Artificial Intelligence Technology Solutions Inc. - Quarter Report: 2022 August (Form 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 August 31, 2022
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: shares of common stock were issued and outstanding as of October 20, 2022.
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PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| August 31, 2022 (Unaudited) |
February 28, 2022* | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash | $ | 363,073 | $ | 4,648,146 | |||
| Accounts receivable, net | 442,652 | 429,469 | |||||
| Share proceeds receivable | 281,200 | ||||||
| Device parts inventory, net | 1,640,891 | 1,530,657 | |||||
| Prepaid expenses and deposits | 568,752 | 442,164 | |||||
| Total current assets | 3,296,568 | 7,050,436 | |||||
| Operating lease asset | 1,268,597 | 1,331,605 | |||||
| Revenue earning devices, net of accumulated depreciation of $622,200 and $434,661, respectively | 947,571 | 709,063 | |||||
| Fixed assets, net of accumulated depreciation of $101,312 and $49,065, respectively | 319,381 | 137,952 | |||||
| Trademarks | 28,723 | 28,723 | |||||
| Security deposit | 21,239 | 21,239 | |||||
| Total assets | $ | 5,882,079 | $ | 9,279,018 | |||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||
| Current liabilities: | |||||||
| Accounts payable and accrued expenses | $ | 1,416,315 | $ | 968,853 | |||
| Advances payable | 1,594 | 1,594 | |||||
| Customer deposits | 1,872 | 10,000 | |||||
| Current operating lease liability | 250,169 | 254,027 | |||||
| Current portion of deferred variable payment obligation | 431,720 | 325,600 | |||||
| Current portion of convertible notes payable, net of discount of $522,505 and $0, respectively | 227,495 | 3,500 | |||||
| Loan payable - related party | 200,036 | 193,556 | |||||
| Incentive compensation plan payable | 704,000 | 479,500 | |||||
| Current portion of loans payable, net of discount of $18,541 and $14,745, respectively | 154,959 | 1,004,708 | |||||
| Vehicle loan - current portion | 38,522 | 38,522 | |||||
| Current portion of accrued interest payable | 39,566 | 1,260,271 | |||||
| Derivative liability | 7,587 | ||||||
| Total current liabilities | 3,466,248 | 4,547,718 | |||||
| Non-current operating lease liability | 1,004,584 | 1,057,579 | |||||
| Loans payable, net of discount of $4,351,804 and $4,905,076, respectively | 23,583,842 | 20,309,069 | |||||
| Deferred variable payment obligation | 2,525,000 | 2,525,000 | |||||
| Accrued interest payable | 4,024,451 | 1,816,009 | |||||
| Total liabilities | 34,604,125 | 30,255,375 | |||||
| Commitments and Contingencies | |||||||
| Stockholders’ deficit: | |||||||
| Preferred Stock, undesignated; shares authorized; shares issued and outstanding at August 31, 2022 and February 28, 2022, respectively | |||||||
| Series E Preferred Stock, $ par value; shares authorized; and shares issued and outstanding, respectively | 3,350 | 3,350 | |||||
| Series F Convertible Preferred Stock, $ par value; shares authorized; and shares issued and outstanding, respectively | 2,532 | 2,532 | |||||
| Series G Preferred Stock, $ par value; shares authorized, shares issued and outstanding at August 31, 2022 and February 28, 2022, respectively | |||||||
| Common Stock, $ par value; shares authorized and shares issued, issuable and outstanding, respectively | 50,635 | 47,353 | |||||
| Additional paid-in capital | 74,111,156 | 73,015,576 | |||||
| Preferred stock to be issued | 99,086 | 99,086 | |||||
| Accumulated deficit | (102,988,805 | ) | (94,144,254 | ) | |||
| Total stockholders’ deficit | (28,722,046 | ) | (20,976,357 | ) | |||
| Total liabilities and stockholders’ deficit | $ | 5,882,079 | $ | 9,279,018 | |||
| * | Derived from audited information |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended |
Three Months Ended |
Six Months Ended |
Six Months Ended |
||||||||||
| August 31, 2022 | August 31, 2021 | August 31, 2022 | August 31, 2021 | ||||||||||
| Revenues | $ | 267,484 | $ | 141,572 | $ | 652,641 | $ | 701,906 | |||||
| Cost of Goods Sold | 34,214 | 41,954 | 327,938 | 152,880 | |||||||||
| Gross Profit | 233,270 | 99,618 | 324,703 | 549,026 | |||||||||
| Operating expenses: | |||||||||||||
| Research and development (Note 10) | 963,786 | 699,292 | 1,987,521 | 1,333,937 | |||||||||
| General and administrative | 2,238,442 | 2,590,920 | 4,638,834 | 4,490,712 | |||||||||
| Depreciation and amortization | 145,793 | 47,691 | 239,788 | 85,334 | |||||||||
| Operating lease cost and rent | 63,681 | 75,212 | 133,648 | 104,086 | |||||||||
| (Gain) loss on disposal of fixed assets | (29,125 | ) | (29,125 | ) | |||||||||
| Total operating expenses | 3,411,702 | 3,383,990 | 6,999,791 | 5,984,944 | |||||||||
| Loss from operations | (3,178,432 | ) | (3,284,372 | ) | (6,675,088 | ) | (5,435,918 | ) | |||||
| Other income (expense), net: | |||||||||||||
| Change in fair value of derivative liabilities | 3,595 | 193,063 | 3,595 | 372,502 | |||||||||
| Interest expense | (1,002,020 | ) | (1,813,773 | ) | (2,177,050 | ) | (2,762,223 | ) | |||||
| Gain (loss) on settlement of debt | 3,992 | 72,709 | 3,992 | (32,911,652 | ) | ||||||||
| Total other expense net | (994,433 | ) | (1,548,001 | ) | (2,169,463 | ) | (35,301,373 | ) | |||||
| Net loss | $ | (4,172,865 | ) | $ | (4,832,373 | ) | $ | (8,844,551 | ) | $ | (40,737,291 | ) | |
| Net loss per share - basic | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | |
| Net loss per share - diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | |
| Weighted average common share outstanding - basic | 4,970,040,852 | 3,890,453,905 | 4,884,349,362 | 3,689,985,691 | |||||||||
| Weighted average common share outstanding - diluted | 4,970,040,852 | 3,890,453,905 | 4,884,349,362 | 3,689,985,691 | |||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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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, 2021 | 4,350,000 | $ | 4,350 | 2,799 | $ | 176,869 | 3,229,426,884 | $ | 32,294 | $ | 16,764,554 | $ | (31,521,754 | ) | $ | (14,543,687 | ) | ||||||||
| Series F preferred shares and warrants issued with deferred variable payment obligation amendment agreement | — | 40 | 40 | — | 33,015,174 | 33,015,214 | |||||||||||||||||||
| Series F preferred shares cancelled in exchange for promissory notes | — | (83 | ) | (83 | ) | — | (6,732,752 | ) | (6,732,835 | ) | |||||||||||||||
| Series F preferred shares issued on exercise of warrants | — | 38 | 38 | — | (38 | ) | |||||||||||||||||||
| Series F preferred shares converted to common shares | — | (78 | ) | (78 | ) | 316,345,998 | 3,164 | (3,086 | ) | ||||||||||||||||
| Warrants issued as part of a debt issuance | — | — | — | 4,749,006 | 4,749,006 | ||||||||||||||||||||
| Stock based compensation | — | — | — | 69,350 | 69,350 | ||||||||||||||||||||
| Net income | — | — | — | (35,904,918 | ) | (35,904,918 | ) | ||||||||||||||||||
| Balance at May 31 2021 | 4,350,000 | $ | 4,350 | 2,716 | $ | 176,786 | 3,545,772,882 | $ | 35,458 | $ | 47,862,208 | $ | (67,426,672 | ) | $ | (19,347,870 | ) | ||||||||
| Adjustment to derivative liability | — | — | — | 422,272 | 422,272 | ||||||||||||||||||||
| Common stock issued for debt conversion | — | — | 31,042,436 | 310 | 898,395 | 898,705 | |||||||||||||||||||
| Stock based compensation on issuable shares | — | — | 2,100,000 | 21 | 109,179 | 109,200 | |||||||||||||||||||
| Exercise of warrants | — | — | 300,251,561 | 3,003 | (3,003 | ) | |||||||||||||||||||
| Exchange of debt for common shares | — | — | 116,104,232 | 1,161 | 6,454,235 | 6,455,396 | |||||||||||||||||||
| Relative fair value of warrants issued with debt | — | — | — | 2,035,033 | 2,035,033 | ||||||||||||||||||||
| Cancellation of Series E preferred shares | (1,000,000 | ) | (1,000 | ) | — | — | 1,000 | ||||||||||||||||||
| Exchange of Series F preferred shares for debt | — | (184 | ) | (184 | ) | — | (3,999,976 | ) | (4,000,160 | ) | |||||||||||||||
| Net income | — | — | — | (4,832,373 | ) | (4,832,373 | ) | ||||||||||||||||||
| Balance at August 31 2021 | 3,350,000 | $ | 3,350 | 2,532 | $ | 176,602 | 3,995,271,111 | $ | 39,953 | $ | 53,779,343 | $ | (72,259,045 | ) | $ | (18,259,797 | ) | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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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 | |||||||||||||||||||
| Rounding | — | — | — | (1 | ) | (1 | ) | ||||||||||||||||||
| 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 | ) | ||||||||
| Issuance of shares, net of $95,293 issuance costs | — | — | 191,691,135 | 1,917 | 1,889,350 | 1,891,267 | |||||||||||||||||||
| Cashless exercise of warrants | — | — | 9,688,179 | 97 | (97 | ) | |||||||||||||||||||
| Relative fair value of warrants issued with debt | — | — | — | 404,374 | 404,374 | ||||||||||||||||||||
| Cancelled shares | — | — | (17,116,894 | ) | (171 | ) | 171 | ||||||||||||||||||
| Exchange of warrants for debt | — | — | — | (2,960,500 | ) | (2,960,500 | ) | ||||||||||||||||||
| Shares as payment for services | — | — | 10,000,000 | 100 | 118,400 | 118,500 | |||||||||||||||||||
| Net income | — | — | — | (4,172,865 | ) | (4,172,865 | ) | ||||||||||||||||||
| Balance at August 31, 2022 | 3,350,000 | $ | 3,350 | 2,532 | $ | 101,618 | 5,063,354,356 | $ | 50,635 | $ | 74,111,156 | $ | (102,988,805 | ) | $ | (28,722,046 | ) | ||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Six Months Ended August 31, 2022 |
Six Months Ended August 31, 2021 |
||||||
| CASH FLOWS USED IN OPERATING ACTIVITIES: | |||||||
| Net loss | $ | (8,844,551 | ) | $ | (40,737,291 | ) | |
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||
| Depreciation and amortization | 239,786 | 85,334 | |||||
| Revenue earning device sold and expensed in cost of sales | 3,255 | ||||||
| Bad debts expense | 145,000 | 2,022 | |||||
| Inventory provision | 70,000 | ||||||
| Reduction of right of use asset | 56,854 | 42,684 | |||||
| Accretion of lease liability | 72,090 | 49,656 | |||||
| (Gain) loss on disposal of fixed assets | (29,125 | ) | |||||
| Stock based compensation | 343,000 | 1,200,550 | |||||
| Change in fair value of derivative liabilities | (3,595 | ) | (372,502 | ) | |||
| Interest expense related to penalties from debt defaults | |||||||
| Amortization of debt discounts | 671,594 | 1,395,799 | |||||
| (Gain) loss on settlement of debt | (3,992 | ) | 32,911,652 | ||||
| Increase in related party accrued payroll and interest | 6,480 | 162,438 | |||||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable | (158,183 | ) | (89,913 | ) | |||
| Prepaid expenses | (23,984 | ) | (269,614 | ) | |||
| Deposits on inventory | (278,427 | ) | |||||
| Device parts inventory | (632,760 | ) | (706,562 | ) | |||
| Accounts payable and accrued expenses | 351,014 | (586,886 | ) | ||||
| Accrued expense -related party | (38,807 | ) | |||||
| Customer deposits | (8,128 | ) | (500 | ) | |||
| Operating lease liabilities | (128,944 | ) | (92,340 | ) | |||
| Current portion of deferred variable payment obligation for payments | 106,120 | 154,448 | |||||
| Balance owed WeSecure | (122,000 | ) | |||||
| Accrued interest payable | 987,737 | 1,219,151 | |||||
| Net cash used in operating activities | (6,754,462 | ) | (6,096,978 | ) | |||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | |||||||
| Purchase of fixed assets | (207,197 | ) | (32,162 | ) | |||
| Proceeds on disposal of fixed assets | 30,000 | ||||||
| Cash paid for security deposit | (15,880 | ) | |||||
| Net cash used in investing activities | (207,197 | ) | (18,042 | ) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
| Share proceeds net of issuance costs | 3,255,289 | ||||||
| Proceeds from loans payable | 500,000 | 7,926,146 | |||||
| Repayment of loans payable | (1,697,953 | ) | (276,813 | ) | |||
| Proceeds from convertible debt and warrants issued | 619,250 | ||||||
| Repayment of convertible debt | (65,000 | ) | |||||
| Net borrowings (repayments) on loan payable - related party | (118,342 | ) | |||||
| Net cash provided by financing activities | 2,676,586 | 7,465,991 | |||||
| Net change in cash | (4,285,073 | ) | 1,350,971 | ||||
| Cash, beginning of period | 4,648,146 | 1,044,418 | |||||
| Cash, end of period | $ | 363,073 | $ | 2,395,389 | |||
| Supplemental disclosure of cash and non-cash transactions: | |||||||
| Cash paid for interest | $ | 405,117 | $ | 109,864 | |||
| Cash paid for income taxes | $ | $ | |||||
| Noncash investing and financing activities: | |||||||
| Right of use asset for operating lease liability | $ | $ | 1,275,970 | ||||
| Transfer from device parts inventory to revenue earning devices | $ | 452,526 | $ | 282,337 | |||
| Conversion of convertible notes and interest to shares of common stock | $ | $ | 898,705 | ||||
| Release of derivative liability on conversion of convertible notes payable | $ | $ | 422,272 | ||||
| Derivative debt discount on re-valuation on loan amendment | $ | $ | 438,835 | ||||
| Exchange of notes payable for Series F preferred shares | $ | $ | 6,732,835 | ||||
| Exchange of warrants for debt | $ | 3,000,000 | $ | ||||
| Discount applied to face value of loans | $ | 39,500 | $ | 6,162,945 | |||
| Warrants issued as part of debt | $ | $ | 6,784,039 | ||||
| Exercise of warrants | $ | 97 | $ | 3,003 | |||
| Series F preferred shares issued for debt | $ | $ | 4,000,160 | ||||
| Cancellation of Series E preferred shares and common shares | $ | 171 | $ | 1,000 | |||
| Series F preferred shares converted to common shares | $ | $ | 3,086 | ||||
| Series F preferred shares issued on exercise of warrants | $ | $ | 38 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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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 a Limited Liability Company. On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc., through the issuance of 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 shares of AITX Series E Preferred Stock and shares of Series F Convertible Preferred Stock. AITX’s prior business focus was transportation services, and 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, and 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 August 31, 2022, the Company had negative cash flow from operating activities of $6,754,462. As of August 31, 2022, the Company has an accumulated deficit of $102,988,805, and negative working capital of $169,680. 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:
In the near term, management plans to potentially raise an additional $3 million to $5 million before the end of the fiscal year. 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 began raising money through its S-3 Registration Statement this year and made improvements in paying off debt, investing in inventory and at August 31, 2022 had $363,073 of cash on hand. 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. For the fiscal period through to September 30, 2022, the Company has raised an additional $3.6 million net of issuance costs through the sale of its common shares and paid approximately $1.2 million in current debt.
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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 May 27, 2022. 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 six months ended August 31, 2022 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.
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 $ and $ provided as of August 31, 2022 and February 28, 2022, respectively.
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 August 31, 2022 and February 28, 2021 there was a valuation reserve of $ and $, respectively.
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.
- 9 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 two to five years. Major repairs or improvements are capitalized. Minor replacements and maintenance and repairs which do not improve or extend asset lives are expensed currently.
| Computer equipment and software | or years | |
| Office equipment | ||
| Manufacturing equipment | ||
| Warehouse equipment | ||
| Tooling | ||
| Demo Devices | ||
| Vehicles | ||
| Leasehold improvements |
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 August 31, 2022 and February 28, 2022, 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:
| ● | 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.
- 10 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 six months ended August 31, 2022 , two customers accounted for 26% of total revenue (2021- 87%).
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.
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.
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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 Chief Executive Officer/ 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/ 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:
| ● | 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. |
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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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:
| Amount at | Fair Value Measurement Using | ||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||
| August 31, 2022 | |||||||||||||
| Liabilities | |||||||||||||
| Incentive compensation plan payable- revaluation of equity awards payable in Series G shares | $ | 704,000 | $ | $ | $ | 704,000 | |||||||
| Derivative liability – conversion features pursuant to convertible notes payable | $ | $ | $ | $ | |||||||||
| February 28, 2022 | |||||||||||||
| Liabilities | |||||||||||||
| Incentive compensation plan payable- revaluation of equity awards payable in Series G shares | $ | 479,500 | $ | $ | $ | 479,500 | |||||||
| Derivative liability – conversion features pursuant to convertible notes payable | $ | 7,587 | $ | $ | $ | 7,587 | |||||||
The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and advances, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments.
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.
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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.
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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 | Three Months Ended | Six Months Ended | Six Months Ended | ||||||||||
| August 31, 2022 | August 31, 2021 | August 31, 2022 | August 31, 2021 | ||||||||||
| Device rental activities | $ | 228,214 | $ | 123,375 | $ | 468,019 | $ | 218,081 | |||||
| Direct sales of goods and services | 39,270 | 18,197 | 184,622 | 483,825 | |||||||||
| $ | 267,484 | $ | 141,572 | $ | 652,641 | 701,906 | |||||||
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 August 31, 2022 and February 28, 2022.
| Leases | Classification | August 31, 2022 | February 28, 2022 | ||||||
| Assets | |||||||||
| Operating | Operating Lease Assets | $ | 1,268,597 | $ | 1,331,605 | ||||
| Liabilities | |||||||||
| Current | |||||||||
| Operating | Current Operating Lease Liability | $ | 250,169 | $ | 254,027 | ||||
| Noncurrent | |||||||||
| Operating | Noncurrent Operating Lease Liabilities | 1,004,584 | 1,057,579 | ||||||
| Total lease liabilities | $ | 1,254,753 | $ | 1,311,606 | |||||
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.
Rent expense and operating lease cost was $63,681 and $133,648 for the three and six months ended August 31, 2022, respectively, and $75,212 and $104,086 for the three and six months ended August 31, 2021, respectively.
6. REVENUE EARNING DEVICES
Revenue earning devices consisted of the following:
| August 31, 2022 | February 28, 2022 | ||||||
| Revenue earning devices | $ | 1,569,771 | $ | 1,143,724 | |||
| Less: Accumulated depreciation | (622,200 | ) | (434,661 | ) | |||
| $ | 947,571 | $ | 709,063 | ||||
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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the three and six months ended August 31, 2022 the Company made total additions to revenue earning devices of $251,946 and $426,047, respectively, which were transfers from inventory. During the three and six months ended August 31, 2021, the Company made total additions to revenue earning devices of $212,175 and $282,337, respectively, which were transfers from inventory. During the six months ended August 31, 2021 the Company sold a revenue earning device having a net book value of $3,255 for revenues of $30,600 and included the $3,255 in cost of goods sold.
Depreciation expense was $116,125 and $187,539 for the three and six months ended August 31, 2022, respectively, and $43,834 and $76,839 for the three and six months ended August 31, 2021, respectively.
7. FIXED ASSETS
Fixed assets consisted of the following:
| August 31, 2022 | February 28, 2022 | ||||||
| Automobile | $ | 84,880 | $ | 84,880 | |||
| Manufacturing equipment | 25,625 | 16,800 | |||||
| Demo devices | 43,018 | 16,539 | |||||
| Computer equipment and software | 123,555 | 36,742 | |||||
| Office equipment | 15,312 | 15,312 | |||||
| Warehouse equipment | 11,415 | 11,415 | |||||
| Tooling | 101,320 | ||||||
| Leasehold improvements | 15,568 | 5,329 | |||||
| 420,693 | 187,017 | ||||||
| Less: Accumulated depreciation | (101,312 | ) | (49,065 | ) | |||
| $ | 319,381 | $ | 137,952 | ||||
During the three months ended August 31, 2022, the Company made additions of $139,946 of which $20,693 were transfers from inventory with remaining additions of $118,983. During the six months ended August 31, 2022, the Company made additions of $233,676 of which $26,479 were transfers from inventory with remaining additions of $207,197. During the three months and six months ended August 31, 2021, the Company made additions of $16,800 and $32,162, respectively. During the six months ended August 31, 2021, the Company sold a vehicle having a net book value of $875 for fair value proceeds of $30,000 and recorded a gain on disposal of fixed assets of $29,125.
Depreciation expense was $29,668 and $52,249 for the three and six months ended August 31, 2022, respectively, and $3,857 and $8,495 for the three and six months ended August 31, 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.
- 16 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 another similar arrangement with the (February 1, 2019) 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.
On December 30, 2019, the Company entered into another similar 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 another similar 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 a similar 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. Upon an event of default that we are unable to cure in the time allotted under the agreements, these Payments may be secured with a priority lien by UCC filing against all of our assets, but is subordinated to equipment financing or leasing agreements 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 February 28, 2022, the Company has accrued approximately $325,600 in Payments (February 28, 2021 -$91,587).
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% |
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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 August 31, 2022, 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 three months and six months ended August 31, 2022 and year ended February 28, 2022, 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 August 31, 2022 and February 28, 2022.
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 August 31, 2022, the Company has accrued $431,720 in Payments (February 28, 2022 -$325,600). At August 31, 2022, and February 28, 2022 the Company was in default on $204,430 and $90,300 of those Payments. No notices have been sent to the Company.
9. CONVERTIBLE NOTES PAYABLE
Convertible notes payable consisted of the following:
| Balance | Balance | |||||||||||||
| Interest | Conversion | August31, | February 28, | |||||||||||
| Issued | Maturity | Rate | Rate per Share | 2022 | 2022 | |||||||||
| July 18, 2016 | July 18, 2017* | 8% | $0.003(1) | $ | $ | 3,500 | ||||||||
| August 9, 2022 | August 9, 2023 | 12% | $0.009(2) | 750,000 | ||||||||||
| $ | 750,000 | $ | 3,500 | |||||||||||
| Less: current portion of convertible notes payable | (750,000 | ) | (3,500 | ) | ||||||||||
| Less: discount on noncurrent convertible notes payable | ||||||||||||||
| Noncurrent convertible notes payable, net of discount | $ | $ | ||||||||||||
| Current portion of convertible notes payable | $ | 750,000 | $ | 3,500 | ||||||||||
| Less: discount on current portion of convertible notes payable | 522,505 | |||||||||||||
| Current portion of convertible notes payable, net of discount | $ | 227,495 | $ | 3,500 | ||||||||||
__________
| * | This note was in default as of February 28, 2022. Default interest rate 22% |
| (1) | The conversion price was not subject to adjustment from forward or reverse stock splits. Effective in August 2022 this note (and accrued interest) was no longer convertible. |
| (2) | Subject to adjustment for dilutive issuances |
During both the three and six months ended August 31, 2022, the Company incurred original issue discounts of $75,000, and relative fair value discounts debt discounts from derivative liabilities of $404,373 and fees of $55,750 related to new convertible notes payable. During both the three and six months ended August 31, 2021 the Company recognized debt discounts from derivative liabilities of $438,835. During both the three and six months ended August 31, 2022, the Company recognized interest expense related to the amortization of debt discount of $12,618. During the three and six months ended August 31, 2021, the Company recognized interest expense related to the amortization of debt discount of $694,855 and $775,986, respectively.
The note above is unsecured. As of August 31, 2022 and February 28, 2022, the Company had total accrued interest payable of $31,944 and $28,104, respectively, all of which is classified as current.
- 18 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the three and six months ended August 31, 2022, the Company also had the following convertible note activity:
| ● | The Company transferred the above July 18, 2016 $3,500 note to loans payable as the note was no longer convertible. This was a result of an SEC action against the debt holder who was also a common stockholder. |
| ● | On August 9, 2022 the Company entered into a new convertible note for $750,000 with a one year maturity, interest rate of 12%, with a warrant (Warrant 1) to purchase 47,000,000 common shares with a five year maturity and an exercise price of $0.01, and an additional warrant (Warrant 2) to purchase 47,000,000 common shares with a five year maturity and an exercise price of $0.008 to be cancelled and extinguished if the note balance is $375,000 or less by February 9. 2023. The Company received $619,250 in cash proceeds, recorded an original issue discount of $75,000, recognized $404,373 based on a relative fair value calculation as debt discount with a corresponding adjustment to paid-in capital for the attached warrants, and transaction fees of $55,750. The discount is amortized over the term of the loan. This Note shall have priority over all unsecured indebtedness of the Company. The note has certain default provisions such as failure to pay any principal or interest when due and failure to maintain a minimum market capitalization of $30 million. In the event of these or any other default provisions, the note becomes due and payable at 125%. |
During the three and six months ended August 31, 2021, the Company had the following convertible note activity:
| ● | The Company amended the January 27, 2021 agreement with the lender whereby the conversion rate was changed from $0.10 to $0.03 as a result of a dilutive issuance; this resulted a derivative discount of $438,835 and a loss on extinguishment of $360,125. |
| ● |
Holders of certain convertible notes payable elected to convert a total of $825,000 of principal and $71,955 accrued interest, and $1,750 of fees into 31,042,436 shares of common stock; no gain or loss was recognized on conversions as these conversions occurred within the terms of the agreement that provided for conversion.
|
| ● | The conversion rate of the January 19, 2021 note included above was reduced to $0.027 due to the dilutive issuance provision in the January 19, 2021 agreement. |
10. RELATED PARTY TRANSACTIONS
For the six months ended August 31, 2022, the Company had no repayments of net advances from its loan payable-related party. For the six months ended August 31, 2021 the Company repaid net advances of $118,342. At August 31, 2022, the loan payable-related party was $200,036 and $193,556 at February 28, 2022. Included in the balance due to the related party at August 31, 2022 is $123,504 of deferred salary and interest, $108,000 of which bears interest at 12%. At February 28, 2022, included in the balance due to the related party is $110,700 of deferred salary and interest, $90,000 of which bears interest at 12%. The accrued interest included in loan at August 31, 2022 and August 31, 2021 was $9,180 and $160,536 respectively.
Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months and six ended August 31, 2022, the Company accrued $63,000 and $224,500 of incentive compensation plan payable with a corresponding recognition of stock based compensation due to the expectation of additional awards being met. This will be payable in Series G Preferred Shares which are redeemable at the Company’s option at $ per share. At August 31, 2022 and February 28, 2022 there was $704,000 and $479,500 of incentive compensation payable.
During the three months ended August 31, 2022 and 2021, the Company was charged $957,395 and $562,837, respectively for fees for research and development from a company partially owned by a principal shareholder.
During the six months ended August 31, 2022 and 2021, the Company was charged $1,959,129 and $1,041,788, respectively for fees for research and development from a company partially owned by a principal shareholder.
- 19 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. 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 years maturing November 9, 2021, 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 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 August 31, 2022 and February 28, 2022, respectively, of which all were classified as current.
- 20 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. LOANS PAYABLE
Loans payable at August 31, 2022 consisted of the following:
| Annual | ||||||||||
| Date | Maturity | Description | Principal | Interest Rate | ||||||
| July 18, 2016 | July 18, 2017 | Promissory note | (35) * | $ | 3,500 | |||||
| June 11, 2018 | June 11, 2019 | Promissory note | (2) (#) | — | 25% | |||||
| January 31, 2019 | June 30, 2019 | Promissory note | (1) (#) | — | 15% | |||||
| May 9, 2019 | June 30, 2019 | Promissory note | (3) (#) | — | 15% | |||||
| May 31, 2019 | June 30, 2019 | Promissory note | (4) (#) | — | 15% | |||||
| June 26, 2019 | June 26, 2020 | Promissory note | (5) (#) | — | 15% | |||||
| September 24, 2019 | June 24, 2020 | Promissory note | (6) (#) | — | 15% | |||||
| January 30, 2020 | January 30, 2021 | Promissory note | (7) (#) | — | 15% | |||||
| February 27, 2020 | February 27, 2021 | Promissory note | (8) (#) | — | 15% | |||||
| April 16, 2020 | April 16, 2021 | Promissory note | (9) (#) | — | 15% | |||||
| May 12, 2020 | May 12, 2021 | Promissory note | (11) (#) | — | 15% | |||||
| May 22, 2020 | May 22, 2021 | Promissory note | (12) (#) | — | 15% | |||||
| June 2, 2020 | June 2, 2021 | Promissory note | (13) (#) | — | 15% | |||||
| June 9, 2020 | June 9, 2021 | Promissory note | (14) (#) | — | 15% | |||||
| June 12, 2020 | June 12, 2021 | Promissory note | (15) (#) | — | 15% | |||||
| June 16, 2020 | June 16, 2021 | Promissory note | (16) (#) | — | 15% | |||||
| September 15, 2020 | September 15, 2022 | Promissory note | (17) (#) | — | 10% | |||||
| October 6, 2020 | March 6, 2023 | Promissory note | (18) (#) | — | 12% | |||||
| November 12, 2020 | November 12, 2023 | Promissory note | (19) (#) | — | 12% | |||||
| November 23, 2020 | October 23, 2022 | Promissory note | (20) (#) | — | 15.5% | |||||
| November 23, 2020 | November 23, 2023 | Promissory note | (21) (#) | — | 15% | |||||
| December 10, 2020 | December 10, 2023 | Promissory note | (22) (#) | — | 12% | |||||
| December 10, 2020 | December 10, 2023 | Promissory note | (23) | 3,921,168 | 12% | |||||
| December 10, 2020 | December 10, 2023 | Promissory note | (24) | 3,054,338 | 12% | |||||
| December 10, 2020 | December 10, 2023 | Promissory note | (25) | 165,605 | 12% | |||||
| December 14, 2020 | December 14, 2023 | Promissory note | (26) | 310,375 | 12% | |||||
| December 30, 2020 | December 30, 2023 | Promissory note | (27) | 350,000 | 12% | |||||
| December 31, 2021 | December 31, 2024 | Promissory note | (28) | 25,000 | 12% | |||||
| December 31, 2021 | December 31, 2024 | Promissory note | (29) | 145,000 | 12% | |||||
| January 14, 2021 | January 14, 2024 | Promissory note | (30) | 550,000 | 12% | |||||
| February 22, 2021 | February 22, 2024 | Promissory note | (31) | 1,650,000 | 12% | |||||
| March 1, 2021 | March 1, 2024 | Promissory note | (10) | 6,000,000 | 12% | |||||
| June 8, 2021 | June 8, 2024 | Promissory note | (32) | 2,750,000 | 12% | |||||
| July 12, 2021 | July 26, 2026 | Promissory note | (33) | 3,964,160 | 7% | |||||
| September 14, 2021 | September 14, 2024 | Promissory note | (34) | 1,650,000 | 12% | |||||
| July 28, 2022 | July 28, 2023 | Promissory note | (36) | 170,000 | 15% | |||||
| August 30, 2022 | August 30,2024 | Promissory note | (38) | 3,000,000 | 15% | |||||
| September 7, 2022 | September 7, 2023 | Promissory note | (37) | 400,000 | 15% | |||||
| $ | 28,109,146 | |||||||||
| Less: current portion of convertible notes payable | (173,500 | ) | ||||||||
| Less: discount on noncurrent convertible notes payable | (4,351,804 | ) | ||||||||
| Noncurrent convertible notes payable, net of discount | $ | 23,583,842 | ||||||||
| Current portion of convertible notes payable | $ | 173,500 | ||||||||
| Less: discount on current portion of convertible notes payable | (18,541 | ) | ||||||||
| Current portion of convertible notes payable, net of discount | $ | 154,959 | ||||||||
- 21 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| * | In default. Default interest rate 22% |
| (#) | Loans with a principal balance of $1,661,953 along with associated accrued interest of $342,138 totaling $2,004,091 were paid in March 2022, with a remaining accrued liability of $62,979. |
| (1) | Original $78,432 note may be pre-payable at any time. The note balance includes 33% original issue discount of $25,882 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (2) | Repayable in 12 monthly instalments of $4,562 commencing August 11, 2018 and secured by revenue earning devices having a net book value of at least $48,000. The loan and accrued interest were fully paid in March 2022. |
| (3) | Original $7,850 note may be pre-payable at any time. The note balance includes 33% original issue discount of $2,590 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (4) | Original $86,567 note may be pre-payable at any time. The note balance includes 33% original issue discount of $28,567 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (5) | Original $79,104 note may be pre-payable at any time. The note balance includes 33% original issue discount of $26,104 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (6) | Original $12,000 note may be pre-payable at any time. The note balance includes an original issue discount of $3,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (7) | Original $11,000 note may be pre-payable at any time. The note balance includes an original issue discount of $2,450 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (8) | Original $5,000 note may be pre-payable at any time. The note balance includes an original issue discount of $1,200 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (9) | Original $13,000 note may be pre-payable at any time. The note balance includes an original issue discount of $3,850 at issuance. The loan and accrued interest were paid in March 2022. |
| (10) | 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 shares at an exercise price of $ per share with a -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. For both the three and six months ended August 31, 2022, the Company recorded amortization expense of $0 with an unamortized discount of $0 at August 31, 2022. 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. |
| (11) | Original $43,500 note may be pre-payable at any time. The note balance includes an original issue discount of $8,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (12) | Original $85,000 note may be pre-payable at any time. The note balance includes an original issue discount of $15,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (13) | Original $62,000 note may be pre-payable at any time. The note balance includes an original issue discount of $12,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (14) | Original $31,000 note may be pre-payable at any time. The note balance includes an original issue discount of $6,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
- 22 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (15) | Original $50,000 note may be pre-payable at any time. The note balance includes an original issue discount of $10,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (16) | Original $42,000 note may be pre-payable at any time. The note balance includes an original issue discount of $7,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| (17) | Original $300,000 note may be pre-payable at any time. The note balance includes an original issue discount of $50,000. Interest payable monthly, principal due at maturity. Secured by a general security charging all of RAD’s present and after-acquired property. The loan and accrued interest were fully paid in March 2022. |
| (18) | Original principal of $150,000 and interest repayable in 28 monthly instalments commencing December 6, 2020, the first 6 months at $2,000 per month, the remaining 22 payments at $ 8,500 per month. Secured by revenue earning devices. The loan and accrued interest were fully paid in March 2022. |
| (19) | Original $110,000 note may be pre-payable at any time. The note balance includes an original issue discount of $10,000 and was issued with a warrant to purchase shares at an exercise price of $ per share, with a -year term and having a relative fair value of $41,176. 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 $41,176 with a corresponding adjustment to paid in capital. The loan and accrued interest were fully paid in March 2022. |
| (20) | Original principal of $65,000 and interest repayable in 21 monthly instalments of $4,060 commencing February 23, 2021. Secured by revenue earning devices. The loan and accrued interest were fully paid in March 2022. |
| (21) | Original $300,000 note may be pre-payable at any time. The note balance includes an original issue discount of $25,000 and was issued with a warrant to purchase shares at an exercise price of $ per share with a -year term and having a relative fair value of $125,814. 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 $125,814 with a corresponding adjustment to paid in capital for the relative value of the warrant. The loan and accrued interest were fully paid in March 2022. |
| (22) | Original $82,500 note may be pre-payable at any time. The note balance includes an original issue discount of 7,500 and was issued with a warrant to purchase shares at an exercise price of $ per share with a -year term and having a relative fair value of $54,545. 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 $54,545 with a corresponding adjustment to paid in capital for the relative value of the warrant. The loan and accrued interest were fully paid in March 2022. |
| (23) | 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 $ 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. |
| (24) | 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. |
| (25) | 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 shares at an exercise price of $. per share and a three-year maturity having a fair value of $176,000. |
| (26) | 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 shares at an exercise price of $. per share and a three-year maturity having a fair value of $182,500. |
- 23 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (27) | 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 shares at an exercise price of $ per share with a -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 and six months ended August 31, 2022, the Company recorded amortization expense of $17,267 and $30,238, respectively, with an unamortized discount of $246,525 at August 31, 2022. |
| (28) | 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. |
| (29) | 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. |
| (30) | 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 shares at an exercise price of $ per share with a -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 and six months ended August 31, 2022, the Company recorded amortization expense of $28,290 and $51,527, respectively, with an unamortized discount of $315,705 at August 31, 2022. |
| (31) | 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 shares at an exercise price of $ per share with a -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. For the three and six months ended August 31, 2022, the Company recorded amortization expense of $59,503 and $102,378, respectively, with an unamortized discount of $1,309,454 at August 31, 2022. 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. |
| (32) | 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 shares at an exercise price of $ per share with a -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. For the three and six months ended August 31, 2022, the Company recorded amortization expense of $106,009 and $ $198,719, respectively, with an unamortized discount of $1,051,026 at August 31, 2022. 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. |
| (33) | 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 quarter ended August 31, 2022 there was a $36,000 repayment on the note. |
- 24 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (34) | 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 shares at an exercise price of $ per share with a -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 and six months ended August 31, 2022, the Company recorded amortization expense of $31,420 and $62,840, respectively. with an unamortized discount of $1,339,594 at August 31, 2022. |
| (35) | This note was transferred from convertible notes payable because in August 2022 it was no longer convertible due to restrictions placed on the lender. |
| (36) | 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 and six months ended August 31, 2022, the Company recorded amortization expense of $1,459 with an unamortized discount of $18,541 at August 31, 2022. |
| (37) | 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. As the note is dated after August 31, 2022 there was no amortization expense an unamortized discount of $50,000 at August 31, 2022. |
| (38) | 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. There was no amortization expense and an unamortized discount of $39,500 at August 31, 2022. |
13. DERIVATIVE LIABILITIES
As of August 31, 2022, and February 28, 2022 the Company revalued the fair value of all of the Company’s derivative liabilities associated with the conversion features on the convertible notes payable and determined that it had a total derivative liability of $0, and $7,587, respectively. For both the three and six months ended August 31, 2022, the Company recorded a change in far value of derivative liabilities of $3,595 and a gain on settlement of debt (with a corresponding adjustment to derivative liabilities) of $3,992.
14. STOCKHOLDERS’ EQUITY (DEFICIT)
Summary or Preferred Stock Activity
No preferred stock activity during the period.
Summary of Preferred Stock Warrant Activity
| Number of Series C Preferred Warrants | Weighted Average Exercise Price | Weighted Average Remaining Years | ||||
| Outstanding at March 1, 2022 | 329 | $1.00 | ||||
| Issued | — | |||||
| Exercised | — | |||||
| Forfeited and cancelled | — | — | ||||
| Outstanding at August 31, 2022 | 329 | $1.00 |
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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summary of Common Stock Activity
The Company increased authorized common shares from 5,000,000,000 to on July 8, 2022.
During the six months ended, August 31, 2022, the Company issued common shares with gross proceeds of $3,748,939 and net proceeds of $3,536,489 after issuance costs of $212,450, issued 9,688,179 shares through the cashless exercise of 61,378,210 warrants, cancelled 17,116,894 shares and issued 10,000,000 shares for $118,500 as payment for services. As of August 31, 2022 proceeds receivable from an offering of $281,000 was collected prior to the issuance of these financials statements.
| Common shares | August 31, 2022 | February 28, 2022 | |||||
| Issued | $ | 5,051,254,356 | $ | 4,733,110,360 | |||
| Issuable | 12,100,000 | 2,100,000 | |||||
| Issued, issuable and outstanding | $ | 5,063,354,356 | $ | 4,735,210,360 | |||
Summary of Common Stock Warrant Activity
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Years | ||||
| Outstanding at March 1, 2022 | 1,216,845,661 | $0.07 | ||||
| Issued | 94,000,000 | $0.009 | ||||
| Adjusted(1) | 66,750,000 | $0.011 | ||||
| Exercised | (61,378,210 | ) | $0.011 | |||
| Forfeited, extinguished and cancelled | (955,000,000 | ) | $0.008 | |||
| Outstanding at August 31, 2022 | 361,217,451 | $0.07 |
__________
| (1) | Required dilution adjustment per warrant agreement |
For the three months and six months ended August 31, 2022 and August 31, 2021, the Company recorded a total of $ and $, respectively, to stock-based compensation for options and warrants with a corresponding adjustment to additional paid-in capital.
On August 30, 2022 a warrant holder exchanged 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 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.
Summary of Common Stock Option Activity
On August 11, 2022 the Company amended its 2021 Incentive Stock Option Plan increasing the maximum number of shares applicable to the Plan from to .
15. 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.
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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $63,681 and $133,648 for the three and six months ended August 31, 2022, respectively, and $75,212 and $104,086 for the three and six months ended August 31, 2021, respectively.
| Maturity of Lease Liabilities | Operating Leases |
||
| August 31, 2023 | $ | 250,169 | |
| August 31, 2024 | 239,669 | ||
| August 31, 2025 | 207,558 | ||
| August 31, 2026 | 207,558 | ||
| August 31, 2027 | 207,558 | ||
| August 31, 2028 and after | 761,046 | ||
| Total lease payments | 1,873,558 | ||
| Less: Interest | (618,805 | ) | |
| Present value of lease liabilities | $ | 1,254,753 | |
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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The net income (loss) per common share amounts were determined as follows:
| For the Three Months Ended | For the Six Months Ended | ||||||||||||
| August 31, | August 31, | ||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||
| Numerator: | |||||||||||||
| Net income (loss) available to common shareholders | $ | (4,172,865 | ) | $ | (4,832,373 | ) | $ | (8,844,551 | ) | $ | (40,737,291 | ) | |
| Effect of common stock equivalents | |||||||||||||
| Add: interest expense on convertible debt | 8,543 | 38,345 | 8,737 | 63,299 | |||||||||
| Add (less) loss (gain) on settlement of debt | (3,992 | ) | (3,992 | ) | |||||||||
| Add (less) loss (gain) on change of derivative liabilities | (3,595 | ) | 193,063 | (3,595 | ) | 372,502 | |||||||
| Net income (loss) adjusted for common stock equivalents | (4,171,909 | ) | (4,600,965 | ) | (8,843,401 | ) | (40,301,490 | ) | |||||
| Denominator: | |||||||||||||
| Weighted average shares – basic | 4,970,040,852 | 3,890,435,903 | 4,884,349,362 | 3,689,985,692 | |||||||||
| Net income (loss) per share – basic | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | |
| Dilutive effect of common stock equivalents: | |||||||||||||
| Convertible Debt | — | — | — | — | |||||||||
| Preferred shares | — | — | — | — | |||||||||
| Warrants | — | — | — | — | |||||||||
| — | — | — | — | ||||||||||
| Denominator: | |||||||||||||
| Weighted average shares – diluted | |||||||||||||
| Net income (loss) per share – diluted | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.00 | ) | $ | (0.01 | ) | |
| For the Three Months Ended | For the Six Months Ended | ||||||||||||
| August 31, | August 31, | ||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||
| Convertible notes and accrued interest | 836,425,685 | 2,782,614 | 836,425,685 | 2,782,614 | |||||||||
| Convertible Series F Preferred Shares | 13,783,685,333 | 13,783,685,333 | |||||||||||
| Stock options and warrants | 401,217,451 | 818,523,492 | 401,217,451 | 818,523,492 | |||||||||
| Total | 1,237,643,136 | 14,604,991,439 | 1,237,643,136 | 14,604,991,439 | |||||||||
17. SUBSEQUENT EVENTS
Subsequent to August 31, 2022 through to October 20, 2022:
— The Company issued common shares pursuant to a share purchase agreement for gross proceeds of $, issuance costs of $ and net proceeds of $.
— On September 8, 2022 the Company issued a promissory note to a lender for $475,000 with cash proceeds of $400,000 and an original issue discount of $75,000. The loan bears interest at 15%, matures in 1 year and has a general security charging all of the Company’s present and after-acquired property.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of our financial condition and results of operations for the three and six months ended August 31, 2022 and August 31, 2021 should be read in conjunction with our unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended February 28, 2022, as filed on May 27, 2022 with the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms “AITX”, the “Company”, “we”, “us”, and “our” refer to Artificial Intelligence Technology Solutions Inc.
Overview
AITX was incorporated in Florida on March 25, 2010. AITX reincorporated into Nevada on February 17, 2015. AITX’s fiscal year end is February 28 (February 29 during leap year). AITX is located at 10800 Galaxie Ave., Ferndale Michigan, 48220, and our telephone number is 877-767-6268.
AITX’s mission is to apply Artificial Intelligence (AI) technology to solve enterprise problems categorized as expensive, repetitive, difficult to staff, and outside of the core competencies of the client organization.
A short list of basic examples include:
| 1. | Typical security guard-related functions such as monitoring a parking lot during and after hours and responding appropriately. This scenario applies to perimeters, interior yard areas, and related similar environments. | |
| 2. | Integrated hardware/software with AI-driven responses, simulating and expanding on what legacy or manned solutions could perform. | |
| 3. | Automation of common access control functions through technology utilizing facial recognition and machine vision, leapfrogging most legacy solutions in use today. |
RAD solutions are unique because they:
| 1. | Start with an AI-driven autonomous response utilizing cellular-optimized communications, while easily connecting to a human operator for a manned response, as needed. | |
| 2. | Use unique hardware purpose-built by RAD for delivery of these solutions. Various form factors have been customized to deliver this new functionality. | |
| 3. | Deliver services through RAD-developed software and cloud services, allowing enterprise IT groups to focus on core competencies instead of maintenance of complex video and security platforms. |
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Management Discussion and Analysis
Results of Operations for the Three Months Ended August 31, 2022 and 2021
The following table shows our results of operations for the three months ended August31, 2022 and 2021. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
| Period | ||||||||||||
| Three Months Ended |
Three Months Ended |
Change | ||||||||||
| August 31, 2022 | August 31, 2021 | Dollars | Percentage | |||||||||
| Revenues | $ | 267,484 | $ | 141,572 | $ | 125,912 | 89% | |||||
| Gross profit | 233,270 | 99,618 | 133,652 | 134% | ||||||||
| Operating expenses | 3,411,702 | 3,383,990 | 27,712 | 1% | ||||||||
| Loss from operations | (3,178,432 | ) | (3,284,372 | ) | 105,940 | (3% | ) | |||||
| Other income (expense), net | (994,433 | ) | (1,548,001 | ) | 553,568 | 36% | ||||||
| Net income (loss) | $ | (4,172,865 | ) | $ | (4,832,373 | ) | $ | 659,508 | 14% | |||
Revenue
The following table presents revenues from contracts with customers disaggregated by product/service:
| Three Months Ended |
Three Months Ended |
Change | ||||||||||
| August 31, 2022 | August 31, 2021 | Dollars | Percentage | |||||||||
| Device rental activities | $ | 228,214 | $ | 123,375 | $ | 104,839 | 85% | |||||
| Direct sales of goods and services | 39,270 | 18,197 | 21,073 | 116% | ||||||||
| $ | 267,484 | $ | 141,572 | $ | 125,912 | 89% | ||||||
Total revenue for the three-month period ended August 31, 2022 was $267,484 which represented an increase of $125,912 compared to total revenue of $141,572 for the three months ended August 31, 2021. This increase is a result of higher rental sales in the current year’s quarter. Rental activities increased by 85% over the prior year’s quarter as the Company continues to grow its core business. Direct sales was driven by an increase in training revenue and grew by 116% over last year’s quarter.
Gross profit
Total gross profit for the three-month period ended August 31, 2022 was $233,270, which represented an increase of $133,652 compared to gross profit of $99,618 for the three months ended August 31, 2021. The gross profit increased due to the higher sales and inventory changes. The gross profit % of 87% for the three-month period ended August 31, 2022 was higher than the gross profit % of 70% for the prior year’s corresponding period.
Operating Expenses
| Period | ||||||||||||
| Three Months Ended |
Three Months Ended |
Change | ||||||||||
| August 31, 2022 | August 31, 2021 | Dollars | Percentage | |||||||||
| Research and development | $ | 963,786 | $ | 699,292 | $ | 264,494 | 38% | |||||
| General and administrative | 2,238,442 | 2,590,920 | (352,478 | ) | (14% | ) | ||||||
| Depreciation and amortization | 145,793 | 47,691 | 98,102 | 206% | ||||||||
| Operating lease cost and rent | 63,681 | 75,212 | (11,531 | ) | (15% | ) | ||||||
| Gain loss on disposal of fixed assets | — | (29,125 | ) | (29,125 | ) | 100% | ||||||
| Operating expenses | $ | 3,411,702 | $ | 3,383,990 | $ | 27,712 | 1% | |||||
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Our operating expenses were comprised of general and administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the three-month period ended August 31, 2022 and August 31, 2021, were $3,411,702 and $3,383,990, respectively. The overall increase of $27,712 was primarily attributable to the following changes in operating expenses of:
| ● | General and administrative expenses decreased by $352,478. In comparing the three months ended August 31, 2022 and August 31, 2021 this decrease was primarily due to these changes increases in the following: wages and salaries of $350,555 due to staffing of new manufacturing facility and increases in office and management staff , insurance of $75,282 due to health plan for new employees and increased liability and property insurance due to new manufacturing facility, advertising , sales and marketing of $158,699, office expenses of $36,400 and bad debts expense due to a general provision of $40,000 on slow payers due to present economic factors. These increases offset these following decreases: stock based compensation of $949,700 for prior charges based on CEO incentive plan and travel $41,983 . |
| ● | Research and development increased by $264,494 due to funding development of new products as well as upgrades of existing products. Included in that increase is the increase in research and development paid to a related party of $394,557. |
| ● | Depreciation and amortization increased by $98,102 due to the acquisition of ERP computer software, computer equipment tooling, and 18 new revenue earning devices. |
| ● | Operating lease cost and rent decreased by $11,531 due to one less office lease for the three months ended August 31, 2022 comparing to the three months ended August 31, 2021 |
Other Income (Expense)
Other income (expense) consisted of the change of fair value of derivative instruments, loss on settlement of debt and interest. Other income (expense) during the three months ended August 31, 2022 and August 31, 2021, was ($994,433) and ($1,548,001), respectively. The $553,568 increase in other income was primarily attributable to the loss on settlement of debt realized in the prior year’s quarter.
| ● | In comparing the three months ended August 31, 2022 and the three months ended August 31, 2021, the change in fair value of derivative liabilities decreased by $189,468. The change in fair value of derivative liabilities was due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock. As there was no derivative liabilities resulting from the conversion features of the convertible debt at August 31, 2022 the corresponding change in fair value was significantly lower when comparing the prior year’s quarter. |
| ● | Interest expense decreased by $811,753 due to a decrease in debt amortization expense. The three months ended August 31, 2021 had higher amortization due to debt settlements. |
| ● | Gain on settlement of debt was $3,992 the quarter ended August 31, 2022 and $72,709 in the quarter ended August 31, 2022. |
Net loss
We had a net loss of $4,172,865 for the three months ended August 31, 2022, compared to a net loss of $4,832,373 for the three months ended August 31, 2021. The decrease in net loss of $659,508 is primarily as a result higher revenues and lower other expense in the three months ended August 31, 2022 as well as and other items discussed above.
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Results of Operations for the Six Months Ended August 31, 2022 and 2021
The following table shows our results of operations for the six months ended August 31, 2022 and 2021. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
Revenue
| Period | ||||||||||||
| Six Months Ended |
Six Months Ended |
Change | ||||||||||
| August 31, 2022 | August 31, 2021 | Dollars | Percentage | |||||||||
| Revenues | $ | 652,641 | $ | 701,906 | $ | (49,265 | ) | (7% | ) | |||
| Gross profit | 324,703 | 549,026 | (224,323 | ) | (41% | ) | ||||||
| Operating expenses | 6,999,791 | 5,984,944 | 1,014,847 | 17% | ||||||||
| Loss from operations | (6,675,088 | ) | (5,435,918 | ) | (1,239,170 | ) | 23% | |||||
| Other income (expense), net | (2,169,463 | ) | (35,301,373 | ) | 33,131,910 | 94% | ||||||
| Net loss | $ | (8,844,551 | ) | $ | (40,737,291 | ) | $ | 31,892,740 | 78% | |||
The following table presents revenues from contracts with customers disaggregated by product/service:
| Six Months Ended |
Six Months Ended |
Change | ||||||||||
| August 31, 2022 | August 31, 2021 | Dollars | Percentage | |||||||||
| Device rental activities | $ | 468,019 | $ | 218,081 | $ | 249,938 | 115% | |||||
| Direct sales of goods and services | 184,622 | 483,825 | (299,203 | ) | (62% | ) | ||||||
| $ | 652,641 | $ | 701,906 | $ | (49,265 | ) | (7% | ) | ||||
Total revenue for the six-month period ended August 31, 2022 was $652,641 which represented a decrease of $49,265 compared to total revenue of $701,996 for the six months ended August 31, 2021. The small decrease was a result of unusually large unit sales which includes sales of new units totaling $434,342 which occurred in the six months ended August 31, 2021 .This was partially offset by a 115% increase in rental activities increased as the Company continues to grow its rental business.
Gross profit
Total gross profit for the six-month period ended August 31, 2022 was $324,703 which represented a decrease of $224,323, compared to gross profit of $549,026 for the six months ended August 31, 2021. The decrease resulted both from lower revenues noted above as well as cost of sales increases in 2022 due to inventory changes. The gross profit percentage of 50% for the six-month period ended August 31, 2022 was lower than the margin of 78% for the prior year’s corresponding period was primarily due to inventory adjustments due to shrinkage and obsolescence totaling $152,475, which occurred in the first quarter. Before these adjustments the gross profit % for the six months ended August 31, 2022 would have been a comparable 73%.
Operating Expenses
| Period | ||||||||||||
| Six Months Ended |
Six Months Ended |
Change | ||||||||||
| August 31, 2022 | August 31, 2021 | Dollars | Percentage | |||||||||
| Research and development | $ | 1,987,521 | $ | 1,333,937 | $ | 653,584 | 49% | |||||
| General and administrative | 4,638,834 | 4,490,712 | 148,122 | 3% | ||||||||
| Depreciation and amortization | 239,788 | 85,334 | 154,454 | 181% | ||||||||
| Operating lease cost and rent | 133,648 | 104,086 | 29,562 | 28% | ||||||||
| (Gain) loss on disposal of fixed assets | — | (29,125 | ) | 29,125 | (100% | ) | ||||||
| Operating expenses | $ | 6,999,791 | $ | 5,984,944 | $ | 1,014,847 | 17% | |||||
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Our operating expenses were comprised of general and administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the six-month period ended August 31, 2022 and August 31, 2021, were $6,999,791 and $5,984,944, respectively. The overall increase of $1,014,847 was primarily attributable to the following changes in operating expenses of:
| ● | General and administrative expenses increased by $148,122. In comparing the six months ended August 31, 2022 and August 31, 2021 may be partially explained by the following increases: wages and salaries by $1,004,437, sales and marketing by $231,205, travel by $97,118, insurance by $178,077, duty and freight by $29,837, and office expense by $78,308. These were partially offset by decreases in the following accounts: production supplies by $109,037, professional fees by $408,682, subcontractor fees $100,294 and stock-based compensation $857,550. |
| ● | Research and development increased by $653,584 due to funding development of new products as well as upgrades of existing products. Included in that increase is the increase in research and development paid to a related party of $917,341. |
| ● | Depreciation and amortization increased by $154,454 due to the acquisition of ERP computer software, computer equipment tooling, and 54 new revenue earning devices. |
| ● | Operating lease cost and rent increased by $29,562 due the manufacturing facility lease, six full months for the six months ended August 31, 2022 compared to only 4 months for the six months ended August 31, 2021. |
| ● | (Gain) loss on disposal of fixed assets increase by $29,125 due to a vehicle sold in the prior year. |
Other Income (Expense)
Other income (expense) during the six months ended August 31, 2022 and August 31, 2021, was ($2,169,463) and ($35,301,373), respectively. The $33,131,910 increase in other income was primarily attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt.
| ● | In comparing the six months ended August 31, 2022 and the six months ended August 31, 2021, the change in fair value of derivative liabilities decreased by $368,907 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock as well as reductions in derivative liability as a result of settlements on the underlying debt. |
| ● | Interest expense increased by $585,173 due to increases in loan and convertible notes payable |
| ● | Gain (loss) on settlement of debt was $3,992 the six months ended August 31, 2022 and ($32,911,652) in six months ended August 31, 2022. This current period the gain was a result of the reduction of the derivative liability , the prior year’s period has an amendment of the deferred variable payment obligation that led to a $33,015,215 loss which was partially offset by gains from accrued liabilities settlements and the debt exchange for common shares. This loss on settlement of debt was non-cash and has no effect on the cash flows of the Company. |
Net loss
We had a net loss of $8,844,551 for the six months ended August 31, 2022, compared to a net loss of $40,737,291 for the six months ended August 31, 2021. The change is primarily the result of the loss on settlement in the six months ended August 31, 2021 as well as the change in the fair value of the derivative liabilities and other items discussed above.
Liquidity, Capital Resources and Cash Flows
Management believes that we will continue to incur losses for the immediate future. Therefore, we will need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern. For the three months ended May 31, 2022, we have generated revenue and are trying to achieve positive cash flows from operations.
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As of August 31, 2022, we had a cash balance of $363,073, accounts receivable of $442,652, device parts inventory of $1,640,891 and $3,466,248 in current liabilities. At the current cash consumption rate, we will need to consider additional funding sources going forward. We are taking proactive measures to reduce operating expenses and drive growth in revenue.
The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.
Capital Resources
The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated:
| August 31, 2022 | February 28, 2022 | ||||||
| Current assets | $ | 3,296,568 | $ | 7,050,436 | |||
| Current liabilities | 3,466,248 | 4,547,718 | |||||
| Working capital | $ | (169,680 | ) | $ | 2,502,718 | ||
As of August 31, 2022 and February 28, 2022, we had a cash balance of $363,073 and $4,648,146, respectively.
Summary of Cash Flows
| Summary of Cash Flows | Six Months Ended August 31, 2022 |
Six Months Ended August 31, 2021 |
|||||
| Net cash used in operating activities | $ | (6,754,462 | ) | $ | (6,096,978 | ) | |
| Net cash used in investing activities | $ | (207,197 | ) | $ | (18,042 | ) | |
| Net cash provided by financing activities | $ | 2,676,586 | $ | 7,465,991 | |||
Net cash used in operating activities.
Net cash used in operating activities for the six months ended August 31, 2022 was $6,754,462, which included a net loss of $8,844,551, non-cash activity such as the bad debts expense of $145,000, inventory provision $70,000, reduction of right of use asset of $56,854, accretion of lease liability $72,090, stock based compensation of $343,000, change in value of derivative liabilities of ($3,595), gain on settlement of debt of ($3,992) , change in operating assets of $492,871, amortization of debt discount of $671,594, increase in related party accrued payroll and interest of $6,480 and depreciation and amortization of $239,786 to derive the uses of cash in operations.
Net cash used in investing activities.
Net cash used in investing activities for the six months ended August 31, 2022 was $207,197, which was the purchase of fixed assets,
Net cash provided by financing activities.
Net cash provided by financing activities was $2,676,586 for the six months ended August 31, 2022. This consisted of share proceeds net of issuance costs of $3,255,289,procees from convertible notes payable of $619,250, proceeds from loans payable of $500,000, reduced by repayments on loans payable of $1,697,953.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K for the year ended February 28, 2022, as filed on May 27, 2022.
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Related Party Transactions
For the six months ended August 31, 2022, the Company had no repayments of net advances from its loan payable-related party. For the six months ended August 31, 2021 the Company repaid net advances of $118,342. At August 31, 2022, the loan payable-related party was $200,036 and $193,556 at February 28, 2022. Included in the balance due to the related party at August 31, 2022 is $123,504 of deferred salary and interest, $108,000 of which bears interest at 12%. At February 28, 2022, included in the balance due to the related party is $110,700 of deferred salary and interest, $90,000 of which bears interest at 12%. The accrued interest included in loan at August 31, 2022 and August 31, 2021 was $9,180 and $160,536 respectively.
Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months and six ended August 31, 2022, the Company accrued $63,000 and $224,500 of incentive compensation plan payable with a corresponding recognition of stock based compensation due to the expectation of additional awards being met. This will be payable in Series G Preferred Shares which are redeemable at the Company’s option at $1,000 per share. At August 31, 2022 and February 28, 2022, there was $704,000 and $479,500 of incentive compensation payable.
During the three months ended August 31, 2022 and 2021, the Company was charged $957,395 and $562,837, respectively for fees for research and development from a company partially owned by a principal shareholder.
During the six months ended August 31, 2022 and 2021, the Company was charged $1,959,129 and $1,041,788, respectively for fees for research and development from a company partially owned by a principal shareholder.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for a smaller reporting company.
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 August 31, 2022. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of August 31, 2022, 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 August 31, 2022, 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 August 31, 2022, 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.
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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.
ITEM 5. OTHER INFORMATION
None.
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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: October 21, 2022 | BY: /s/ Steven Reinharz |
| Steven Reinharz | |
| President, Chief Executive Officer (principal executive officer) | |
| Date: October 21, 2022 | BY: /s/ Anthony Brenz |
| Anthony Brenz | |
| Chief Financial Officer (principal financial officer) |
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