variable payments (Payments) are to be made 30 days after the end of each fiscal quarter. If the Payments would deplete RAD’s available cash by more than 30%, the Payments may be deferred for up to 12 months after the quarterly report at an interest rate of 6% per annum on the unpaid amount. In the event that at least 10% of the assets of the Company are sold by the Company, the investors would be entitled to the fair market value (FMV) of all future Payments associated with the assets sold as determined by an independent valuator to be chosen by the investors. The FMV cannot exceed 30% of the total asset disposition price defined as the total price paid for the assets plus all future Payments associated with the assets sold. In the event that the common or preferred shares are sold by the Company to a third party as to effect a change in control, then the investors must be paid the FMV of all future Payments in one lump payment. The FMV cannot exceed 30% of the share disposition price defined as the total price the third party paid for the shares plus the total value of all future Payments. On November 18, 2019 the Company entered into an arrangement similar to the (February 1, 2019 agreement above) investor above whereby the investor would advance up to $ 225,000 in exchange for a perpetual 2.25 % rate Payment on the Company’s quarterly Revenues (commencing on quarter ending May 31, 2020). At February 29, 2020 the investor has advanced $ 109,000 and the investor advanced the $ 116,000 remainder as of May 2020. - 15 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) On December 30, 2019 the Company entered into an arrangement with a new investor whereby the investor would advance up to $ 100,000 in exchange for a perpetual 1.00 % rate Payment on the Company’s quarterly Revenues (commencing quarter ended November 30, 2020). At February 29, 2020 the investor has advanced $50,000 with the remainder to be advanced no later than June 30, 2020. If the total investor advances turns out to be less than $100,000, this would not constitute a breach of the agreement, rather the 1.00% rate would be adjusted on a pro-rata basis. On April 22, 2020 the Company entered into an arrangement with the (first May 9, 2019) investor above whereby the investor would advance up to $ 100,000 in exchange for a perpetual 1.00 % rate Payment on the Company’s quarterly Revenues. At May 31, 2020 the investor has fully funded this commitment. On July 1, 2020 the Company entered into an agreement with the first investor whereby the investor would pay up to $ 800,000 in exchange for a perpetual 2.75 % rate payment (Payment) on the Company’s reported quarterly revenue. These Payments are to be made 90 days after the fiscal quarter with the first payment being due no later than May 31, 2021. If the Payments would deplete RAD’s available cash by more than 20%, the payment may be deferred. The investor had agreed to pay $100,000 per month over an 8 month period with the first payment due July 2020 and the final payment no later than February 28, 2021. As at August 31, 2020 the investor had fully funded the $800,000 commitment On August 27, 2020 the Company and the first investor referred to above consolidated the three separate agreements of February 1, 2019 for $ 900,000 , November 18, 2019 for $ 225,000 and July 1, 2020 for $ 800,000 into a new agreement for a total of $ 1,925,000 . This new agreement is for similar terms as the above agreements save for the following: the rate payment is revised to 14.25 % payable on revenues commencing the quarter ended August 31, 2020 and the Payments are secured by the assets of the Company. This interest may be secured by UCC filing but is subordinated to equipment financing on the products the Company leases to its customers. In summary of all agreements mentioned above if in the event that at least 10 % of the assets of the Company are sold by the Company, the investors would be entitled to the fair market value (FMV) of all future Payments associated with the assets sold as determined by an independent valuator to be chosen by the investors. The FMV cannot exceed 43.77% of the total asset disposition price defined as the total price paid for the assets plus all future Payments associated with the assets sold. In the event that the common or preferred shares are sold by the Company to a third party as to effect a change in control, then the investors must be paid the FMV of all future Payments in one lump payment. The FMV cannot exceed 43.77% of the share disposition price defined as the total price the third party paid for the shares plus the total value of all future Payments. As of March 1, 2021 as a result of the amendment with the first investor noted below. This aggregate asset disposition % was reduced from 43.77 % to 33.77% The Payments will first become payable on June 30, 2019 (unless otherwise indicated) based on the quarterly Revenues for the quarter ended May 31, 2019 and will accrue every quarter thereafter. As of May 31, 2023, the Company has accrued approximately $ 604,811 in Payments, of which $ 388,226 is in arrears. As of February 28, 2023, the Company has accrued approximately $ 542,177 in Payments, of which $ 325,600 is in arrears. On March 1, 2021 the first investor referred to above whose aggregate investment is $ 1,925,000 revised his agreements as follows: 1) The rate payment was reduced from 14.25 % to 9.65 % 2) The asset disposition % (see below) was reduced from 31 % to 21 % In consideration for the above changes, the investor received 40 Series F Convertible Preferred Stock and a warrant to purchase 367 shares of its Series F Convertible Preferred Stock with a five-year term and an exercise price of $ 1.00 . During the three months ended May 31, 2021 the warrant holder exercised warrants to acquire 38 shares of Series F Convertible Preferred Stock. The company attributed a fair value based on recent transactions for the Series F Preferred stock and warrants of $ 33,015,214 and recorded a loss on settlement of debt with a corresponding adjustment to paid in capital. The Company retains total involvement in the generation of cash flows from these revenue streams that form the basis of the payments to be made to the investors under this agreement. Because of this, the Company has determined that the agreements constitute debt agreements. As of February 28, 2023, and February 28, 2022, the long-term balances other than Payments already owed is the cash received of $ 2,525,000 and $ 2,525,000 , respectively. For both the years ended February 28, 2023 and February 28, 2022, the Company has received $ 0 related to the deferred payment obligation as the balance remains $ 2,525,000 at both February 28, 2023 and February 28, 2022. - 16 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the three months ended May 31, 2023 and year ended February 28, 2023 , the Company has received $ 0 related to the deferred payment obligation since there were no new agreements during this period. The balance remains $ 2,525,000 at both May 31, 2023 and February 28, 2023. The Payments first become payable on June 30, 2019 (unless otherwise indicated) based on the quarterly Revenues for the quarter ended May 31, 2019 and accrue every quarter thereafter. As of May 31, 2023, the Company has accrued $ 388,227 in Payments (February 28, 2023 -$ 542,177 ). At May 31, 2023, and February 28, 2023 the Company was in default on $ 388,226 and $ 325,600 of those Payments. No notices have been sent to the Company. 9. RELATED PARTY TRANSACTIONS For both the three months ended May 31, 2023 and May 31, 2022 , the Company had no repayments of net advances from its loan payable-related party. At May 31, 2023, the loan payable-related party was $ 243,256 and $ 206,516 at February 28, 2023. Included in the balance due to the related party at May 31, 2023 is $ 139,250 of deferred salary and interest, $ 133,000 of which bears interest at 12 %. At February 28, 2023 there was $ 108,000 of deferred salary with $ 108,000 bearing interest at 12 %. The accrued interest included in loan at May 31, 2023 and February 28, 2022 was $ 19,275 and $ 15,660 , respectively. Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months ended May 31, 2023 the Company accrued $ 63,000 (three months ended May 31 2022-$ 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, 2023 and February 28, 2023 there was $ 1,042,000 and $ 979,000 of incentive compensation payable. During the three months ended May 31, 2023 and 2022, the Company was charged $ 882,015 and $ 1,001,734 , respectively for fees for research and development from a company partially owned by a principal shareholder. 10. OTHER DEBT – VEHICLE LOAN In December 2016, RAD entered into a vehicle loan for $ 47,704 secured by the vehicle. The loan is repayable over 5 years maturing November 9, 20 21, and repayable $ 1,019 per month including interest and principal. In November 2017, RAD entered into another vehicle loan secured by the vehicle for $ 47,661 . The loan is repayable over 5 years, maturing October 24, 2022 and repayable at $ 923 per month including interest and principal. The principal repayments made were $ 0 for both the year ended February 28, 2022 and February 28, 2021. Regarding the second vehicle loan, the vehicle was returned at the end of fiscal 2019 and the car was subsequently sold by the lender for proceeds of $ 21,907 which went to reduce the outstanding balance of the loan. A loss of $ 3,257 was recorded as well. A balance of $ 21,578 remains on this vehicle loan at both February 28, 2021 and February 29, 2020. For the first vehicle loan, the vehicle was retired in 2020, the proceeds of the disposal of $ 18,766 was applied against the balance of the loan with a $ 5,515 gain on the remaining asset value of $ 13,251 . A balance of $ 16,944 remains on this vehicle loan at both February 28, 2022 and February 28, 2021. The remaining total balances of the amounts owed on the vehicle loans were $ 38,522 and $ 38,522 as of May 31, 2022 and February 28, 2022, respectively, of which all were classified as current. - 17 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 11. LOANS PAYABLE Loans payable at May 31, 2023 consisted of the following: Annual Date Maturity Description Principal Interest Rate July 18, 2016 July 18, 2017 Promissory note (1) * $ 3,500 22 % December 10, 2020 December 10, 2023 Promissory note (2) 3,921,168 12 % December 10, 2020 December 10, 2023 Promissory note (3) 3,054,338 12 % December 10, 2020 December 10, 2023 Promissory note (4) 165,605 12 % December 14, 2020 December 14, 2023 Promissory note (5) 310,375 12 % December 30, 2020 December 30, 2023 Promissory note (6) 350,000 12 % January 1, 2021 January 1, 2024 Promissory note (7) 25,000 12 % January 1, 2021 January 1, 2024 Promissory note (8) 145,000 12 % January 14, 2021 January 14, 2024 Promissory note (9) 550,000 12 % February 22, 2021 February 22, 2024 Promissory note (10) 1,650,000 12 % March 1, 2021 March 1, 2024 Promissory note (11) 6,000,000 12 % June 8, 2021 June 8, 2024 Promissory note (12) 2,750,000 12 % July 12, 2021 July 26, 2026 Promissory note (13) 3,857,360 7 % September 14, 2021 September 14, 2024 Promissory note (14) 1,650,000 12 % July 28, 2022 July 28, 2023 Promissory note (15) 170,000 15 % August 30, 2022 August 30,2024 Promissory note (16) 3,000,000 15 % September 7, 2022 September 7, 2023 Promissory note (17) 400,000 15 % September 8, 2022 September 8, 2023 Promissory note (18) 475,000 15 % October 13, 2022 October 13, 2023 Promissory note (19) 350,000 15 % October 28, 2022 October 31, 2026 Promissory note (20) 400,000 15 % November 9, 2022 October 31, 2026 Promissory note (20) 400,000 15 % November 10, 2022 October 31, 2026 Promissory note (20) 400,000 15 % November 15, 2022 October 31, 2026 Promissory note (20) 400,000 15 % January 11, 2023 October 31,2026 Promissory note (20) 400,000 15 % February 6, 2023 October 31, 2026 Promissory note (20) 400,000 15 % April 5. 2023 October 31, 2026 Promissory note (20) 400,000 15 % April 20, 23 October 31, 2026 Promissory note (20) 400,000 15 % May 11, 2023 October 31, 2026 Promissory note (20) 400,000 15 % $ 32,427,346 Less: current portion of loans payable ( 17,569,985 ) Less: discount on non-current loans payable ( 4,973,120 ) Non-current loans payable, net of discount $ 9,884,241 Current portion of loans payable $ 17,569,985 Less: discount on current portion of loans payable ( 1,348,996 ) Current portion of loans payable, net of discount $ 16,220,989 * In default (1) This note was transferred from convertible notes payable because in August 2022 it was no longer convertible due to restrictions placed on the lender. (2) This promissory note was issued as part of a debt settlement whereby $ 2,683,357 in convertible notes and associated accrued interest of $ 1,237,811 totaling $ 3,921,168 was exchanged for this promissory note of $ 3,921,168 , and a warrant to purchase 450,000,000 shares at an exercise price of $ .002 per share and a three-year maturity having a relative fair value of $ 990,000 . This note is secured by a general security charging all of the Company’s present and after-acquired property. - 18 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (3) This promissory note was issued as part of a debt settlement whereby $ 1,460,794 in convertible notes and associated accrued interest of $ 1,593,544 totaling $ 3,054,338 was exchanged for this promissory note of $ 3,054,338 , and a warrant to purchase 250,000,000 shares at an exercise price of $ .002 per share and a three-year maturity having a relative fair value of $ 550,000 . This note is secured by a general security charging all of the Company’s present and after-acquired property. (4) This promissory note was issued as part of a debt settlement whereby $ 103,180 in convertible notes and associated accrued interest of $ 62,425 totaling $ 165,605 was exchanged for this promissory note of $ 165,605 , and a warrant to purchase 80,000,000 shares at an exercise price of $ .002 per share and a three-year maturity having a fair value of $ 176,000 . (5) This promissory note was issued as part of a debt settlement whereby $ 235,000 in convertible notes and associated accrued interest of $ 75,375 totaling $ 310,375 was exchanged for this promissory note of $ 310,375 , and a warrant to purchase 25,000,000 shares at an exercise price of $ .002 per share and a three-year maturity having a fair value of $ 182,500 . (6) The note, with an original principal amount of $ 350,000 , may be pre-payable at any time. The note balance includes an original issue discount of $ 35,000 and was issued with a warrant to purchase 50,000,000 shares at an exercise price of $ 0.025 per share with a 3 -year term and having a relative fair value of $ 271,250 . The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $ 271,250 with a corresponding adjustment to paid in capital for the relative fair value of the warrant. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 39,904 , respectively, with an unamortized discount of $ 153,611 at May 31, 2023. (7) This promissory note was issued as part of a debt settlement whereby $ 9,200 in convertible notes and associated accrued interest of $ 6,944 totaling $ 16,144 was exchanged for this promissory note of $ 25,000 . This note is secured by a general security charging all of the Company’s present and after-acquired property. (8) This promissory note was issued as part of a debt settlement whereby $ 79,500 in convertible notes and associated accrued interest of $ 28,925 totaling $ 108,425 was exchanged for this promissory note of $ 145,000 . This note is secured by a general security charging all of the Company’s present and after-acquired property. (9) The note, with an original principal amount of $ 550,000 , may be pre-payable at any time. The note balance includes an original issue discount of $ 250,000 and was issued with a warrant to purchase 50,000,000 shares at an exercise price of $ 0.025 per share with a 3 -year term and having a relative fair value of $ 380,174 . The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $ 380,174 with a corresponding adjustment to paid in capital. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 51,045 respectively, with an unamortized discount of $ 188,291 at May 31, 2023. (10) The note, with an original principal balance of $ 1,650,000 , may be pre-payable at any time. The note balance includes an original issue discount of $ 150,000 and was issued with a warrant to purchase 100,000,000 shares at an exercise price of $ 0.135 per share with a 3 -year term and having a relative fair value of $ 1,342,857 . The discount and warrant are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $ 1,342,857 with a corresponding adjustment to paid in capital for the relative fair value of the warrant. The maturity date was extended from February 22, 2022 to February 22, 2024 on February 28, 2022 in exchange for warrants to purchase 50,000,000 at an exercise price of $ .0164 and a 3 year term. These warrants have a fair value of $ 950,000 recorded as interest expense with a corresponding adjustment to paid in capital recorded in the year ended February 28, 2022. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 159,064 respectively, with an unamortized discount of $ 953,197 at May 31, 2023. (11) The unsecured note may be pre-payable at any time. Cash proceeds of $ 5,400,000 were received. The note balance of $ 6,000,000 includes an original issue discount of $ 600,000 and was issued with a warrant to purchase 300,000,000 shares at an exercise price of $ 0.135 per share with a 3 -year term and having a relative fair value of $ 4,749,005 using Black-Scholes with assumptions described in note 13. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $ 4,749,005 with a corresponding adjustment to paid in capital for the relative value of the warrant.. The maturity was extended from March 1, 2022 to March 1, 2024 on February 28, 2022 in exchange for warrants to purchase 150,000,000 shares of common stock at an exercise price of $ .0164 and a 3 year term. These warrants have a fair value of $ 2,850,000 recorded as interest expense with a corresponding adjustment to paid in capital recorded in the year ended February 28, 2022. This note has been fully amortized. - 19 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (12) The note, with an original principal balance of $ 2,750,000 , may be pre-payable at any time. The note balance includes an original issue discount of $ 50,000 and was issued with a warrant to purchase 170,000,000 shares at an exercise price of $ 0.064 per share with a 3 -year term and having a relative fair value of $ 2,035,033 . The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $ 2,035,033 with a corresponding adjustment to paid in capital. The maturity date was extended from June 8, 2022 to June 8, 2024 on February 28, 2022 in exchange for warrants to purchase 85,000,000 at an exercise price of $ .0164 and a 3 year term. These warrants have a fair value of $ 1,615,000 recorded as interest expense with a corresponding adjustment to paid in capital recorded in the year ended February 28, 2022. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 154,910 respectively, with an unamortized discount of $ 639,308 at May 31, 2023. (13) This loan, with an original principal balance of $ 4,000,160 , was in exchange for 184 Series F preferred shares from a former director. The interest and principal are payable at maturity. The loan is unsecured. For the three months ended May 31, 2023 there were repayments of $ 27,000 on the note. (14) The note, with an original principal balance of $ 1,650,000 , may be pre-payable at any time. The note balance includes an original issue discount of $ 150,000 and was issued with a warrant to purchase 250,000,000 shares at an exercise price of $ 0.037 per share with a 3 -year term and having a relative fair value of $ 1,284,783 , The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $ 1,284,783 with a corresponding adjustment to paid in capital. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 86,930 respectively, with an unamortized discount of $ 1,27,501 at May 31, 2023. (15) Original $ 170,000 note may be pre-payable at any time. The note balance includes an original issue discount of $ 20,000 . Principal and interest due at maturity. Secured by a general security charging all of RAD’s present and after-acquired property. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 5,287 respectively, with an unamortized discount of $ 3,739 at May 31, 2023. (16) A warrant holder exchanged 955,000,000 warrants for a promissory note of $ 3,000,000 , bearing interest at 15 % with a two year maturity. The fair value of the warrants was determined to be $ 2,960,500 with a corresponding adjustment to paid-in capital and a debt discount of $ 39,500 which will be amortized over the term of the loan. Principal and interest due at maturity. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 4,557 respectively, with an unamortized discount of $ 26,312 at May 31, 2023. (17) Original $ 400,000 note may be pre-payable at any time. The note balance includes an original issue discount of $ 50,000 . Principal and interest due at maturity. Secured by a general security charging all of RAD’s present and after-acquired property. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 12,342 respectively, with an unamortized discount of $ 15,479 at May 31, 2023. (18) Original $ 475,000 note may be pre-payable at any time. The note balance includes an original issue discount of $ 75,000 . Principal and interest due at maturity. Secured by a general security charging all of RAD’s present and after-acquired property. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 18,930 respectively, with an unamortized discount of $ 17,799 at May 31, 2023. (19) Original $ 350,000 note may be pre-payable at any time. The note balance includes an original issue discount of $ 50,000 . Principal and interest due at maturity. Secured by a general security charging all of the Company’s s present and after-acquired property. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 12,290 respectively, with an unamortized discount of $ 20,620 at May 31, 2023. - 20 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (20) On October 28, 2022 the Company entered into an loan facility with a lender for up to $ 4,000,000 including an original issue discount of $500,000. In exchange the Company will issue one series F Preferred Share, extended 329 series F warrants with a March 1, 2026 maturity to a new October 31, 2033 maturity, and issue up to 10 tranches with each tranche of $400,000, with cash proceeds of $350,000 an original issue discount of $50,000, October 31, 2026 maturity, and 61 Series F warrants with a October 31, 2033 maturity. Secured by a general security charging all of the Company’s present and after-acquired property. At November 30, 2022 the Company has issued 6 tranches as follows: October 28, 2022, $ 400,000 loan, original issue discount of $ 50,000 , 61 Series F Preferred Share warrants and 1 Series F Preferred Share having a relative fair value of $299,399. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 1,866 respectively, with an unamortized discount of $ 346,157 at May 31, 2023. November 9, 2022, $ 400,000 loan, original issue discount of $ 50,000 , 61 Series F Preferred Share warrants having a relative fair value of $299,750. For the three months ended May 31, 2023, the Company recorded amortization expense of $$ 1,838 respectively, with an unamortized discount of $ 346,600 at May 31, 2023. November 10, 2022, $ 400,000 loan, original issue discount of $ 50,000 , 61 Series F Preferred Share warrants having a relative fair value of $302,020. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 16,678 respectively, with an unamortized discount of $ 349,214 at May 31, 2023. November 15, 2022, $ 400,000 loan, original issue discount of $ 50,000 , 61 Series F Preferred Share warrants having a relative fair value of $299,959. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 1,881 respectively, with an unamortized discount of $ 345,914 at May 31, 2023. January 11, 2023, $ 400,000 loan, original issue discount of $ 50,000 , 61 Series F Preferred Share warrants having a relative fair value of $299,959. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 1,925 respectively, with an unamortized discount of $ 345,265 at May 31, 2023. February 6, 2023, $ 400,000 loan, original issue discount of $ 50,000 , 61 Series F Preferred Share warrants having a relative fair value of $299,959. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 1,836 respectively, with an unamortized discount of $ 346,590 at May 31, 2023. April 5, 2023, $ 400,000 loan, original issue discount of $ 50,000 , 61 Series F Preferred Share warrants having a relative fair value of $296,245. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 751 respectively, with an unamortized discount of $ 345,494 at May 31, 2023. April 20, 2023, $ 400,000 loan, original issue discount of $ 50,000 , 61 Series F Preferred Share warrants having a relative fair value of $302,219. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 196 respectively, with an unamortized discount of $ 352,023 at May 31, 2023. May 11, 2023, $ 400,000 loan, original issue discount of $ 50,000 , 61 Series F Preferred Share warrants having a relative fair value of $348,983. For the three months ended May 31, 2023, the Company recorded amortization expense of $ 0 respectively, with an unamortized discount of $ 398,983 at May 31, 2023. - 21 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 12. STOCKHOLDERS’ EQUITY (DEFICIT) Summary or Preferred Stock Activity No preferred stock activity during the period. Summary of Preferred Stock Warrant Activity Number of Series F Preferred Warrants Weighted Average Exercise Price Weighted Average Remaining Years Outstanding at March 1, 2023 695 $ 1.00 10.00 Issued 183 1.00 9.88 Exercised — — — Forfeited and cancelled — — — Outstanding at May 31, 2023 878 $ 1.00 9.75 During the three months ended May 31, 2023, as part of debt issuance the Company issued 183 Series F Preferred Warrants to a lender for a relative fair value of $ 947,447 . (see Note 11) Summary of Common Stock Activity For the three months ended May 31, 2023 , the Company issued 280,929,190 common shares with gross proceeds of $ 1,400,094 and net proceeds of $ 1,318,809 after issuance costs of $ 81,285 . The table below represent the common shares issued, issuable and outstanding at May 31, 2023 and February 28, 2023: Common shares May 31, 2023 February 28, 2023 Issued 6,117,570,789 5,836,641,599 Issuable 12,100,000 12,100,000 Issued, issuable and outstanding 6,129,670,789 5,848,741,599 Summary of Common Stock Warrant Activity Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Years Outstanding at February 28, 2023 314,217,451 $ 0.114 1.95 Issued — — — Exercised — — — Forfeited and cancelled — — — Outstanding at May 31, 2023 314,217,451 $ 0.114 1.70 For the three months ended May 31, 2022 and May 31, 2021, the Company recorded a total of $ 0 and $ 0 , respectively, to stock-based compensation for options and warrants with a corresponding adjustment to additional paid-in capital. Summary of Common Stock Option Activity Number of Warrants Weighted Average Exercise Price Weighted Average Remaining Years Outstanding at February 28 , 2023 95,725,000 $ 0.02 4.75 Issued — — — Exercised — — — Forfeited, extinguished and cancelled ( 13,025,000 ) $ 0.02 (4.75) Outstanding at May 31, 2023 82,700,000 $ 0.02 4.50 - 22 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 13. COMMITMENTS AND CONTINGENCIES Litigation Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions. The related legal costs are expensed as incurred. Operating Lease On December 18, 2020, the Company entered into a 15-month lease agreement for office space at 18009 Sky Park Circle Suite E, Irvine CA, 92614, commencing on December 18, 2020 through to March 31, 2022 with a minimum base rent of $3,859 per month. The Company paid a security deposit of $ 3,859 . On March 10, 2021, the Company entered into a 10 year lease agreement for q manufacturing facility at 10800 Galaxie Avenue, Ferndale, Michigan, 48220, commencing on May 1, 2021 through to April 30, 2031 with a minimum base rent of $ 15,880 per month. The base rent increase by 3% per annum commencing May 1, 2024. The Company paid a security deposit of $ 15,880 . On September 30, 2021, the Company entered into a 3-year lease agreement for a vehicle commencing September 30, 2021 through to April 30, 2031 with a minimum base rent of $1,538 per month. The Company paid a down payment of $18,462. On January 28, 2022, the Company entered into a 2-year lease agreement for office space at 1516 E Edinger, Santa Ana, California, 92705, commencing on February 1, 2022 through to January 31, 2024 with a minimum base rent of $ 1,500 per month. The Company paid a security deposit of $ 1,500 . The Company’s leases are accounted for as operating leases. Rent expense and operating lease cost are recorded over the lease terms on a straight-line basis. Rent expense and operating lease cost was $ 62,542 for the three months May 31, 2023 and $ 69,967 for the three months May 31, 2022. Maturity of Lease Liabilities Operating Leases May 31, 2024 $ 244,169 May 31, 2025 213,711 May 31, 2026 207,558 May 31, 2027 207,557 May 31, 2028 207,558 May 31, 2029 and after 605,378 Total lease payments 1,685,931 Less: Interest ( 515,488 ) Present value of lease liabilities $ 1,170,443 - 23 - Table of Contents ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 14. EARNINGS (LOSS) PER SHARE The net income (loss) per common share amounts were determined as follows: For the Three Months Ended May 31, 2023 May 31, 2022 Numerator: Net income (loss) available to common shareholders $ ( 4,555,193 ) $ ( 4,671,686 ) Effect of common stock equivalents Add: interest expense on convertible debt — — Net income (loss) adjusted for common stock equivalents ( 4,555,193 ) ( 4,671,686 ) Denominator: Weighted average shares – basic 5,964,709,322 4,798,657,871 Net income (loss) per share – basic $ ( 0.00 ) $ ( 0.00 ) Denominator: Weighted average shares – diluted 5,964,709,322 4,798,657,871 Net income (loss) per share – diluted $ ( 0.00 ) $ ( 0.00 ) The anti-dilutive shares of common stock equivalents for the three months ended May 31, 2023 and 2022 were as follows: For the Three Months Ended May 31, 2023 May 31, 2022 Convertible notes and accrued interest — 7,093,255 Convertible Series F Preferred Shares — — Stock options and warrants 396,917,451 1,216,845,661 Total 396,917,451 1,223,938,916 * On August 23, 2021, the Company filed amended Series F preferred shares such that Series F preferred shares are not convertible into common stock by a holder until (A) August 23, 2023 or (B) the date on which such a conversion may be required for the purpose of (i) uplisting the Company to a new stock exchange, or (ii) selling more than 50% of the Company’s assets. Had these Series F preferred shares been convertible at May 31, 2023 and 2022 the dilutive effects would be as follows: Series F Preferred shares been convertible the dilutive effects would be as follows: For the Three Months Ended May 31, 2023 May 31, 2022 Convertible Series F Preferred Shares 21,147,364,222 16,798,367,179 15. SUBSEQUENT EVENTS Subsequent to May 31, 2023 through to July 14, 2023: — the Company issued 441,502,460 common shares pursuant to a share purchase agreement for gross proceeds of $ 2,922,520 , issuance costs of $ 132,591 and net proceeds of $ 2,789,929 . - 24 - Table of Contents 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. - 25 - Table of Contents Management Discussion and Analysis Results of Operations for the Three Months Ended May 31, 2023 and 2022 The following table shows our results of operations for the three months ended May 31, 2023 and 2022. 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, 2023 May 31, 2022 Dollars Percentage Revenues $ 385,208 $ 385,157 $ 51 0% Gross profit 293,697 91,433 202,264 221% Operating expenses 3,242,674 3,588,089 (345,415 ) (10% ) Loss from operations (2,948,977 ) (3,496,656 ) 547,679 16% Other income (expense), net (1,606,216 ) (1,175,030 ) (431,186 ) (37% ) Net loss $ (4,555,193 ) $ (4,671,686 ) $ 116,493 2% Revenue The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change May 31, 2023 May 31, 2022 Dollars Percentage Device rental activities $ 238,149 $ 239,805 $ (1,656 ) (1% ) Direct sales of goods and services 147,059 145,352 1,707 1% $ 385,208 $ 385,157 $ 51 0% Total revenue for the three-month period ended May 31, 2023 was $385,208 which represented a small increase of $51 compared to total revenue of $385,157 for the three months ended May 31, 2022. Gross profit Total gross profit for the three-month period ended May 31, 2023 was $293,697 which represented an increase of $202,264 compared to gross profit of $ 91,433 for the three months ended May 31, 2022. The increase resulted primarily from inventory adjustments incurred in the prior three month period ended May 31, 2022 totaling $177,475. This was 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 76% for the three month period ended May 31, 2023 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 have been 70% for comparative purposes. Operating Expenses Period Three Months Ended Three Months Ended Change May 31, 2023 May 31, 2022 Dollars Percentage Research and development $ 891,757 $ 1,023,735 $ (131,978 ) (13% ) General and administrative 2,120,433 2,400,392 (279,959 ) (12% ) Depreciation and amortization 167,942 93,995 73,947 79% Operating lease cost and rent 62,542 69,967 (7,425 ) (11% ) Operating expenses $ 3,242,674 $ 3,588,089 $ (345,415 ) (10% ) - 26 - 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 May 31, 2023 and May 31, 2022, were $3,242,674 and $3,588,089, respectively. The overall decrease of $345,415 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses decreased by $279,959. In the three months ended May 31, 2023 the Company undertook cost savings measures including a reduction in force. In comparing the three months ended May 31, 2023 and May 31, 2022 the decrease in G& A was primarily due to decreases in wages and salaries of $50,527 due to reduction in force, stock-based compensation of $45,779, office expenses of $7,087, travel $43,876, production supplies by $85,246 and bad debts expense of $89,000 due to fewer slow payers. These decreases were partially offset by increases in sales and marketing of $62,731and professional fees of $61,631 mostly due compliance and audit fees increase. ● Research and development decreased by $131,978 due to a reduction in funding on development of future products. ● Depreciation and amortization increased by $73,947 due to large increases in revenue earning devoices , demo devices, tooling and computer equipment. ● Operating lease cost and rent decreased by $7,425 due to one less lease in three month period ended May 31, 2023. Other Income (Expense) Other income (expense) consisted of interest. Other income (expense) during the three months ended May 31, 2023 and May 31, 2022, was ($1,606,216) and ($1,175,030), respectively. The $431,186 increase in other expense was primarily attributable to the increase in interest and amortization of debt due to higher loans. Net incomes We had a net loss of $4,555,193 for the three months ended May 31, 2023, compared to a net loss of $4,671,686 for the three months ended May 31, 2022. The change is primarily the result of the loss on settlement in the three months ended May 31, 2021. 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, 2023, we have generated revenue and are trying to achieve positive cash flows from operations. As of May 31, 2023, we had a cash balance of $287,202, accounts receivable of $391,823, device parts inventory of $1,489,429 and $24,509,171 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, 2023 February 28, 2023 Current assets $ 2,689,955 $ 3,438,992 Current liabilities 24,509,171 16,049,593 Working capital $ (21,819,216 ) $ (12,610,601 ) As of May 31, 2023 and February 28, 2023, we had a cash balance of $287,202 and $939,759, respectively. - 27 - Table of Contents Summary of Cash Flows Three Months Ended May 31, 2023 Three Months Ended May 31, 2022 Net cash used in operating activities $ (2,991,003 ) $ (3,621,572 ) Net cash used in investing activities $ (3,463 ) $ (88,214 ) Net cash (used in) provided by financing activities $ 2,341,909 $ (16,731 ) Net cash used in operating activities. Net cash used in operating activities for the three months ended May 31, 2023 was $2,991,003, which included a net loss of $4,555,193, non-cash activity such as the bad debts expense of $16,000, reduction of right of use asset of $28,767, accretion of lease liability $33,775, stock based compensation of $115,721, change in operating assets of $608,025, amortization of debt discount of $557,219, increase in related party accrued payroll and interest of $36,740 and depreciation and amortization of $167,942 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, 2023 was $3,463, which was the purchase of fixed assets, Net cash provided (used) in financing activities. Net cash provided by financing activities was $2,341,909 for the three months ended May 31, 2023. This consisted of share proceeds net of issuance costs of $1,318,909, and proceeds from loans payable of $1,050,000, reduced by repayments on loans payable of $27,000. Off-Balance Sheet Arrangements None. Critical Accounting Policies and Estimates Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K for the year ended February 28, 2023, as filed on June 14, 2023. Related Party Transactions For both the three months ended May 31, 2023 and May 31, 2022 , the Company had no repayments of net advances from its loan payable-related party. At May 31, 2023, the loan payable-related party was $243,256 and $206,516 at February 28, 2022. Included in the balance due to the related party at May 31, 2023 is $139,250 of deferred salary and interest, $133,000 of which bears interest at 12%. At February 28, 2023 there was $108,000 of deferred salary with $108,000 bearing interest at 12%. The accrued interest included in loan at May 31, 2023 and February 28, 2022 was $19,275 and $15,660, respectively. Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months ended May 31, 2023 the Company accrued $63,000 (three months ended May 31 2022-$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, 2023 and February 28, 2023 there was $1,042,000 and $979,000 of incentive compensation payable. During the three months ended May 31, 2023 and 2022, the Company was charged $882,015 and $1,001,734, 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. - 28 - Table of Contents ITEM 4. CONTROLS AND PROCEDURES Management’s Report on Internal Control over Financial Reporting We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of May 31, 2023. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of May 31, 2023, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. 1. As of May 31, 2023, we did not maintain effective controls over our control environment. Specifically, we have not developed and effectively communicated to our employees our accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. 2. As of May 31, 2023, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness. Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. Change in Internal Controls over Financial Reporting The only change in internal controls was the implementation of the Company’s new CRM/ERP/Accounting software. This change in our internal controls over financial reporting that occurred during the period covered by this report, should not have materially affected, or is not reasonably likely to materially affect, our internal controls over financial reporting. PART II — OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. ITEM 1A. RISK FACTORS This item is not applicable to smaller reporting companies. ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS Each issuance of securities was issued without registration in reliance of the exemption from registration Section 3(a)9 of the Securities Act of 1933. ITEM 3. DEFAULTS UPON SENIOR SECURITIES The Company has not defaulted upon senior securities. ITEM 4. MINE SAFETY DISCLOSURES Not applicable to the Company. - 29 - Table of Contents ITEM 5. OTHER INFORMATION None. ITEM 6. EXHIBITS Exhibit No. Description of Document 3.1 Articles of Incorporation (1) 3.2 Bylaws (2) 14 Code of Ethics (2) 21 Subsidiaries of the Registrant (3) 31.1 Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer. (3) 31.2 Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial and accounting officer. (3) 32.1 Section 1350 Certification of principal executive officer. (3) 32.2 Section 1350 Certification of principal financial accounting officer. (3) 101.INS Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. (3) 101.SCH Inline XBRL Taxonomy Extension Schema Document (3) 101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document (3) 101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document (3) 101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document (3) 101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document (3) 104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) (3) __________ (1) Incorporated by reference to our Form 10-KT file with the Securities and Exchange Commission on March 12, 2018. (2) Incorporated by reference to our Form S-1 filed with the Securities and Exchange Commission on August 4, 2010. (3) Filed or furnished herewith. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Artificial Intelligence Technology Solutions Inc. Date: July 17, 2023 BY: /s/ Steven Reinharz Steven Reinharz President, Chief Executive Officer (principal executive officer) Date: July 17, 2023 BY: /s/ Anthony Brenz Anthony Brenz Chief Financial Officer (principal financial officer) - 30 -