UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
FOR THE QUARTERLY PERIOD ENDED
OR
FOR THE TRANSITION PERIOD FROM _______________ TO _______________
COMMISSION FILE NUMBER:
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of Incorporation or organization) | (I.R.S. Employer Identification Number) | |
| (Address of principal executive offices) | (Zip code) |
(
(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.
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).
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 | [_] | |
| [X] | Smaller reporting company | |||
| 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 [_]
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 January 6, 2023.
- 2 -
PART 1 – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| * | |||||||
| November 30, 2022 (Unaudited) |
February 28, 2022* | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash | $ | $ | |||||
| Accounts receivable, net | |||||||
| Device parts inventory, net | |||||||
| Prepaid expenses and deposits | |||||||
| Total current assets | |||||||
| Operating lease asset | |||||||
| Revenue earning devices, net of accumulated depreciation of $ |
|||||||
| Fixed assets, net of accumulated depreciation of $ |
|||||||
| Trademarks | |||||||
| Security deposit | |||||||
| Total assets | $ | $ | |||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||||
| Current liabilities: | |||||||
| Accounts payable and accrued expenses | $ | $ | |||||
| Advances payable | |||||||
| Customer deposits | |||||||
| Current operating lease liability | |||||||
| Current portion of deferred variable payment obligation | |||||||
| Current portion of convertible notes payable, net of discount of $ |
|||||||
| Loan payable - related party | |||||||
| Incentive compensation plan payable | |||||||
| Current portion of loans payable, net of discount of $ |
|||||||
| Vehicle loan - current portion | |||||||
| Current portion of accrued interest payable | |||||||
| Derivative liability | |||||||
| Total current liabilities | |||||||
| Non-current operating lease liability | |||||||
| Loans payable, net of discount of $ |
|||||||
| Deferred variable payment obligation | |||||||
| Accrued interest payable | |||||||
| Total liabilities | |||||||
| Commitments and Contingencies | |||||||
| Stockholders’ deficit: | |||||||
| Preferred Stock, undesignated; shares authorized; shares issued and outstanding at November 30, 2022 and February 28, 2022, respectively | |||||||
| Series E Preferred Stock, $ par value; shares authorized; and 3,350,000 shares issued and outstanding, respectively | |||||||
| Series F Convertible Preferred Stock, $par value; shares authorized; and shares issued and outstanding, respectively | |||||||
| Series G Preferred Stock, $ par value; shares authorized, shares issued and outstanding at November 30, 2022 and February 28, 2022, respectively | |||||||
| Common Stock, $ par value; shares authorized and shares issued, issuable and outstanding, respectively | |||||||
| Additional paid-in capital | |||||||
| Preferred stock to be issued | |||||||
| Accumulated deficit | ( |
) | ( |
) | |||
| Total stockholders’ deficit | ( |
) | ( |
) | |||
| Total liabilities and stockholders’ deficit | $ | $ | |||||
| * |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
- 3 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| Three Months Ended November 30, 2022 |
Three Months Ended November 30, 2021 |
Nine Months Ended November 30, 2022 |
Nine Months Ended November 30, 2021 |
||||||||||
| Revenues | $ | $ | $ | $ | |||||||||
| Cost of Goods Sold | |||||||||||||
| Gross Profit | |||||||||||||
| Operating expenses: | |||||||||||||
| Research and development (Note 10) | |||||||||||||
| General and administrative | |||||||||||||
| Depreciation and amortization | |||||||||||||
| Operating lease cost and rent | |||||||||||||
| (Gain) loss on disposal of fixed assets | ( |
) | |||||||||||
| Total operating expenses | |||||||||||||
| Loss from operations | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Other income (expense), net: | |||||||||||||
| Change in fair value of derivative liabilities | |||||||||||||
| Interest expense | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Gain (loss) on settlement of debt | ( |
) | ( |
) | |||||||||
| Total other income (expense), net | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Net Loss | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |
| Net income (loss) per share - basic | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |
| Net income ( loss) per share - diluted | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |
| Weighted average common share outstanding - basic | |||||||||||||
| Weighted average common share outstanding - diluted | |||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
- 4 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S DEFICIT
(Unaudited)
| Series E | Series F | Series G | Additional | Total | ||||||||||||||||||||||||||
| Preferred Stock | Preferred Stock | Preferred Stock | Common Stock | Paid-In | Accumulated | Shareholders' | ||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Shares | Amount | Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||||||
| Balance at February 28, 2021 | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||
| Series F Preferred Shares issued with amendment agreement | — | — | ||||||||||||||||||||||||||||
| Series F Preferred Shares Warrants issued with amendment agreement | — | — | — | — | ||||||||||||||||||||||||||
| Series F Preferred Shares cancelled in exchange for promissory notes | — | ( |
) | ( |
) | — | — | ( |
) | ( |
) | |||||||||||||||||||
| Series F preferred shares issued on exercise of warrants | — | — | — | ( |
) | |||||||||||||||||||||||||
| Series F Preferred Shares converted to common shares | — | ( |
) | ( |
) | — | ( |
) | ||||||||||||||||||||||
| Relative fair value of warrants issued with debt | — | — | — | — | ||||||||||||||||||||||||||
| Stock based compensation | — | — | — | |||||||||||||||||||||||||||
| Net income | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at May 31, 2021 | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
| Adjustment to derivative liability | — | — | — | — | ||||||||||||||||||||||||||
| Common stock issued for debt conversion | — | — | — | |||||||||||||||||||||||||||
| Exercise of warrants | — | — | — | ( |
) | |||||||||||||||||||||||||
| Relative fair value of warrants issued with debt | — | — | — | — | ||||||||||||||||||||||||||
| Cancellation of Series E Shares | ( |
) | ( |
) | — | — | — | |||||||||||||||||||||||
| Exchange of debt for common shares | — | — | — | |||||||||||||||||||||||||||
| Stock based compensation on issuable shares | — | — | — | |||||||||||||||||||||||||||
| Exchange of Series F Preferred Shares for debt | — | ( |
) | ( |
) | — | — | ( |
) | ( |
) | |||||||||||||||||||
| Net income | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at August 31, 2021 | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
| Issuance of shares, net of $ |
— | — | — | |||||||||||||||||||||||||||
| Cashless exercise of 100,000,000 warrants | — | — | — | ( |
) | |||||||||||||||||||||||||
| Relative fair value of warrants issued with debt | — | — | — | — | ||||||||||||||||||||||||||
| Redemption of 19 Issuable Series F shares | — | — | ( |
) | — | — | ( |
) | ( |
) | ||||||||||||||||||||
| Issuance of Series G preferred as equity awards per employment agreement | — | — | — | |||||||||||||||||||||||||||
| Redemption of Series G shares as compensation payment | — | — | ( |
) | ( |
) | — | ( |
) | |||||||||||||||||||||
| Net income | — | — | — | — | ( |
) | ( |
) | ||||||||||||||||||||||
| Balance at November 30, 2021 | $ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
- 5 -
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 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
| Issuance of shares, net of $ |
— | — | |||||||||||||||||||||||
| Rounding | — | — | — | ( |
) | ( |
) | ||||||||||||||||||
| Net income | — | — | — | ( |
) | ( |
) | ||||||||||||||||||
| Balance at May 31, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
| Issuance of shares, net of $ |
— | — | |||||||||||||||||||||||
| Cashless exercise of warrants | — | — | ( |
) | |||||||||||||||||||||
| Relative fair value of warrants issued with debt | — | — | — | ||||||||||||||||||||||
| Cancelled shares | — | — | ( |
) | ( |
) | |||||||||||||||||||
| Exchange of warrants for debt | — | — | — | ( |
) | ( |
) | ||||||||||||||||||
| Shares as payment for services | — | — | |||||||||||||||||||||||
| Net income | — | — | — | ( |
) | ( |
) | ||||||||||||||||||
| Balance at August 31, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
| Issuance of shares, net of $ |
— | — | |||||||||||||||||||||||
| Relative fair value of Series F warrants issued with debt | — | — | |||||||||||||||||||||||
| Relative fair value of warrants issued with debt | — | — | — | ( |
) | ( |
) | ||||||||||||||||||
| Net income | — | — | — | ( |
) | ( |
) | ||||||||||||||||||
| Balance at November 30, 2022 | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
- 6 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| Nine Months Ended November 30, 2022 |
Nine Months Ended November 30, 2021 |
||||||
| CASH FLOWS USED IN OPERATING ACTIVITIES: | |||||||
| Net loss | $ | ( |
) | $ | ( |
) | |
| Adjustments to reconcile net income to net cash used in operating activities: | |||||||
| Depreciation and amortization | |||||||
| Revenue earning device sold and expensed in cost of sales | |||||||
| Bad debts expense | |||||||
| Inventory provision | |||||||
| Reduction of right of use asset | |||||||
| Accretion of lease liability | |||||||
| (Gain) loss on disposal of fixed assets | ( |
) | |||||
| Stock based compensation | |||||||
| Change in fair value of derivative liabilities | ( |
) | ( |
) | |||
| Interest expense related to penalties from debt defaults | |||||||
| Amortization of debt discounts | |||||||
| (Gain) loss on settlement of debt | ( |
) | |||||
| Increase in related party accrued payroll and interest | |||||||
| Changes in operating assets and liabilities: | |||||||
| Accounts receivable | ( |
) | ( |
) | |||
| Prepaid expenses | ( |
) | ( |
) | |||
| Deposits on right of use asset | ( |
) | |||||
| Device parts inventory | ( |
) | ( |
) | |||
| Accounts payable and accrued expenses | |||||||
| Accrued expense -related party | ( |
) | |||||
| Customer deposits | ( |
) | ( |
) | |||
| Operating lease liabilities | ( |
) | ( |
) | |||
| Current portion of deferred variable payment obligation for payments | |||||||
| Balance owed WeSecure | ( |
) | |||||
| Accrued interest payable | |||||||
| Net cash used in operating activities | ( |
) | ( |
) | |||
| CASH FLOWS USED IN INVESTING ACTIVITIES: | |||||||
| Purchase of fixed assets | ( |
) | ( |
) | |||
| Acquisition of trademarks | ( |
) | |||||
| Proceeds on disposal of fixed assets | |||||||
| Cash paid for security deposit | ( |
) | |||||
| Net cash used in investing activities | ( |
) | ( |
) | |||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
| Share proceeds net of issuance costs | |||||||
| Proceeds from loans payable | |||||||
| Repayment of loans payable | ( |
) | ( |
) | |||
| Proceeds from convertible debt and warrants issued | |||||||
| Repayment of convertible debt | ( |
) | |||||
| Series G preferred shares redeemed as payment on incentive plan payable | ( |
) | |||||
| Dividend and redemption of cancelled issuable Series F preferred shares | ( |
) | |||||
| Net borrowings (repayments) on loan payable - related party | ( |
) | |||||
| Net cash provided by financing activities | |||||||
| Net change in cash | ( |
) | |||||
| Cash, beginning of period | |||||||
| Cash, end of period | $ | $ | |||||
| Supplemental disclosure of cash and non-cash transactions: | |||||||
| Cash paid for interest | $ | $ | |||||
| Cash paid for income taxes | $ | $ | |||||
| Noncash investing and financing activities: | |||||||
| Right of use asset for operating lease liability | $ | $ | |||||
| Transfer from device parts inventory to revenue earning devices | $ | $ | |||||
| Conversion of convertible notes and interest to shares of common stock | $ | $ | |||||
| Release of derivative liability on conversion of convertible notes payable | $ | $ | |||||
| Derivative debt discount on re-valuation on loan amendment | $ | $ | |||||
| Exchange of notes payable for Series F preferred shares | $ | $ | |||||
| Exchange of warrants for debt | $ | $ | |||||
| Discount applied to face value of loans | $ | $ | |||||
| Warrants issued as part of debt | $ | $ | |||||
| Exercise of warrants | $ | $ | |||||
| Series F preferred shares and warrants issued for debt | $ | $ | |||||
| Issuance of Series G preferred shares as payment of incentive plan payable | $ | $ | |||||
| Cancellation of Series E preferred shares and common shares | $ | $ | |||||
| Series F preferred shares converted to common shares | $ | $ | |||||
| Series F preferred shares issued on exercise of warrants | $ | $ | |||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
- 7 -
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 ofcommon 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 nine months ended November 30, 2022, the Company
had negative cash flow from operating activities of $
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 $1 million to $3 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 November 30, 2022 had $713,493 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 November 30, 2022, the Company has raised an additional $4.7 million net of issuance costs through the sale of its common shares and raised approximately $3.2 million in current debt.
- 8 -
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 November 30, 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.
Concentrations
Loans payable
At November 30, 2022 there were $30,506,346 of loans payable, $26,090,506 or 85% of these loans to companies controlled by one individual. At February 28, 2022 there were $26,233,598 of loans payable $21,709,459 or 83% of these loans to companies controlled by the same individual.
Cash
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market instruments. The Company places its cash and cash equivalents with high-quality, U.S. financial institutions and, to date has not experienced losses on any of its balances.
Accounts Receivable
Accounts receivable are comprised of balances due
from customers, net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated,
and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances. There was an allowance of $
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 November 30, 2022 and February 28, 2022 there was a
valuation reserve of $
- 9 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue Earning Devices
Revenue earning devices are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of 48 months. The Company continually evaluates revenue earning devices to determine whether events or changes in circumstances have occurred that may warrant revision of the estimated useful life or whether the devices should be evaluated for possible impairment. The Company uses a combination of the undiscounted cash flows and market approaches in assessing whether an asset has been impaired. The Company measures impairment losses based upon the amount by which the carrying amount of the asset exceeds the fair value.
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the respective assets which range from to 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 November 30, 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:
- 10 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| ● | Does the agreement purport, in substance, to be a sale | |
| ● | Does the Company have continuing involvement in the generation of cash flows due the investor | |
| ● | Is the transaction cancellable by either party through payment of a lump sum or other transfer of assets | |
| ● | Is the investors rate of return is implicitly limited by the terms of the agreement | |
| ● | Does the Company’s revenue for a reporting period underlying the agreement have only a minimal impact on the investor’s rate of return | |
| ● | Does the investor have recourse relating to payments due |
In the event a transaction is determined to be a sale of future revenues, it is recorded as deferred revenue and amortized using the sum-of-the-revenue method. In the event a transaction is determined to be debt, it is recorded as debt and amortized using the effective interest method. As of the date of these financial statements, the Company has determined that all such agreements are debt.
Revenue Recognition
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, supersedes the revenue recognition requirements and industry specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Topic 606 defines a five-step process that must be evaluated and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing accounting principles generally accepted in the United States of America (“U.S. GAAP”) including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company adopted Topic 606 on March 1, 2018, using the modified retrospective method. Under the modified retrospective method, prior period financial positions and results will not be adjusted. There was no cumulative effect adjustment recognized as a result of this adoption. Refer to Note 4 – Revenue from Contracts with Customers for additional information. For the nine months ended November 30, 2022 , two customers accounted for 41% of total revenue (2021- 60%).
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.
- 11 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
If at its inception, a lease meets any of the four lease criteria above, the lease is classified by the Company as a sales/finance; and if none of the four criteria are met, the lease is classified by the Company as an operating lease.
Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in liabilities.
Distinguishing Liabilities from Equity
The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.
Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.
Our 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:
- 12 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| ● | Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. | |
| ● | Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. | |
| ● | Level 3 – Inputs that are unobservable for the asset or liability. |
Measured on a Recurring Basis
The following table presents information about our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fell:
| Amount at | Fair Value Measurement Using | ||||||||||||
| Fair Value | Level 1 | Level 2 | Level 3 | ||||||||||
| November 30, 2022 | |||||||||||||
| Liabilities | |||||||||||||
| Incentive compensation plan payable- revaluation of equity awards payable in Series G shares | $ | $ | $ | $ | |||||||||
| 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 | $ | $ | $ | $ | |||||||||
| Derivative liability – conversion features pursuant to convertible notes payable | $ | $ | $ | $ | |||||||||
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.
- 13 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
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).
- 14 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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.
The following table presents revenues from contracts with customers disaggregated by product/service:
| Three Months Ended November 30, 2022 |
Three Months Ended November 30, 2021 |
Nine Months Ended November 30, 2022 |
Nine Months Ended November 30, 2021 |
||||||||||
| Device rental activities | $ | $ | $ | $ | |||||||||
| Direct sales of goods and services | |||||||||||||
| $ | $ | $ | |||||||||||
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 November 30, 2022 and February 28, 2022.
| Leases | Classification | November 30, 2022 | February 28, 2022 | ||||||
| Assets | |||||||||
| Operating | Operating Lease Assets | $ | $ | ||||||
| Liabilities | |||||||||
| Current | |||||||||
| Operating | Current Operating Lease Liability | $ | $ | ||||||
| Noncurrent | |||||||||
| Operating | Noncurrent Operating Lease Liabilities | ||||||||
| Total lease liabilities | $ | $ | |||||||
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 $
- 15 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
6. REVENUE EARNING DEVICES
Revenue earning devices consisted of the following:
| November 30, 2022 | February 28, 2022 | ||||||
| Revenue earning devices | $ | $ | |||||
| Less: Accumulated depreciation | ( |
) | ( |
) | |||
| $ | $ | ||||||
During the three and nine months ended November 30,
2022 the Company made total additions to revenue earning devices of $
Depreciation expense was $
7. FIXED ASSETS
Fixed assets consisted of the following:
| November 30, 2022 | February 28, 2022 | ||||||
| Automobile | $ | $ | |||||
| Manufacturing equipment | |||||||
| Demo devices | |||||||
| Computer equipment and software | |||||||
| Office equipment | |||||||
| Warehouse equipment | |||||||
| Tooling | |||||||
| Leasehold improvements | |||||||
| Less: Accumulated depreciation | ( |
) | ( |
) | |||
| $ | $ | ||||||
During the three months ended November 30, 2022, the
Company made additions of $
Depreciation expense was $
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 $
On May 9, 2019 the Company entered into two similar arrangements with two investors:
- 16 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (1) | The investor would pay up to $ | |
| (2) | The investor would pay up to $ |
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.
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 $
On December 30, 2019, the Company entered into another
similar arrangement with a new investor whereby the investor would advance up to $
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 $
On July 1, 2020, the Company entered into a similar
agreement with the first investor whereby the investor would pay up to $
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 $
In summary of all agreements mentioned above if in
the event that at least
- 17 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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) | The rate payment was reduced from | |
| 2) | The asset disposition % (see below) was reduced from |
In consideration for the above changes, the investor
received 40 Series F Convertible Preferred Stock and a warrant to purchase
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 November 30, 2022, and February 28, 2022, the
long-term balances other than Payments already owed is the cash received of $
For both the three months and nine months ended November
30, 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 $
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 November 30, 2022, the Company has accrued $
9. CONVERTIBLE NOTES PAYABLE
Convertible notes payable consisted of the following:
| Balance | Balance | |||||||||||||
| Interest | Conversion | November 30, | February 28, | |||||||||||
| Issued | Maturity | Rate | Rate per Share | 2022 | 2022 | |||||||||
| 8% | $ |
$ | $ | |||||||||||
| 12% | $ |
|||||||||||||
| $ | $ | |||||||||||||
| (Less): current portion of convertible notes payable | ( |
) | ( |
) | ||||||||||
| (Less): discount on noncurrent convertible notes payable | ||||||||||||||
| Noncurrent convertible notes payable, net of discount | $ | $ | ||||||||||||
| Current portion of convertible notes payable | $ | $ | ||||||||||||
| (Less): discount on current portion of convertible notes payable | ( |
) | ||||||||||||
| Current portion of convertible notes payable, net of discount | $ | $ | ||||||||||||
__________
| * | |
| (1) | |
| (2) |
- 18 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During both the three and nine months ended November 30, 2022, the Company incurred original issue discounts of $75,000, and relative fair value discounts debt discounts from derivative liabilities of $393,949 and fees of $55,750 related to new convertible notes payable. During both the three and nine months ended November 30, 2021 the Company recognized debt discounts from derivative liabilities of $438,835. During the three and nine months ended November 30, 2022, the Company recognized interest expense related to the amortization of debt discount of $78,149 and $90,767. During the three and nine months ended November 30, 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 November 30, 2022 and February 28, 2022, the Company had total accrued interest payable of $51,458 and $28,104, respectively, all of which is classified as current.
During the nine months ended November 30, 2022, the Company also had the following convertible note activity:
| ● | |
| ● |
During the nine months ended November 30, 2021, the Company had the following convertible note activity:
| ● | |
| ● |
|
| ● |
- 19 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. RELATED PARTY TRANSACTIONS
For the nine months ended November 30, 2022, the Company
had no repayments of net advances from its loan payable-related party. For the nine months ended November 30, 2021 the Company repaid
net advances of $
Pursuant to the amended Employment Agreement with
its Chief Executive Officer, for the three months and nine months ended November 30, 2022, the Company accrued $138,000 and $362,500 of
incentive compensation plan payable with a corresponding recognition of stock based compensation due to the expectation of additional
awards being met. This will be payable in Series G Preferred Shares which are redeemable at the Company’s option at $ per share.
At November 30, 2022 and February 28, 2022 there was $
During the three months ended November 30, 2022 and
2021, the Company was charged $
During the nine months ended November 30, 2022 and
2021, the Company was charged $
11. OTHER DEBT – VEHICLE LOAN
In December 2016, RAD entered into a vehicle loan
for $
- 20 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. LOANS PAYABLE
Loans payable at November 30, 2022 consisted of the following:
| Annual | ||||||||||
| Date | Maturity | Description | Principal | Interest Rate | ||||||
| July 18, 2017 | Promissory note | (35) * | $ | 22% | ||||||
| June 11, 2019 | Promissory note | (2) (#) | — | 25% | ||||||
| June 30, 2019 | Promissory note | (1) (#) | — | 15% | ||||||
| June 30, 2019 | Promissory note | (3) (#) | — | 15% | ||||||
| June 30, 2019 | Promissory note | (4) (#) | — | 15% | ||||||
| June 26, 2020 | Promissory note | (5) (#) | — | 15% | ||||||
| June 24, 2020 | Promissory note | (6) (#) | — | 15% | ||||||
| January 30, 2021 | Promissory note | (7) (#) | — | 15% | ||||||
| February 27, 2021 | Promissory note | (8) (#) | — | 15% | ||||||
| April 16, 2021 | Promissory note | (9) (#) | — | 15% | ||||||
| May 12, 2021 | Promissory note | (11) (#) | — | 15% | ||||||
| May 22, 2021 | Promissory note | (12) (#) | — | 15% | ||||||
| June 2, 2021 | Promissory note | (13) (#) | — | 15% | ||||||
| June 9, 2021 | Promissory note | (14) (#) | — | 15% | ||||||
| June 12, 2021 | Promissory note | (15) (#) | — | 15% | ||||||
| June 16, 2021 | Promissory note | (16) (#) | — | 15% | ||||||
| September 15, 2022 | Promissory note | (17) (#) | — | 10% | ||||||
| March 6, 2023 | Promissory note | (18) (#) | — | 12% | ||||||
| November 12, 2023 | Promissory note | (19) (#) | — | 12% | ||||||
| October 23, 2022 | Promissory note | (20) (#) | — | 15.5% | ||||||
| November 23, 2023 | Promissory note | (21) (#) | — | 15% | ||||||
| December 10, 2023 | Promissory note | (22) (#) | — | 12% | ||||||
| December 10, 2023 | Promissory note | (23) | 12% | |||||||
| December 10, 2023 | Promissory note | (24) | 12% | |||||||
| December 10, 2023 | Promissory note | (25) | 12% | |||||||
| December 14, 2023 | Promissory note | (26) | 12% | |||||||
| December 30, 2023 | Promissory note | (27) | 12% | |||||||
| December 31, 2024 | Promissory note | (28) | 12% | |||||||
| December 31, 2024 | Promissory note | (29) | 12% | |||||||
| January 14, 2024 | Promissory note | (30) | 12% | |||||||
| February 22, 2024 | Promissory note | (31) | 12% | |||||||
| March 1, 2024 | Promissory note | (10) | 12% | |||||||
| June 8, 2024 | Promissory note | (32) | 12% | |||||||
| July 26, 2026 | Promissory note | (33) | 7% | |||||||
| September 14, 2024 | Promissory note | (34) | 12% | |||||||
| July 28, 2023 | Promissory note | (36) | 15% | |||||||
| August 30,2024 | Promissory note | (38) | 15% | |||||||
| September 7, 2023 | Promissory note | (37) | 15% | |||||||
| September 8, 2023 | Promissory note | (39) | 15% | |||||||
| October 13, 2023 | Promissory note | (40) | 15% | |||||||
| October 31, 2026 | Promissory note | (41) | 15% | |||||||
| October 31, 2026 | Promissory note | (41) | 15% | |||||||
| October 31, 2026 | Promissory note | (41) | 15% | |||||||
| October 31, 2026 | Promissory note | (41) | 15% | |||||||
| $ | ||||||||||
| Less: current portion of loans payable | ( |
) | ||||||||
| Less: discount on non-current loans payable | ( |
) | ||||||||
| Non-current loans payable, net of discount | $ | |||||||||
| Current portion of loans payable | $ | |||||||||
| Less: discount on current portion of loans payable | ( |
) | ||||||||
| Current portion of loans payable, net of discount | $ | |||||||||
- 21 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| * | |
| (#) | |
| (1) | |
| (2) | |
| (3) | |
| (4) | |
| (5) | |
| (6) | |
| (7) | |
| (8) | |
| (9) | |
| (10) | |
| (11) | |
| (12) | |
| (13) | |
| (14) |
- 22 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (15) | |
| (16) | |
| (17) | |
| (18) | |
| (19) | |
| (20) | |
| (21) | |
| (22) | |
| (23) | |
| (24) | |
| (25) | |
| (26) |
- 23 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (27) | |
| (28) | |
| (29) | |
| (30) | |
| (31) | |
| (32) | |
| (33) | |
| (34) |
- 24 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (35) | |
| (36) | |
| (37) | |
| (38) | |
| (39) |
|
| (40) | |
| (41) |
October 28, 2022, $
November 9, 2022, $
November 10, 2022, $
November 15, 2022, $ |
- 25 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
13. DERIVATIVE LIABILITIES
As of November 30, 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 $
14. STOCKHOLDERS’ EQUITY (DEFICIT)
Series F Preferred Shares
Each holder of Series E Convertible Preferred Shares may, at any time and from time to time convert all, but not less than all, of their shares into a number of fully paid and nonassessable shares of common stock determined by multiplying the number of issued and outstanding shares of common stock of the Company on the date of conversion by three and 45 100ths (3.45) on a pro rata basis.
On August 23, 2021, the Company filed amended Series F preferred shares such that Series F preferred shares are not convertible into common stock by a holder until (A) August 23, 2023 or (B) the date on which such a conversion may be required for the purpose of (i) uplisting the Company to a new stock exchange, or (ii) selling more than 50% of the Company’s assets.
Summary or Preferred Stock Activity
There was 1 Series F Preferred Share issued along with debt to a lender.
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 | $ |
|||||
| Issued | $ |
|||||
| Exercised | — | |||||
| Forfeited and cancelled | — | |||||
| Outstanding at November 30, 2022 | $ |
Summary of Common Stock Activity
The Company increased authorized common shares from 5,000,000,000 to on July 8, 2022.
During the nine months ended, November 30, 2022, the
Company issued common shares with gross proceeds of $
| Common shares | November 30, 2022 | February 28, 2022 | |||||
| Issued | |||||||
| Issuable | |||||||
| Issued, issuable and outstanding | |||||||
- 26 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summary of Common Stock Warrant Activity
| Number of Warrants | Weighted Average Exercise Price | Weighted Average Remaining Years | ||||
| Outstanding at March 1, 2022 | $ |
|||||
| Issued | $ |
|||||
| Adjusted(1) | $ |
|||||
| Exercised | ( |
) | $ |
|||
| Forfeited, extinguished and cancelled | ( |
) | $ |
|||
| Outstanding at November 30, 2022 | $ |
| (1) |
For the three months and nine months ended November 30, 2022 and November 30, 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 $
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.
Operating Lease
On December 18, 2020,
On March 10, 2021,
On September 30, 2021,
On January 28, 2022,
- 27 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 $61,005 and $194,653for the three and nine months ended November 30, 2022, respectively, and $103,115 and $207,201 for the three and nine months ended November 30, 2021, respectively.
| Maturity of Lease Liabilities | Operating Leases |
||
| November 30, 2023 | $ | ||
| November 30, 2024 | |||
| November 30, 2025 | |||
| November 30, 2026 | |||
| November 30, 2027 | |||
| November 30, 2028 and after | |||
| Total lease payments | |||
| Less: Interest | ( |
) | |
| Present value of lease liabilities | $ | ||
The net income (loss) per common share amounts were determined as follows:
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||
| November 30, | November 30, | ||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||
| Numerator: | |||||||||||||
| Net income (loss) available to common shareholders | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |
| Effect of common stock equivalents | |||||||||||||
| Add: interest expense on convertible debt | |||||||||||||
| Add: amortization of debt discount | |||||||||||||
| Add (less) loss (gain) on settlement of debt | ( |
) | |||||||||||
| Add (less) loss (gain) on change of derivative liabilities | ( |
) | |||||||||||
| Net income (loss) adjusted for common stock equivalents | ( |
) | ( |
) | ( |
) | ( |
) | |||||
| Denominator: | |||||||||||||
| Weighted average shares – basic | |||||||||||||
| Net income (loss) per share – basic | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |
| Dilutive effect of common stock equivalents: | |||||||||||||
| Convertible Debt | — | — | — | — | |||||||||
| Preferred shares | — | — | — | — | |||||||||
| Warrants | — | — | — | — | |||||||||
| — | — | — | — | ||||||||||
| Denominator: | |||||||||||||
| Weighted average shares – diluted | |||||||||||||
| Net income (loss) per share – diluted | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | |
- 28 -
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| For the Three Months Ended | For the Nine Months Ended | ||||||||||||
| November 30, | November 30, | ||||||||||||
| 2022 | 2021 | 2022 | 2021 | ||||||||||
| Convertible notes and accrued interest | |||||||||||||
| Convertible Series F Preferred Shares* | |||||||||||||
| Stock options and warrants | |||||||||||||
| Total | |||||||||||||
| * |
| For the Three and Nine Months Ended | |||||
| November 30 | |||||
| 2022 | 2021 | ||||
| Convertible Series F Preferred Shares | |||||
17. SUBSEQUENT EVENTS
Subsequent to November 30, 2022 through to January 9, 2023:
— The Company issued common shares pursuant to a share purchase agreement for gross proceeds of $, issuance costs of $ and net proceeds of $.
— On December 23, 2022 the Company entered
into a Simple Agreement for Future Equity (SAFE) contract to invest $
- 29 -
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of our financial condition and results of operations for the three and nine months ended November 30, 2022 and November 30, 2021 should be read in conjunction with our unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended February 28, 2022, as filed on May 27, 2022 with the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.
Unless expressly indicated or the context requires otherwise, the terms “AITX”, the “Company”, “we”, “us”, and “our” refer to Artificial Intelligence Technology Solutions Inc.
Overview
Artificial Intelligence Technology Solutions Inc. (“we”, “our, “us”, “AITX” or the “Company”) was incorporated in Florida on March 25, 2010 as On the Move Systems Inc. and was quoted on OTC Pinks as ‘OMVS’. We reincorporated in Nevada on February 17, 2015. Our fiscal year end is February 28 (February 29 during leap year). We are located at 10800 Galaxie Ave., Ferndale, Michigan 48220, and our telephone number is 877-767-6268. We completed a stock ticker change to AITX in 2018. Steve Reinharz became our Chief Executive Officer in March 2021 and is the founder of our primary wholly owned subsidiary, Robotic Assistance Devices, Inc. (RAD). We have a 3-year executive compensation agreement with our CEO.
Our mission is to apply artificial intelligence (AI) technology to solve enterprise security-related problems categorized as expensive, repetitive, difficult to staff, dangerous, and outside of the core competencies of the client organization.
For example:
| ● | Typical security guard-related functions such as monitoring a parking lot during and after hours and responding appropriately. This scenario applies to perimeters, interior yard areas, and related similar environments. |
| ● | Integrated hardware/software with AI-driven responses simulating and expanding on what legacy or manned solutions could perform. |
| ● | Performance of difficult, rare, and high value tasks such as firearm detection and immediate response whether autonomously or with human assistance. |
| ● | Automation of common access control functions through technology utilizing facial recognition and machine vision, leapfrogging over most legacy solutions in use today. |
| ● | Patrol and response of commercial, industrial and government areas requiring heightened security work to be completed via autonomous mobile robotics devices. |
RAD solutions are unique due to their functionalities, as follows:
| ● | Start with an AI-driven autonomous response utilizing cellular-optimized communications, while easily connecting to a human operator for a manned response, as needed. |
| ● | Use RAD’s exclusive hardware and software, purpose-built by for delivery of these solutions. Various form factors have been customized to deliver this new functionality, both mobile and stationary. |
| ● | Deliver services through -RAD developed software and cloud services, allowing enterprise IT groups to focus on core competencies instead of maintenance of complex video and security platforms. |
| ● | Perform workflow functions via purpose-built fixed and mobile devices with unique technology and methodology. |
- 30 -
Through our subsidiary, Robotic Assistance Devices, Inc. (RAD), AITX is redefining the $25 billion (US) security and guarding services industry through its broad lineup of innovative, AI-driven Solutions-as-a-Service business model. RAD solutions are specifically designed to provide a cost savings to businesses of between 35% and 80% when compared to the industry’s existing and costly manned security guarding and monitoring model. RAD delivers this costs savings via a suite of stationary and mobile robotic security solutions that complement, and at times, directly replace the need for human personnel in environments better suited for machines.
At the beginning of the prior fiscal year ended February 28, 2022, AITX began its 10-year lease at its 29,316 sq ft manufacturing facility outside of Detroit, Michigan, hired the employees, and acquired the infra-structure to support it. This facility, referred to by RAD as ‘the REX’ positions AITX to achieve its growth objectives and meet future sales demands.
As of January 16, 2023, there were approximately 300 RAD units deployed with approximately 290 units on backorder, in production or en route to deployment. Additionally, RAD has reported a total authorized dealer count of 55. RAD distributes its products through a combination of direct sales to end-users and opportunities developed through its dealer channel.
Our 85 employees as of January 16, 2023 constitute our workforce that supports the necessary infrastructure (Engineering, Production, Business Development, Marketing, Administration) built to achieve our growth objectives and meet future sales demands. We strive for rapid growth and creation/expansion of our departments and teams; however, this creates significant challenges that if unsuccessful will negatively impact our results of operations.
We and our subsidiaries have launched several new solutions during the 3rd quarter of the current fiscal year (FY2023), including:
| ● | RIO™, a portable, solar-powered, wide-area security device. RIO was formally introduced to the security industry at one of its premier trade shows, GSX 2022 in Atlanta in September 2022. |
| ● | ROSA-P, a switched-powered security and safety solution that powers RAD’s best-selling ROSA 3.x where power does not currently exist in the industry at night. |
| ● | RADDOG™, the security industry’s purpose-built mobile robot dog. |
| ● | ROSS™, a software solution which enables millions of IP security cameras presently deployed with the ability to connect with the RAD ecosystem (RADSoC). ROSS empowers these non-RAD cameras to run the same AI analytic capabilities as other RAD hardware solutions. |
| ● | Wholly owned subsidiary Robotic Assistance Devices Group, Inc. (RAD-G) announced the launch of a sales initiative targeting OEM markets. This market development endeavor marks our first of its kind and involves the placement of hardware and software solutions developed across all subsidiaries for use in other vertical markets through OEM suppliers. |
| ● | Wholly owned subsidiary Robotic Assistance Devices Mobile, Inc., is expected to make a new solution announcement sometime in FY2024. |
These solutions utilize the comprehensive RAD platform to offer unparalleled, all-in-one, security and safety solutions that can be implemented within a half hour. These solutions include cutting-edge features such as the detection of firearms, deterrents for trespassing, peripheral surveillance, management of visitors, and more.
RAD’s sales funnel has experienced substantial growth in both volume and value.
RAD is working towards adding the following deployments to be in place by February 29, 2024:
| ● | 25 ROAMEOs, the robust mobile-patrolling security robot. The current schedule, subject to engineering development timelines, parts availability and manufacturing, has these ROAMEO units available to ship to clients and start billing as soon as August 2023. We expect to deploy 5-10 a month beginning in August. Pre-selling has begun with the goal of exceeding 25 units for FY2024. |
| ● | 150 RIOs, portable solar-powered, wide-area security devices. RAD’s largest dealer is expected to add this to their line card by May 2023 which we can reasonably expect will drive significant volume. Management expects RIO revenue to begin significance towards the end of Q2 FY2024. |
- 31 -
| ● | 350 ROSAs / ROSA-Ps, stationary security and safety solutions. This number of ROSA & ROSA P units is roughly at the same run rate as the last few months of calendar year 2022 and is considered by management to be easily achievable. Management expects a minimum of 30 units being added monthly to recurring monthly revenue beginning March 1, 2023. |
| ● | 100 AVAs, an autonomous access control / vehicle access device. AVA 3.0 units hit 10 deployed units by mid-January. Early indications of market reception are positive and it’s expected that dealers will begin ordering in greater quantities as management gathers more case studies and references. |
| ● | 15 RADDOG™, the security industry’s purpose-built robot dog. RADDOG version 1.0 was first publicly displayed on December 7, 2022 at the Company’s Investor Open House and Technology Reveal. As was stated at that time all of our tests were successful and we are moving forward with a larger, stronger version to commercialize. This version will be shown at the ISC West trade show in Las Vegas at the end of March and will be available to ship to clients in the May time frame. The projected number of 15 is considered conservative by management for FY2024. |
| ● | 5000 IP camera integrations via ROSS. These are expected to be ‘take-over’ or ‘side-by-side’ type deployments featuring pre-existing LAN connected IP security cameras. ‘Take-over’ deployments would replace the pre-existing Video Management System and ‘side-by-side’ deployments would leave the existing systems in place and use secondary camera feeds through ROSS. |
| ● | 35 TOM autonomous visitor management devices. TOM, an acronym for ‘The Office Manager’ is the evolution and replacement for Wally™. ‘TOM+’ is scheduled for development and release in FY2024. Currently RAD’s largest single client has deployed TOM units throughout the US and at two European locations. Given monthly sales orders it is expected that this 35 unit target could be met entirely by this one client. We are discussing rolling the product out to its dealer channel as at the moment it is only available to this single client. |
The realization of the deployments, if successful and if within a 10% range of standard RAD dealer pricing, will result in our recurring monthly revenues reaching approximately $800,000, and if achieved, would enable us to attain positive cash flow. As such, we will continue to focus on improving existing team members’ efficiency and productivity with a focus on retention. Achievement of the sales goals listed herein will require approximately 5% to 10% headcount growth in the production and deployment teams which could push back the goals of positive cash flow.
Several significant new clients are expected to receive their deployments in FY2024 and are expected to be public. Security is generally a private corporate function and we note that prior clients that have been publicized have been inundated with shareholder phone calls looking for further verification. It is for these reasons that we will continue to rarely pursue publicization of end users.
FY2024 will feature balancing efforts on cost savings with accelerated growth in order to increase probability of achieving targeted positive cash flow targets.
Management Discussion and Analysis
Results of Operations for the Three Months Ended November 30, 2022 and 2021
The following table shows our results of operations for the three months ended November 30, 2022 and 2021. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
| Period | ||||||||||||
| Three Months Ended |
Three Months Ended |
Change | ||||||||||
| November 30, 2022 | November 30, 2021 | Dollars | Percentage | |||||||||
| Revenues | $ | 402,399 | $ | 373,897 | $ | 28,502 | 8% | |||||
| Gross profit | 276,439 | 230,473 | 45,966 | 20% | ||||||||
| Operating expenses | 3,090,941 | 5,118,000 | (2,027,059 | ) | (40% | ) | ||||||
| Loss from operations | (2,814,502 | ) | (4,887,527 | ) | 2,073,025 | 42% | ||||||
| Other income (expense), net | (1,271,158 | ) | (2,206,915 | ) | 935,757 | 42% | ||||||
| Net income (loss) | $ | (4,085,660 | ) | $ | (7,094,442 | ) | $ | 3,008,782 | 42% | |||
- 32 -
Revenue
The following table presents revenues from contracts with customers disaggregated by product/service:
| Three Months Ended |
Three Months Ended |
Change | ||||||||||
| November 30, 2022 | November 30, 2021 | Dollars | Percentage | |||||||||
| Device rental activities | $ | 154,628 | $ | 165,353 | $ | (10,725 | ) | (6% | ) | |||
| Direct sales of goods and services | 247,771 | 208,544 | 39,227 | 19% | ||||||||
| $ | 402,399 | $ | 373,897 | $ | 28,502 | 8% | ||||||
Total revenue for the three-month period ended November 30, 2022 was $402,399 which represented an increase of $28,502 compared to total revenue of $373,897 for the three months ended November 30, 2021. This increase is a result of higher direct sales in the current year’s quarter.
Gross profit
Total gross profit for the three-month period ended November 30, 2022 was $276,439, which represented an increase of $45,966 compared to gross profit of $230,473 for the three months ended November 30, 2021. The gross profit increased due to the higher sales and variations in product mix sales. The gross profit % of 69% for the three-month period ended November 30, 2022 was higher than the gross profit % of 62% for the prior year’s corresponding period.
Operating Expenses
| Period | ||||||||||||
| Three Months Ended |
Three Months Ended |
Change | ||||||||||
| November 30, 2022 | November 30, 2021 | Dollars | Percentage | |||||||||
| Research and development | $ | 813,313 | $ | 982,446 | $ | (169,133 | ) | (17% | ) | |||
| General and administrative | 2,123,768 | 3,964,512 | (1,840,744 | ) | (46% | ) | ||||||
| Depreciation and amortization | 92,855 | 67,927 | 24,928 | 37% | ||||||||
| Operating lease cost and rent | 61,005 | 103,115 | (42,110 | ) | (41% | ) | ||||||
| Operating expenses | $ | 3,090,941 | $ | 5,118,000 | $ | (2,027,059 | ) | (40% | ) | |||
Our operating expenses were comprised of general and administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the three-month period ended November 30, 2022 and November 30, 2021, were $3,090,941 and $5,118,000, respectively. The overall decrease of $2,027,059 was primarily attributable to the following changes in operating expenses of:
| ● | General and administrative expenses decreased by $1,840,744. In comparing the three months ended November 30, 2022 and November 30, 2021 this decrease was primarily due to the following decreases: stock based compensation of $819,500 for higher prior year charges based on the CEO incentive plan, wages and salaries for prior year bonuses paid, bad debts expense of $25,785 and professional fees of $126,435. These decreases were offset by the following increases: insurance of $51,485 due to health plan for new employees and increased liability and property insurance due to new manufacturing facility, advertising , sales and marketing of $82,893, subcontractor fees of $13,802, travel of $18,004, duty and freight of $36,230 and bad debts expense due to a general provision of $40,000 on slow payers due to present economic factors. |
| ● | Research and development decreased by $169,133 due to higher activity in the prior year in R&D design and equipment for the development of new products such as ROAMEO and AVA, as well as upgrades of existing products. That decrease was partially offset by an increase in research and development paid to a related party of $146,995. |
| ● | Depreciation and amortization increased by $24,928 due to the acquisition of computer equipment and new revenue earning devices. |
| ● | Operating lease cost and rent decreased by $42,110 due to one less office lease for the three months ended November 30, 2022 comparing to the three months ended November 30, 2021. |
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Other Income (Expense)
Other income (expense) consisted of the change of fair value of derivative instruments, loss on settlement of debt and interest. Other income (expense) during the three months ended November 30, 2022 and November 30, 2021, was ($1,271,158) and ($2,206,915), respectively. The $935,757 decrease in other expense, net was primarily attributable to reduced interest expense.
| ● | Interest expense decreased by $779,096 due to a decrease in debt amortization expense. The three months ended November 30, 2021 had higher amortization due to debt settlements. |
| ● | Loss on settlement of debt was $0 the quarter ended November 30, 2022 and $156,661 in the quarter ended November 30, 2022. |
Net loss
We had a net loss of $4,085,660 for the three months ended November 30, 2022, compared to a net loss of $7,094,442 for the three months ended November 30, 2021. The decrease in net loss of $3,008,782 is due to a number of factors: higher gross profit and lower general and administrative and other expense in the three months ended November 30, 2022.
Results of Operations for the Nine Months Ended November 30, 2022 and 2021
The following table shows our results of operations for the nine months ended November 30, 2022 and 2021. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.
Revenue
| Period | ||||||||||||
| Nine Months Ended |
Nine Months Ended |
Change | ||||||||||
| November 30, 2022 | November 30, 2021 | Dollars | Percentage | |||||||||
| Revenues | $ | 1,055,040 | $ | 1,075,803 | $ | (20,763 | ) | (2% | ) | |||
| Gross profit | 601,142 | 779,499 | (178,357 | ) | (23% | ) | ||||||
| Operating expenses | 10,090,732 | 11,102,944 | (1,012,212 | ) | (9% | ) | ||||||
| Loss from operations | (9,489,590 | ) | (10,323,445 | ) | 833,855 | (8% | ) | |||||
| Other income (expense), net | (3,440,621 | ) | (37,508,288 | ) | 34,067,667 | 91% | ||||||
| Net loss | $ | (12,930,211 | ) | $ | (47,831,733 | ) | $ | 34,901,522 | 73% | |||
The following table presents revenues from contracts with customers disaggregated by product/service:
| Nine Months Ended |
Nine Months Ended |
Change | ||||||||||
| November 30, 2022 | November 30, 2021 | Dollars | Percentage | |||||||||
| Device rental activities | $ | 622,647 | $ | 383,434 | $ | 239,213 | 62% | |||||
| Direct sales of goods and services | 432,393 | 692,369 | (259,976 | ) | (38% | ) | ||||||
| $ | 1,055,040 | $ | 1,075,803 | $ | (20,763 | ) | (2% | ) | ||||
Total revenue for the nine-month period ended November 30, 2022 was $1,055,040 which represented a decrease of $20,763 compared to total revenue of $1,075,803 for the nine months ended November 30, 2021. The small decrease was a result of unusually large unit sales which includes sales of new units totaling $692,369 which occurred in the nine months ended November 30, 2021. This was partially offset by a 62% increase in rental activities increased as the Company continues to grow its rental business.
Gross profit
Total gross profit for the nine-month period ended November 30, 2022 was $601,142 which represented a decrease of $178,357, compared to gross profit of $779,449 for the nine months ended November 30, 2021. The decrease resulted both from lower revenues noted above as well as cost of sales increases in 2022 due to inventory changes. The gross profit percentage of 57% for the nine-month period ended November 30, 2022 was lower than the margin of 72% for the prior year’s corresponding period was primarily due to inventory adjustments due to shrinkage and obsolescence totaling $123,309, which occurred in the first quarter. Before these adjustments the gross profit % for the nine months ended November 30, 2022 would have been a comparable 69%.
- 34 -
Operating Expenses
| Period | ||||||||||||
| Nine Months Ended |
Nine Months Ended |
Change | ||||||||||
| November 30, 2022 | November 30, 2021 | Dollars | Percentage | |||||||||
| Research and development | $ | 2,800,834 | $ | 2,316,383 | $ | 484,451 | 21% | |||||
| General and administrative | 6,762,602 | 8,455,224 | (1,692,622 | ) | (20% | ) | ||||||
| Depreciation and amortization | 332,643 | 153,261 | 179,382 | 117% | ||||||||
| Operating lease cost and rent | 194,653 | 207,201 | (12,548 | ) | (6% | ) | ||||||
| (Gain) loss on disposal of fixed assets | — | (29,125 | ) | 29,125 | 100% | |||||||
| Operating expenses | $ | 10,090,732 | $ | 11,102,944 | $ | (1,012,212 | ) | (9% | ) | |||
Our operating expenses were comprised of general and administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the nine-month period ended November 30, 2022 and November 30, 2021, were $10,090,732 and $11,102,944, respectively. The overall decrease of $1,012,212 was primarily attributable to the following changes in operating expenses of:
| ● | General and administrative expenses decreased by $1,692,622. In comparing the nine-months ended November 30, 2022 and November 30, 2021 may be partially explained by the following decreases: wages and salaries by $144,439, professional fees by $535,117, subcontractor fees $89,492 and stock-based compensation $1,677,050. These were partially offset by increases in the following accounts: sales and marketing by $314,098, travel by $115,122, insurance by $229,562, duty and freight by $66,067,bad debts expense $117,193, and office expense by $73,922. |
| ● | Research and development increased by $484,451 due to funding development of new products as well as upgrades of existing products that mostly took place in the first two quarters of 2022. Included in that increase is the increase in research and development paid to a related party of $1,064,636. This increase was partially offset by the higher development costs incurred in equipment and design on new products for the nine-month period ended November 30, 2021. |
| ● | Depreciation and amortization increased by $179,382 due to the acquisition of ERP computer software, computer equipment tooling, and 54 new revenue earning devices. |
| ● | Operating lease cost and rent decreased by $12,548 due to the expiration of one lease in early fiscal 2022. |
| ● | (Gain) loss on disposal of fixed assets increase by $29,125 due to a vehicle sold in the prior year. |
Other Income (Expense)
Other income (expense) during the nine months ended November 30, 2022 and November 30, 2021, was ($3,440,621) and ($37,508,288), respectively. The $34,067,677 increase in other income was primarily attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt.
| ● | In comparing the nine months ended November 30, 2022 and the nine months ended November 30, 2021, the change in fair value of derivative liabilities decreased by $368,907 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock as well as reductions in derivative liability as a result of settlements on the underlying debt. |
| ● | Interest expense decreased by $1,364,269 due to the decrease in debt amortization expense. The three months ended November 30, 2021 had higher amortization due to debt settlements. |
| ● | Gain (loss) on settlement of debt was $3,992 the nine months ended November 30, 2022 and ($33,068,313) in the nine months ended November 30, 2021. This current period the gain was a result of the reduction of the derivative liability , the prior year’s period has an amendment of the deferred variable payment obligation that led to a $33,015,215 loss which was partially offset by gains from accrued liabilities settlements and the debt exchange for common shares. This loss on settlement of debt was non-cash and has no effect on the cash flows of the Company. |
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Net loss
We had a net loss of $12,930,211 for the nine months ended November 30, 2022, compared to a net loss of $47,831,733 for the nine months ended November 30, 2021. The change is primarily the result of the loss on settlement in the nine months ended November 30, 2021 as well as the lower general and administrative expenses and other items discussed above.
Liquidity, Capital Resources and Cash Flows
Management believes that we will continue to incur losses for the immediate future. Therefore, we will need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern.
As of November 30, 2022, we had a cash balance of $713,493, net accounts receivable of $464,044, net device parts inventory of $1,573,380 and $4,470,418 in current liabilities. At the current cash consumption rate, we will need to consider additional funding sources going forward. We are taking proactive measures to reduce operating expenses and drive growth in revenue.
The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.
Capital Resources
The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated:
| November 30, 2022 | February 28, 2022 | ||||||
| Current assets | $ | 3,423,711 | $ | 7,050,436 | |||
| Current liabilities | 4,470,418 | 4,547,718 | |||||
| Working capital | $ | (1,046,707 | ) | $ | 2,502,718 | ||
As of November 30, 2022 and February 28, 2022, we had a cash balance of $713,493 and $4,648,146, respectively.
Summary of Cash Flows
| Summary of Cash Flows | Nine Months Ended November 30, 2022 |
Nine Months Ended November 30, 2021 |
|||||
| Net cash used in operating activities | $ | (9,883,272 | ) | $ | (10,434,762 | ) | |
| Net cash used in investing activities | $ | (217,601 | ) | $ | (46,741 | ) | |
| Net cash provided by financing activities | $ | 6,166,220 | $ | 13,540,949 | |||
Net cash used in operating activities.
Net cash used in operating activities for the nine months ended November 30, 2022 was $9,883,272, which included a net loss of $12,930,211, non-cash activity such as the bad debts expense of $224,215, inventory provision $90,000, reduction of right of use asset of $84,298, accretion of lease liability $107,187, stock based compensation of $481,000, change in value of derivative liabilities of ($3,595), gain on settlement of debt of ($3,992), amortization of debt discount of $1,094,388, increase in related party accrued payroll and interest of $9,720, depreciation and amortization of $332,643 and change in operating assets of $631,074, to derive the uses of cash in operations.
Net cash used in investing activities.
Net cash used in investing activities for the nine months ended November 30, 2022 was $217,601, which was the purchase of fixed assets.
Net cash provided by financing activities.
Net cash provided by financing activities was $6,166,220 for the nine months ended November 30, 2022. This consisted of share proceeds net of issuance costs of $4,657,979, proceeds from convertible notes payable of $619,250, proceeds from loans payable of $2,600,000, reduced by repayments on loans payable of $1,711,009.
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Off-Balance Sheet Arrangements
None.
Critical Accounting Policies and Estimates
Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K for the year ended February 28, 2022, as filed on May 27, 2022.
Related Party Transactions
For the nine months ended November 30, 2022, the Company had no repayments of net advances from its loan payable-related party. For the nine months ended November 30, 2021 the Company repaid net advances of $812,234. At November 30, 2022, the loan payable-related party was $203,276 and $193,556 at February 28, 2022. Included in the balance due to the related party at November 30, 2022 is $126,744 of deferred salary and interest, $108,000 of which bears interest at 12%. At February 28, 2022, included in the balance due to the related party is $110,700 of deferred salary and interest, $90,000 of which bears interest at 12%. The accrued interest included in loan at November 30, 2022 and November 30, 2021 was $12,420 and $540 respectively.
Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months and nine months ended November 30, 2022, the Company accrued $138,000 and $362,500 of incentive compensation plan payable with a corresponding recognition of stock based compensation due to the expectation of additional awards being met. This will be payable in Series G Preferred Shares which are redeemable at the Company’s option at $1,000 per share. At November 30, 2022 and February 28, 2022 there was $842,000 and $479,500 of incentive compensation payable.
During the three months ended November 30, 2022 and 2021, the Company was charged $794,460 and $647.465, respectively for fees for research and development from a company partially owned by a principal shareholder.
During the nine months ended November 30, 2022 and 2021, the Company was charged $2,735,589 and $1,689,253, respectively for fees for research and development from a company partially owned by a principal shareholder.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable for a smaller reporting company.
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 November 30, 2022. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of November 30, 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 November 30, 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 November 30, 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. |
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Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.
Change in Internal Controls over Financial Reporting
The only change in internal controls was the implementation of the Company’s new CRM/ERP/Accounting software. This change in our internal controls over financial reporting that occurred during the period covered by this report, should not have materially affected, or is not reasonably likely to materially affect, our internal controls over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 1A. RISK FACTORS
This item is not applicable to smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Each issuance of securities was issued without registration in reliance of the exemption from registration Section 3(a)9 of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
The Company has not defaulted upon senior securities.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable to the Company.
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: January 20, 2023 | BY: /s/ Steven Reinharz |
| Steven Reinharz | |
| President, Chief Executive Officer (principal executive officer) | |
| Date: January 20, 2023 | BY: /s/ Anthony Brenz |
| Anthony Brenz | |
| Chief Financial Officer (principal financial officer) |
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