NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL INFORMATION
Artificial Intelligence Technology Solutions Inc.
(“AITX” or the “Company”) was incorporated in Florida on March 25, 2010 and reincorporated in Nevada on February
17, 2015. On August 24, 2018, Artificial Intelligence Technology Solutions Inc., changed its name from On the Move Systems Corp (“OMVS”).
Robotic Assistance Devices, LLC (“RAD”), was incorporated in
the State of Nevada on July 26, 2016 as a Limited Liability Company. On July 25, 2017, Robotic Assistance Devices LLC converted to a C
Corporation, Robotic Assistance Devices, Inc., through the issuance of 10,000 common shares to its sole shareholder.
On August 28, 2017, AITX completed the acquisition
of RAD (the “Acquisition”), whereby AITX acquired all the ownership and equity interest in RAD for 3,350,000 shares of AITX
Series E Preferred Stock and 2,450 shares of Series F Convertible Preferred Stock. AITX’s prior business focus was transportation
services, and was exploring the on-demand logistics market by developing a network of logistics partnerships. As a result of the
closing of the Acquisition, AITX has succeeded to the business of RAD, and AITX’s business going forward will consist of
one segment activity, which is the delivery of artificial intelligence and robotic solutions for operational, security and monitoring needs.
The Acquisition was treated as a reverse recapitalization
effected by a share exchange for financial accounting and reporting purposes since substantially all of AITX’s operations were disposed
of as part of the consummation of the transaction. Therefore, no goodwill or other intangible assets were recorded by AITX as a result
of the Acquisition. RAD is treated as the accounting acquirer as its stockholders control the Company after the Acquisition, even though
AITX was the legal acquirer. As a result, the assets and liabilities and the historical operations that are reflected in these financial
statements are those of RAD as if RAD had always been the reporting company.
2. GOING CONCERN
The accompanying unaudited consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. The accompanying financial statements do not
include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications
of liabilities that may result from the possible inability of the Company to continue as a going concern.
For the three months ended August 31, 2022, the Company
had negative cash flow from operating activities of $6,754,462. As of August 31, 2022, the Company has an accumulated deficit of $102,988,805,
and negative working capital of $169,680. Management does not anticipate having positive cash flow from operations in the near future.
These factors raise a substantial doubt about the Company’s ability to continue as a going concern for the twelve months following
the issuance of these financial statements.
The Company does not have the resources at this time
to repay its credit and debt obligations, make any payments in the form of dividends to its shareholders or fully implement its business
plan. Without additional capital, the Company will not be able to remain in business.
Management has plans to address the Company’s
financial situation as follows:
In the near term, management plans to
potentially raise an additional $3 million to $5 million before the end of the fiscal year. Management is committed to raise either
non-dilutive funds or minimally dilutive funds. There is no assurance that these funds will be able to be raised nor can we provide
assurance that these possible raises may not have dilutive effects.
The Company began raising money through its S-3 Registration Statement
this year and made improvements in paying off debt, investing in inventory and at August 31, 2022 had $363,073 of cash on hand. Management
is committed to raise either non-dilutive funds or minimally dilutive funds. There is no assurance that these funds will be able to be
raised nor can we provide assurance that these possible raises may not have dilutive effects. For the fiscal period through to September
30, 2022, the Company has raised an additional $3.6 million net of issuance costs through the sale of its common shares and paid approximately
$1.2 million in current debt.
- 8 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
3. ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United
States (“GAAP”) and in conformity with the condensing instructions on Form 10-Q and Rule 8-03 of Regulation S-X and the
related rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with
the audited financial statements and notes thereto in the Company’s latest Annual Report filed with the SEC on Form 10-K as
filed on May 27, 2022. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly
owned subsidiaries, Robotic Assistance Devices, Inc., Robotic Assistance Devices Group , Inc, Robotic Assistance Devices Mobile,
Inc., On the Move Experience, LLC and On the OMV Transports, LLC. All significant intercompany accounts and transactions have been
eliminated in consolidation. The unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring
accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations
for the six months ended August 31, 2022 are not necessarily indicative of the results that may be expected for the entire year.
Use of Estimates
In order to prepare financial statements in conformity
with accounting principles generally accepted in the United States, management must make estimates, judgements and assumptions that affect
the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the
financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from resolution
currently anticipated by management and on which the financial statements are based. The most significant estimates included in these
consolidated financial statements are those associated with the assumptions used to value preferred stock and derivative liabilities.
Cash
The Company considers all highly liquid investments
with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks
and money market instruments. The Company places its cash and cash equivalents with high-quality, U.S. financial institutions and, to
date has not experienced losses on any of its balances.
Accounts Receivable
Accounts receivable are comprised of balances due
from customers, net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated,
and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances. There was an allowance of $218,890
and $33,890 provided as of August 31, 2022 and February 28, 2022, respectively.
Device Parts Inventory
Device parts inventory is stated at the lower of cost
or net realizable value using the weighted average cost method. The Company records a valuation reserve for obsolete and slow-moving inventory,
relying principally on specific identification of such inventory. The Company uses these device parts in the assembly of revenue earning
devices (and demo devices) as well as research and development. Depending on use, the Company will transfer the parts to the corresponding
asset or expense if used in research and development. A charge to income is taken when factors that would result in a need for an
increase in the valuation, such as excess or obsolete inventory, are noted. As of August 31, 2022 and February 28, 2021 there was a valuation
reserve of $135,000 and $65,000, respectively.
Revenue Earning Devices
Revenue earning devices are stated at cost. Depreciation
is provided on a straight-line basis over the estimated useful life of 48 months. The Company continually evaluates revenue earning devices
to determine whether events or changes in circumstances have occurred that may warrant revision of the estimated useful life or whether
the devices should be evaluated for possible impairment. The Company uses a combination of the undiscounted cash flows and market approaches
in assessing whether an asset has been impaired. The Company measures impairment losses based upon the amount by which the carrying amount
of the asset exceeds the fair value.
- 9 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Fixed Assets
Fixed assets are stated at cost. Depreciation is provided
on the straight-line method based on the estimated useful lives of the respective assets which range from two to five years. Major repairs
or improvements are capitalized. Minor replacements and maintenance and repairs which do not improve or extend asset lives are expensed
currently.
| Computer equipment and software |
|
2 or 3 years |
| Office equipment |
|
4 years |
| Manufacturing equipment |
|
7 years |
| Warehouse equipment |
|
5 years |
| Tooling |
|
2 years |
| Demo Devices |
|
4 years |
| Vehicles |
|
3 years |
| Leasehold improvements |
|
5 years, the life of the lease |
The Company periodically evaluates the fair value
of fixed assets whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. Upon retirement
or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain
or loss, if any, is recognized in income.
Research and Development
Research and development costs are expensed in the
period they are incurred in accordance with ASC 730, Research and Development unless they meet specific criteria related to technical,
market and financial feasibility, as determined by Management, including but not limited to the establishment of a clearly defined future
market for the product, and the availability of adequate resources to complete the project. If all criteria are met, the costs are deferred
and amortized over the expected useful life or written off if a product is abandoned. At August 31, 2022 and February 28, 2022, the Company
had no deferred development costs.
Contingencies
Occasionally, the Company may be involved in claims
and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes
that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions
change or prove to be incorrect, it could have a material impact on the Company’s consolidated financial statements. Contingencies
are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely
heavily on estimates and assumptions.
Sales of Future Revenues
The Company has entered into transactions, as more
fully described in footnote 8, in which it has received funding from investors in exchange for which it will make payments to those investors
based on the level of sales of certain revenue categories, generally based on a percentage of sales for those certain revenues. The Company
determines whether these agreements constitute sales of future revenues or are in substance debt based on the facts and circumstances
of each agreement, with the following primary criteria determinative of whether the agreement constitutes a sale of future revenues or
debt:
| |
● |
Does the agreement purport, in substance, to be a sale |
| |
● |
Does the Company have continuing involvement in the generation of cash flows due the investor |
| |
● |
Is the transaction cancellable by either party through payment of a lump sum or other transfer of assets |
| |
● |
Is the investors rate of return is implicitly limited by the terms of the agreement |
| |
● |
Does the Company’s revenue for a reporting period underlying the agreement have only a minimal impact on the investor’s rate of return |
| |
● |
Does the investor have recourse relating to payments due |
In the event a transaction is determined to be a sale
of future revenues, it is recorded as deferred revenue and amortized using the sum-of-the-revenue method. In the event a transaction is
determined to be debt, it is recorded as debt and amortized using the effective interest method. As of the date of these financial statements,
the Company has determined that all such agreements are debt.
- 10 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Revenue Recognition
ASU 2014-09, “Revenue from Contracts with
Customers (Topic 606)”, supersedes the revenue recognition requirements and industry specific guidance under Revenue Recognition
(Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount
that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Topic 606 defines a five-step
process that must be evaluated and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition
process than required under existing accounting principles generally accepted in the United States of America (“U.S. GAAP”)
including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction
price and allocating the transaction price to each separate performance obligation. The Company adopted Topic 606 on March 1, 2018, using
the modified retrospective method. Under the modified retrospective method, prior period financial positions and results will not be adjusted.
There was no cumulative effect adjustment recognized as a result of this adoption. Refer to Note 4 – Revenue from Contracts with
Customers for additional information. For the six months ended August 31, 2022 , two customers accounted for 26% of total revenue (2021-
87%).
Income Taxes
Income taxes are accounted for under the asset and
liability method. Deferred tax assets and liabilities are recognized when items of income and expense are recognized in the financial
statements in different periods than when recognized in the tax return. Deferred tax assets arise when expenses are recognized in the
financial statements before the tax returns or when income items are recognized in the tax return prior to the financial statements. Deferred
tax assets also arise when operating losses or tax credits are available to offset tax payments due in future years. Deferred tax liabilities
arise when income items are recognized in the financial statements before the tax returns or when expenses are recognized in the tax return
prior to the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
On December 22, 2017, the Tax Cuts and Jobs Act (“Tax
Act”) was signed into law. ASC 740, Accounting for Income Taxes requires companies to recognize the effects of changes in tax laws
and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation
is enacted. The Company’s gross deferred tax assets were revalued based on the reduction in the federal statutory tax rate from
35% to 21%. A corresponding offset has been made to the valuation allowance, and any potential other taxes arising due to the Tax Act
will result in reductions to the Company’s net operating loss carryforward and valuation allowance. The Company will continue to
analyze the Tax Act to assess its full effects on the Company’s financial results, including disclosures, for the Company’s
fiscal year ending February 28, 2023, but the Company does not expect the Tax Act to have a material impact on the Company’s consolidated
financial statements
Leases
Lease agreements are evaluated to determine if they
are sales/finance leases meeting any of the following criteria at inception: (a) transfer of ownership of the underlying asset; (b) purchase
option that is reasonably certain of being exercised; (c) the lease term is greater than a major part of the remaining estimated economic
life of the underlying asset; or (d) if the present value of the sum of lease payments and any residual value guaranteed by the lessee
that has not already been included in lease payments in accordance with ASC 842-10-30-5(f) equals or exceeds substantially all of the
fair value of the underlying asset.
If at its inception, a lease meets any of the four
lease criteria above, the lease is classified by the Company as a sales/finance; and if none of the four criteria are met, the lease is
classified by the Company as an operating lease.
Operating lease payments are recognized as an expense
in the income statement on a straight-line basis over the lease term, whereby an equal amount of rent expense is attributed to each period
during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments
during the early years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized
and actual rental payments is recorded as deferred rent and included in liabilities.
- 11 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Distinguishing Liabilities from Equity
The Company relies on the guidance provided by ASC
Topic 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company
first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification
if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional
obligation that the Company must or may settle by issuing a variable number of its equity shares.
Once the Company determines that a financial instrument
should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability
section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification
if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the
Company accounts for the financial instrument as permanent equity.
Our Chief Executive Officer/ Chairman holds sufficient shares of the Company’s
voting preferred stock that give sufficient voting rights under the articles of incorporation and bylaws of the Company such that the
CEO/ Chairman can at any time unilaterally vote to increase the number of authorized shares of common stock of the Company, without the
need to call a general meeting of common shareholders of the Company.
Initial Measurement
The Company records its financial instruments classified
as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.
Subsequent Measurement – Financial Instruments
Classified as Liabilities
The Company records the fair value of its financial
instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified
as liabilities are recorded as other income (expenses).
Fair Value of Financial Instruments
ASC Topic 820, Fair Value Measurements and
Disclosures (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted
accounting principles.
ASC Topic 820 defines fair value as the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement
date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on
market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions
developed based on the best information available in the circumstances (unobservable inputs).
The fair value hierarchy consists of three broad levels,
which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest
priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:
| |
● |
Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. |
| |
|
|
| |
● |
Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. |
| |
|
|
| |
● |
Level 3 – Inputs that are unobservable for the asset or liability. |
- 12 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Measured on a Recurring Basis
The following table presents information about our
liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements
fell:
| |
|
Amount at |
|
Fair Value Measurement Using |
|
| |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
| August 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Incentive compensation plan payable- revaluation of equity awards payable in Series G shares |
|
$ |
704,000 |
|
$ |
— |
|
$ |
— |
|
$ |
704,000 |
|
| Derivative liability – conversion features pursuant to convertible notes payable |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| February 28, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Incentive compensation plan payable- revaluation of equity awards payable in Series G shares |
|
$ |
479,500 |
|
$ |
— |
|
$ |
— |
|
$ |
479,500 |
|
| Derivative liability – conversion features pursuant to convertible notes payable |
|
$ |
7,587 |
|
$ |
— |
|
$ |
— |
|
$ |
7,587 |
|
The carrying amounts of the Company’s financial
assets and liabilities, such as cash, accounts receivable, prepaid expenses and advances, accounts payable and accrued expenses, approximate
their fair values because of the short maturity of these instruments.
Earnings (Loss) per Share
Basic earnings (loss) per share (“EPS”)
is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding
(denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding during the period using the
treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price
for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options and/or warrants. Diluted
EPS excluded all dilutive potential shares if their effect is anti-dilutive.
Basic loss per common share is computed based on the
weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss
per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the
potential to be issued by virtue of convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete
conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share.
Recently Issued Accounting Pronouncements
Recently
Adopted Accounting Standards
In
December 2019, the Financial Accounting Standards Board (FASB) issued amended guidance on the accounting and reporting of income taxes.
The guidance is intended to simplify the accounting for income taxes by removing exceptions related to certain intraperiod tax allocations
and deferred tax liabilities; clarifying guidance primarily related to evaluating the step-up tax basis for goodwill in a business combination;
and reflecting enacted changes in tax laws or rates in the annual effective tax rate. The Company adopted the new guidance effective February
1, 2021. There was no impact to the Company’s consolidated financial statements upon adoption.
- 13 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In January 2020,
the FASB issued new guidance intended to clarify certain interactions between accounting standards related to equity securities, equity
method investments and certain derivatives. The guidance addresses accounting for the transition into and out of the equity method of
accounting and measuring certain purchased options and forward contracts to acquire investments. The Company adopted the new guidance
effective February 1, 2021. There was no impact to the Company’s consolidated financial statements upon adoption.
In August 2020,
the FASB issued amended guidance on the accounting for convertible instruments and contracts in an entity’s own equity. The guidance
removes the separation model for convertible debt instruments and preferred stock, amends requirements for conversion options to be classified
in equity as well as amends diluted earnings per share (EPS) calculations for certain convertible debt instruments. The amended guidance
is effective for interim and annual periods in 2022. The application of the amendments in the new guidance are to be applied either on
a modified retrospective or a retrospective basis. We are currently assessing the effect that the adoption of this standard will have
on the Company’s consolidated financial statements upon adoption.
Recently
Issued Accounting Standards Not Yet Adopted
In March 2020,
the FASB issued optional guidance to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform
on financial reporting and subsequently issued clarifying amendments. The guidance provides optional expedients and exceptions for accounting
for contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (LIBOR) or another reference
rate expected to be discontinued because of reference rate reform. The optional guidance is effective upon issuance and can be applied
on a prospective basis at any time between January 1, 2020 through December 31, 2022. The Company is currently evaluating the impact of
adoption on its consolidated financial statements.
In October 2021,
the FASB issued amended guidance that requires acquiring entities to recognize and measure contract assets and liabilities in a business
combination in accordance with existing revenue recognition guidance. The amended guidance is effective for interim and annual periods
in 2023 and is to be applied prospectively. Early adoption is permitted on a retrospective basis to the beginning of the fiscal year of
adoption. The adoption of this guidance will not have a material impact on the Company’s consolidated financial statements for prior
acquisitions; however, the impact in future periods will be dependent upon the contract assets and contract liabilities acquired in future
business combinations.
In November 2021, the FASB
issued new guidance to increase the transparency of transactions with a government that are accounted for by applying a grant or contribution
accounting model by analogy. The guidance requires annual disclosures of such transactions to include the nature of the transactions and
the significant terms and conditions, the accounting treatment and the impact to the company’s financial statements. The guidance
is effective for annual periods beginning in 2022 and is to be applied on either a prospective or retrospective basis. The Company is
currently evaluating the impact of adoption on its consolidated financial statements.
4. REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue is earned primarily from two sources: 1) direct
sales of goods or services and 2) short-term rentals. Direct sales of goods or services are accounted for under Topic 606, and short-term
rentals are accounted for under Topic 842 (which addresses lease accounting and was adopted on March 1, 2019).
As disclosed in the revenue recognition section of
Note 3 – Accounting Polices, the Company adopted Topic 606 in accordance with the effective date on March 1, 2018. Note 3 includes
disclosures regarding the Company’s method of adoption and the impact on the Company’s financial statements. Revenue is recognized
on direct sales of goods or services when it transfers promised goods or services to customers in an amount that reflects the consideration
the entity expects to be entitled to in exchange for those goods or services.
After adopting Topic 842, also referred to above in
Note 3, the Company is accounting for revenue earned from rental activities where an identified asset is transferred to the customer and
the customer has the ability to control that asset. The Company recognizes revenue from its device rental activities when persuasive evidence
of a contract exists, the performance obligations have been satisfied, the transaction price is fixed or determinable and collection is
reasonably assured. Performance obligations associated with device rental transactions are satisfied over the rental period. Rental periods
are short-term in nature. Therefore, the Company has elected to apply the practical expedient which eliminates the requirement to disclose
information about remaining performance obligations. Payments are due from customers at the completion of the rental, except for customers
with negotiated payment terms, generally net 30 days or less, which are invoiced and remain as accounts receivable until collected.
- 14 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The following table presents revenues from contracts
with customers disaggregated by product/service:
| |
|
Three Months Ended |
|
Three Months Ended |
|
Six Months Ended |
|
Six Months Ended |
|
| |
|
August 31, 2022 |
|
August 31, 2021 |
|
August 31, 2022 |
|
August 31, 2021 |
|
| Device rental activities |
|
$ |
228,214 |
|
$ |
123,375 |
|
$ |
468,019 |
|
$ |
218,081 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Direct sales of goods and services |
|
|
39,270 |
|
|
18,197 |
|
|
184,622 |
|
|
483,825 |
|
| |
|
$ |
267,484 |
|
$ |
141,572 |
|
$ |
652,641 |
|
|
701,906 |
|
5. LEASES
We lease certain warehouses, and office space. Leases
with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line
basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, we did not combine lease and
non-lease components.
There is no lease renewal. The depreciable life of
assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably
certain of exercise.
Below is a summary of our lease assets and liabilities
at August 31, 2022 and February 28, 2022.
| Leases |
|
Classification |
|
August 31, 2022 |
|
February 28, 2022 |
|
| Assets |
|
|
|
|
|
|
|
|
|
| Operating |
|
Operating Lease Assets |
|
$ |
1,268,597 |
|
$ |
1,331,605 |
|
| Liabilities |
|
|
|
|
|
|
|
|
|
| Current |
|
|
|
|
|
|
|
|
|
| Operating |
|
Current Operating Lease Liability |
|
$ |
250,169 |
|
$ |
254,027 |
|
| Noncurrent |
|
|
|
|
|
|
|
|
|
| Operating |
|
Noncurrent Operating Lease Liabilities |
|
|
1,004,584 |
|
|
1,057,579 |
|
| Total lease liabilities |
|
|
|
$ |
1,254,753 |
|
$ |
1,311,606 |
|
Note: As most of our leases do not provide an implicit
rate, we use our incremental borrowing rate of 10% which for the leases noted above was based on the information available at commencement
date in determining the present value of lease payments. We compare against loans we obtain to acquire physical assets and not loans we
obtain for financing. The loans we obtain for financing are generally at significantly higher rates and we believe that physical space
or vehicle rental agreements are in line with physical asset financing agreements. CAM charges were not included in operating lease expense
and were expensed in general and administrative expenses as incurred.
Rent expense and operating lease cost was $63,681
and $133,648 for the three and six months ended August 31, 2022, respectively, and $75,212 and $104,086 for the three and six months ended
August 31, 2021, respectively.
6. REVENUE EARNING DEVICES
Revenue earning devices consisted of the following:
| |
|
August 31, 2022 |
|
February 28, 2022 |
|
| Revenue earning devices |
|
$ |
1,569,771 |
|
$ |
1,143,724 |
|
| Less: Accumulated depreciation |
|
|
(622,200 |
) |
|
(434,661 |
) |
| |
|
$ |
947,571 |
|
$ |
709,063 |
|
- 15 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the three and six months ended August 31, 2022
the Company made total additions to revenue earning devices of $251,946 and $426,047, respectively, which were transfers from inventory.
During the three and six months ended August 31, 2021, the Company made total additions to revenue earning devices of $212,175 and $282,337,
respectively, which were transfers from inventory. During the six months ended August 31, 2021 the Company sold a revenue earning device
having a net book value of $3,255 for revenues of $30,600 and included the $3,255 in cost of goods sold.
Depreciation expense was $116,125 and $187,539 for
the three and six months ended August 31, 2022, respectively, and $43,834 and $76,839 for the three and six months ended August 31, 2021,
respectively.
7. FIXED ASSETS
Fixed assets consisted of the following:
| |
|
August 31, 2022 |
|
February 28, 2022 |
|
| Automobile |
|
$ |
84,880 |
|
$ |
84,880 |
|
| Manufacturing equipment |
|
|
25,625 |
|
|
16,800 |
|
| Demo devices |
|
|
43,018 |
|
|
16,539 |
|
| Computer equipment and software |
|
|
123,555 |
|
|
36,742 |
|
| Office equipment |
|
|
15,312 |
|
|
15,312 |
|
| Warehouse equipment |
|
|
11,415 |
|
|
11,415 |
|
| Tooling |
|
|
101,320 |
|
|
— |
|
| Leasehold improvements |
|
|
15,568 |
|
|
5,329 |
|
| |
|
|
420,693 |
|
|
187,017 |
|
| Less: Accumulated depreciation |
|
|
(101,312 |
) |
|
(49,065 |
) |
| |
|
$ |
319,381 |
|
$ |
137,952 |
|
During the three months ended August 31, 2022, the
Company made additions of $139,946 of which $20,693 were transfers from inventory with remaining additions of $118,983. During the six
months ended August 31, 2022, the Company made additions of $233,676 of which $26,479 were transfers from inventory with remaining additions
of $207,197. During the three months and six months ended August 31, 2021, the Company made additions of $16,800 and $32,162, respectively. During
the six months ended August 31, 2021, the Company sold a vehicle having a net book value of $875 for fair value proceeds of $30,000 and
recorded a gain on disposal of fixed assets of $29,125.
Depreciation expense was $29,668 and $52,249 for the
three and six months ended August 31, 2022, respectively, and $3,857 and $8,495 for the three and six months ended August 31, 2021, respectively.
8. DEFERRED VARIABLE PAYMENT OBLIGATION
On February 1, 2019 the Company entered into an agreement
with an investor whereby the investor would pay up to $900,000 in exchange for a perpetual 9% rate payment (Payments) on the Company’s
reported quarterly revenue from operations excluding any gains or losses from financial instruments (Revenues). At February 29, 2020 the
investor has advanced the full $900,000.
On May 9, 2019 the Company entered into two similar
arrangements with two investors:
| |
(1) |
The investor would pay up to $400,000 in exchange for a perpetual 4% rate Payment on the Company’s reported quarterly Revenues. At February 29, 2020, $400,000 has been paid to the Company. |
| |
|
|
| |
(2) |
The investor would pay up to $50,000 in exchange for a perpetual 1.11% rate Payment on the Company’s reported quarterly Revenues. At February 29, 2020, $50,000 has been paid to the Company. |
These variable payments (Payments) are to be made
30 days after the end of each fiscal quarter. If the Payments would deplete RAD’s available cash by more than 30%, the Payments
may be deferred for up to 12 months after the quarterly report at an interest rate of 6% per annum on the unpaid amount.
- 16 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In the event that at least 10% of the assets of the
Company are sold by the Company, the investors would be entitled to the fair market value (FMV) of all future Payments associated with
the assets sold as determined by an independent valuator to be chosen by the investors. The FMV cannot exceed 30% of the total asset disposition
price defined as the total price paid for the assets plus all future Payments associated with the assets sold. In the event that the common
or preferred shares are sold by the Company to a third party as to effect a change in control, then the investors must be paid the FMV
of all future Payments in one lump payment. The FMV cannot exceed 30% of the share disposition price defined as the total price the third
party paid for the shares plus the total value of all future Payments.
On November 18, 2019, the Company entered into another
similar arrangement with the (February 1, 2019) investor above whereby the investor would advance up to $225,000 in exchange for a perpetual
2.25% rate Payment on the Company’s quarterly Revenues (commencing on quarter ending May 31, 2020). At February 29, 2020, the investor
has advanced $109,000 and the investor advanced the $116,000 remainder as of May 2020.
On December 30, 2019, the Company entered into another
similar arrangement with a new investor whereby the investor would advance up to $100,000 in exchange for a perpetual 1.00% rate Payment
on the Company’s quarterly Revenues (commencing quarter ended November 30, 2020). At February 29, 2020, the investor has advanced
$50,000 with the remainder to be advanced no later than June 30, 2020. If the total investor advances turns out to be less than $100,000,
this would not constitute a breach of the agreement, rather the 1.00% rate would be adjusted on a pro-rata basis.
On April 22, 2020, the Company entered into another
similar arrangement with the (first May 9, 2019) investor above whereby the investor would advance up to $100,000 in exchange for
a perpetual 1.00% rate Payment on the Company’s quarterly Revenues. At May 31, 2020, the investor has fully funded this commitment.
On July 1, 2020, the Company entered into a similar
agreement with the first investor whereby the investor would pay up to $800,000 in exchange for a perpetual 2.75% rate payment (Payment)
on the Company’s reported quarterly revenue. These Payments are to be made 90 days after the fiscal quarter with the first payment
being due no later than May 31, 2021. If the Payments would deplete RAD’s available cash by more than 20%, the payment may be deferred.
The investor had agreed to pay $100,000 per month over an 8 month period with the first payment due July 2020 and the final payment no
later than February 28, 2021. As at August 31, 2020 the investor had fully funded the $800,000 commitment
On August 27, 2020, the Company and the first investor
referred to above consolidated the three separate agreements of February 1, 2019 for $900,000, November 18, 2019 for $225,000 and July
1, 2020 for $800,000 into a new agreement for a total of $1,925,000. This new agreement is for similar terms as the above agreements
save for the following: the rate payment is revised to 14.25% payable on revenues commencing the quarter ended August 31, 2020. Upon an
event of default that we are unable to cure in the time allotted under the agreements, these Payments may be secured with a priority lien
by UCC filing against all of our assets, but is subordinated to equipment financing or leasing agreements on the products the Company
leases to its customers.
In summary of all agreements mentioned above if in
the event that at least 10% of the assets of the Company are sold by the Company, the investors would be entitled to the fair market value
(FMV) of all future Payments associated with the assets sold as determined by an independent valuator to be chosen by the investors. The
FMV cannot exceed 43.77% of the total asset disposition price defined as the total price paid for the assets plus all future Payments
associated with the assets sold. In the event that the common or preferred shares are sold by the Company to a third party as to effect
a change in control, then the investors must be paid the FMV of all future Payments in one lump payment. The FMV cannot exceed 43.77%
of the share disposition price defined as the total price the third party paid for the shares plus the total value of all future Payments.
As of March 1, 2021 as a result of the amendment with the first investor noted below. This aggregate asset disposition % was reduced from
43.77 % to 33.77%
The Payments will first become payable on June 30,
2019 (unless otherwise indicated) based on the quarterly Revenues for the quarter ended May 31, 2019 and will accrue every quarter thereafter.
As of February 28, 2022, the Company has accrued approximately $325,600 in Payments (February 28, 2021 -$91,587).
On March 1, 2021, the first investor referred to above whose aggregate investment
is $1,925,000 revised his agreements as follows:
| |
1) |
The rate payment was reduced from 14.25 % to 9.65 % |
| |
2) |
The asset disposition % (see below) was reduced from 31 % to 21% |
- 17 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In consideration for the above changes, the investor
received 40 Series F Convertible Preferred Stock and a warrant to purchase 367 shares of its Series F Convertible Preferred Stock with
a five-year term and an exercise price of $1.00. During the three months ended May 31, 2021, the warrant holder exercised warrants to acquire
38 shares of Series F Convertible Preferred Stock. The Company attributed a fair value based on recent transactions for the Series F Preferred
stock and warrants of $33,015,214 and recorded a loss on settlement of debt with a corresponding adjustment to paid in capital.
The Company retains total involvement in the generation
of cash flows from these revenue streams that form the basis of the payments to be made to the investors under this agreement. Because
of this, the Company has determined that the agreements constitute debt agreements. As of August 31, 2022, and February 28, 2022, the
long-term balances other than Payments already owed is the cash received of $2,525,000 and $2,525,000, respectively.
For both the three months and six months ended August
31, 2022 and year ended February 28, 2022, the Company has received $0 related to the deferred payment obligation since there were no
new agreements during this period. The balance remains $2,525,000 at both August 31, 2022 and February 28, 2022.
The Payments first become payable on June 30, 2019
(unless otherwise indicated) based on the quarterly Revenues for the quarter ended May 31, 2019 and accrue every quarter thereafter. As
of August 31, 2022, the Company has accrued $431,720 in Payments (February 28, 2022 -$325,600). At August 31, 2022, and February 28, 2022
the Company was in default on $204,430 and $90,300 of those Payments. No notices have been sent to the Company.
9. CONVERTIBLE NOTES PAYABLE
Convertible notes payable consisted of the following:
| |
|
|
|
|
|
|
|
|
Balance |
|
Balance |
|
| |
|
|
|
|
Interest |
|
Conversion |
|
August31, |
|
February 28, |
|
| Issued |
|
Maturity |
|
|
Rate |
|
Rate per Share |
|
2022 |
|
2022 |
|
| July 18, 2016 |
|
July 18, 2017* |
|
|
8% |
|
$0.003(1) |
|
$ |
— |
|
$ |
3,500 |
|
| August 9, 2022 |
|
August 9, 2023 |
|
|
12% |
|
$0.009(2) |
|
|
750,000 |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
$ |
750,000 |
|
$ |
3,500 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Less: current portion of convertible notes payable |
|
|
(750,000 |
) |
|
(3,500 |
) |
| Less: discount on noncurrent convertible notes payable |
|
|
— |
|
|
— |
|
| Noncurrent convertible notes payable, net of discount |
|
$ |
— |
|
$ |
— |
|
| |
|
|
|
|
|
|
|
| Current portion of convertible notes payable |
|
$ |
750,000 |
|
$ |
3,500 |
|
| Less: discount on current portion of convertible notes payable |
|
|
522,505 |
|
|
— |
|
| Current portion of convertible notes payable, net of discount |
|
$ |
227,495 |
|
$ |
3,500 |
|
__________
| * |
This note was in default as of February 28, 2022. Default interest rate 22% |
| (1) |
The conversion price was not subject to adjustment from forward or reverse stock splits. Effective in August 2022 this note (and accrued interest) was no longer convertible. |
| (2) |
Subject to adjustment for dilutive issuances |
During both the three and six months ended August
31, 2022, the Company incurred original issue discounts of $75,000, and relative fair value discounts debt discounts from derivative liabilities
of $404,373 and fees of $55,750 related to new convertible notes payable. During both the three and six months ended August 31, 2021 the
Company recognized debt discounts from derivative liabilities of $438,835. During both the three and six months ended August 31, 2022,
the Company recognized interest expense related to the amortization of debt discount of $12,618. During the three and six months ended
August 31, 2021, the Company recognized interest expense related to the amortization of debt discount of $694,855 and $775,986, respectively.
The note above is unsecured. As of August 31, 2022
and February 28, 2022, the Company had total accrued interest payable of $31,944 and $28,104, respectively, all of which is classified
as current.
- 18 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
During the three and six months ended August 31, 2022,
the Company also had the following convertible note activity:
| ● |
The
Company transferred the above July 18, 2016 $3,500 note to loans payable as the note was no longer convertible. This was a result of
an SEC action against the debt holder who was also a common stockholder. |
| |
|
| ● |
On August 9, 2022 the Company entered into a new convertible note for $750,000 with a one year maturity, interest rate of 12%, with a warrant (Warrant 1) to purchase 47,000,000 common shares with a five year maturity and an exercise price of $0.01, and an additional warrant (Warrant 2) to purchase 47,000,000 common shares with a five year maturity and an exercise price of $0.008 to be cancelled and extinguished if the note balance is $375,000 or less by February 9. 2023. The Company received $619,250 in cash proceeds, recorded an original issue discount of $75,000, recognized $404,373 based on a relative fair value calculation as debt discount with a corresponding adjustment to paid-in capital for the attached warrants, and transaction fees of $55,750. The discount is amortized over the term of the loan. This Note shall have priority over all unsecured indebtedness of the Company. The note has certain default provisions such as failure to pay any principal or interest when due and failure to maintain a minimum market capitalization of $30 million. In the event of these or any other default provisions, the note becomes due and payable at 125%. |
During the three and six months ended August 31, 2021,
the Company had the following convertible note activity:
| ● |
The Company amended the January 27, 2021 agreement with the lender whereby the conversion rate was changed from $0.10 to $0.03 as a result of a dilutive issuance; this resulted a derivative discount of $438,835 and a loss on extinguishment of $360,125. |
| |
|
| ● |
Holders of certain convertible notes payable elected
to convert a total of $825,000 of principal and $71,955 accrued interest, and $1,750 of fees into 31,042,436 shares of common stock; no gain or loss was recognized on conversions as these conversions occurred within the terms of the agreement that provided for conversion.
|
| ● |
The conversion rate of the January 19, 2021 note included above was reduced to $0.027 due to the dilutive issuance provision in the January 19, 2021 agreement. |
10. RELATED PARTY TRANSACTIONS
For the six months ended August 31, 2022, the Company
had no repayments of net advances from its loan payable-related party. For the six months ended August 31, 2021 the Company repaid net
advances of $118,342. At August 31, 2022, the loan payable-related party was $200,036 and $193,556 at February 28, 2022. Included in the
balance due to the related party at August 31, 2022 is $123,504 of deferred salary and interest, $108,000 of which bears interest at 12%.
At February 28, 2022, included in the balance due to the related party is $110,700 of deferred salary and interest, $90,000 of which bears
interest at 12%. The accrued interest included in loan at August 31, 2022 and August 31, 2021 was $9,180 and $160,536 respectively.
Pursuant to the amended Employment Agreement with
its Chief Executive Officer, for the three months and six ended August 31, 2022, the Company accrued $63,000 and $224,500 of incentive
compensation plan payable with a corresponding recognition of stock based compensation due to the expectation of additional awards being
met. This will be payable in Series G Preferred Shares which are redeemable at the Company’s option at $1,000 per share. At August
31, 2022 and February 28, 2022 there was $704,000 and $479,500 of incentive compensation payable.
During the three months ended August 31, 2022 and
2021, the Company was charged $957,395 and $562,837, respectively for fees for research and development from a company partially owned
by a principal shareholder.
During the six months ended August 31, 2022 and 2021,
the Company was charged $1,959,129 and $1,041,788, respectively for fees for research and development from a company partially owned by
a principal shareholder.
- 19 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. OTHER DEBT – VEHICLE LOAN
In December 2016, RAD entered into a vehicle loan
for $47,704 secured by the vehicle. The loan is repayable over 5 years maturing November 9, 2021, and repayable $1,019 per month including
interest and principal. In November 2017, RAD entered into another vehicle loan secured by the vehicle for $47,661. The loan is repayable
over 5 years, maturing October 24, 2022 and repayable at $923 per month including interest and principal. The principal repayments made
were $0 for both the year ended February 28, 2022 and February 28, 2021. Regarding the second vehicle loan, the vehicle was returned at
the end of fiscal 2019 and the car was subsequently sold by the lender for proceeds of $21,907 which went to reduce the outstanding balance
of the loan. A loss of $3,257 was recorded as well. A balance of $21,578 remains on this vehicle loan at both February 28, 2021 and February
29, 2020. For the first vehicle loan, the vehicle was retired in 2020, the proceeds of the disposal of $18,766 was applied against the
balance of the loan with a $5,515 gain on the remaining asset value of $13,251. A balance of $16,944 remains on this vehicle loan at both
February 28, 2022 and February 28, 2021. The remaining total balances of the amounts owed on the vehicle loans were $38,522 and $38,522
as of August 31, 2022 and February 28, 2022, respectively, of which all were classified as current.
- 20 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
12. LOANS PAYABLE
Loans payable at August 31, 2022 consisted of the
following:
Schedule of loans payable
| |
|
|
|
|
|
|
|
Annual |
|
| Date |
|
Maturity |
|
Description |
|
Principal |
|
Interest Rate |
|
| July 18, 2016 |
|
July 18, 2017 |
|
Promissory note |
(35) * |
$ |
3,500 |
|
|
|
| June 11, 2018 |
|
June 11, 2019 |
|
Promissory note |
(2) (#) |
|
— |
|
25% |
|
| January 31, 2019 |
|
June 30, 2019 |
|
Promissory note |
(1) (#) |
|
— |
|
15% |
|
| May 9, 2019 |
|
June 30, 2019 |
|
Promissory note |
(3) (#) |
|
— |
|
15% |
|
| May 31, 2019 |
|
June 30, 2019 |
|
Promissory note |
(4) (#) |
|
— |
|
15% |
|
| June 26, 2019 |
|
June 26, 2020 |
|
Promissory note |
(5) (#) |
|
— |
|
15% |
|
| September 24, 2019 |
|
June 24, 2020 |
|
Promissory note |
(6) (#) |
|
— |
|
15% |
|
| January 30, 2020 |
|
January 30, 2021 |
|
Promissory note |
(7) (#) |
|
— |
|
15% |
|
| February 27, 2020 |
|
February 27, 2021 |
|
Promissory note |
(8) (#) |
|
— |
|
15% |
|
| April 16, 2020 |
|
April 16, 2021 |
|
Promissory note |
(9) (#) |
|
— |
|
15% |
|
| May 12, 2020 |
|
May 12, 2021 |
|
Promissory note |
(11) (#) |
|
— |
|
15% |
|
| May 22, 2020 |
|
May 22, 2021 |
|
Promissory note |
(12) (#) |
|
— |
|
15% |
|
| June 2, 2020 |
|
June 2, 2021 |
|
Promissory note |
(13) (#) |
|
— |
|
15% |
|
| June 9, 2020 |
|
June 9, 2021 |
|
Promissory note |
(14) (#) |
|
— |
|
15% |
|
| June 12, 2020 |
|
June 12, 2021 |
|
Promissory note |
(15) (#) |
|
— |
|
15% |
|
| June 16, 2020 |
|
June 16, 2021 |
|
Promissory note |
(16) (#) |
|
— |
|
15% |
|
| September 15, 2020 |
|
September 15, 2022 |
|
Promissory note |
(17) (#) |
|
— |
|
10% |
|
| October 6, 2020 |
|
March 6, 2023 |
|
Promissory note |
(18) (#) |
|
— |
|
12% |
|
| November 12, 2020 |
|
November 12, 2023 |
|
Promissory note |
(19) (#) |
|
— |
|
12% |
|
| November 23, 2020 |
|
October 23, 2022 |
|
Promissory note |
(20) (#) |
|
— |
|
15.5% |
|
| November 23, 2020 |
|
November 23, 2023 |
|
Promissory note |
(21) (#) |
|
— |
|
15% |
|
| December 10, 2020 |
|
December 10, 2023 |
|
Promissory note |
(22) (#) |
|
— |
|
12% |
|
| December 10, 2020 |
|
December 10, 2023 |
|
Promissory note |
(23) |
|
3,921,168 |
|
12% |
|
| December 10, 2020 |
|
December 10, 2023 |
|
Promissory note |
(24) |
|
3,054,338 |
|
12% |
|
| December 10, 2020 |
|
December 10, 2023 |
|
Promissory note |
(25) |
|
165,605 |
|
12% |
|
| December 14, 2020 |
|
December 14, 2023 |
|
Promissory note |
(26) |
|
310,375 |
|
12% |
|
| December 30, 2020 |
|
December 30, 2023 |
|
Promissory note |
(27) |
|
350,000 |
|
12% |
|
| December 31, 2021 |
|
December 31, 2024 |
|
Promissory note |
(28) |
|
25,000 |
|
12% |
|
| December 31, 2021 |
|
December 31, 2024 |
|
Promissory note |
(29) |
|
145,000 |
|
12% |
|
| January 14, 2021 |
|
January 14, 2024 |
|
Promissory note |
(30) |
|
550,000 |
|
12% |
|
| February 22, 2021 |
|
February 22, 2024 |
|
Promissory note |
(31) |
|
1,650,000 |
|
12% |
|
| March 1, 2021 |
|
March 1, 2024 |
|
Promissory note |
(10) |
|
6,000,000 |
|
12% |
|
| June 8, 2021 |
|
June 8, 2024 |
|
Promissory note |
(32) |
|
2,750,000 |
|
12% |
|
| July 12, 2021 |
|
July 26, 2026 |
|
Promissory note |
(33) |
|
3,964,160 |
|
7% |
|
| September 14, 2021 |
|
September 14, 2024 |
|
Promissory note |
(34) |
|
1,650,000 |
|
12% |
|
| July 28, 2022 |
|
July 28, 2023 |
|
Promissory note |
(36) |
|
170,000 |
|
15% |
|
| August 30, 2022 |
|
August 30,2024 |
|
Promissory note |
(38) |
|
3,000,000 |
|
15% |
|
| September 7, 2022 |
|
September 7, 2023 |
|
Promissory note |
(37) |
|
400,000 |
|
15% |
|
| |
|
|
|
$ |
28,109,146 |
|
|
|
| |
|
|
|
|
|
|
|
|
| Less: current portion of convertible notes payable |
|
|
(173,500 |
) |
|
|
| Less: discount on noncurrent convertible notes payable |
|
|
(4,351,804 |
) |
|
|
| Noncurrent convertible notes payable, net of discount |
|
$ |
23,583,842 |
|
|
|
| |
|
|
|
|
|
|
| Current portion of convertible notes payable |
|
$ |
173,500 |
|
|
|
| Less: discount on current portion of convertible notes payable |
|
|
(18,541 |
) |
|
|
| Current portion of convertible notes payable, net of discount |
|
$ |
154,959 |
|
|
|
- 21 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| * |
In default. Default interest rate 22% |
| |
|
| (#) |
Loans with a principal balance of $1,661,953 along with associated accrued interest of $342,138 totaling $2,004,091 were paid in March 2022, with a remaining accrued liability of $62,979. |
| |
|
| (1) |
Original $78,432 note may be pre-payable at any time. The note balance includes 33% original issue discount of $25,882 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (2) |
Repayable in 12 monthly instalments of $4,562 commencing August 11, 2018 and secured by revenue earning devices having a net book value of at least $48,000. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (3) |
Original $7,850 note may be pre-payable at any time. The note balance includes 33% original issue discount of $2,590 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (4) |
Original $86,567 note may be pre-payable at any time. The note balance includes 33% original issue discount of $28,567 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (5) |
Original $79,104 note may be pre-payable at any time. The note balance includes 33% original issue discount of $26,104 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (6) |
Original $12,000 note may be pre-payable at any time. The note balance includes an original issue discount of $3,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (7) |
Original $11,000 note may be pre-payable at any time. The note balance includes an original issue discount of $2,450 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (8) |
Original $5,000 note may be pre-payable at any time. The note balance includes an original issue discount of $1,200 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (9) |
Original $13,000 note may be pre-payable at any time. The note balance includes an original issue discount of $3,850 at issuance. The loan and accrued interest were paid in March 2022. |
| |
|
| (10) |
The unsecured note may be pre-payable at any time. Cash proceeds of $5,400,000 were received. The note balance of $6,000,000 includes an original issue discount of $600,000 and was issued with a warrant to purchase 300,000,000 shares at an exercise price of $0.135 per share with a 3-year term and having a relative fair value of $4,749,005 using Black-Scholes with assumptions described in note 13. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $4,749,005 with a corresponding adjustment to paid in capital for the relative value of the warrant. For both the three and six months ended August 31, 2022, the Company recorded amortization expense of $0 with an unamortized discount of $0 at August 31, 2022. The maturity was extended from March 1, 2022 to March 1, 2024 on February 28, 2022 in exchange for warrants to purchase 150,000,000 shares of common stock at an exercise price of $.0164 and a 3 year term. These warrants have a fair value of $2,850,000 recorded as interest expense with a corresponding adjustment to paid in capital recorded in the year ended February 28, 2022. |
| |
|
| (11) |
Original $43,500 note may be pre-payable at any time. The note balance includes an original issue discount of $8,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (12) |
Original $85,000 note may be pre-payable at any time. The note balance includes an original issue discount of $15,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (13) |
Original $62,000 note may be pre-payable at any time. The note balance includes an original issue discount of $12,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (14) |
Original $31,000 note may be pre-payable at any time. The note balance includes an original issue discount of $6,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
- 22 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (15) |
Original $50,000 note may be pre-payable at any time. The note balance includes an original issue discount of $10,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (16) |
Original $42,000 note may be pre-payable at any time. The note balance includes an original issue discount of $7,000 at issuance. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (17) |
Original $300,000 note may be pre-payable at any time. The note balance includes an original issue discount of $50,000. Interest payable monthly, principal due at maturity. Secured by a general security charging all of RAD’s present and after-acquired property. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (18) |
Original principal of $150,000 and interest repayable in 28 monthly instalments commencing December 6, 2020, the first 6 months at $2,000 per month, the remaining 22 payments at $ 8,500 per month. Secured by revenue earning devices. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (19) |
Original $110,000 note may be pre-payable at any time. The note balance includes an original issue discount of $10,000 and was issued with a warrant to purchase 70,000,000 shares at an exercise price of $0.00165 per share, with a 3-year term and having a relative fair value of $41,176. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $41,176 with a corresponding adjustment to paid in capital. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (20) |
Original principal of $65,000 and interest repayable in 21 monthly instalments of $4,060 commencing February 23, 2021. Secured by revenue earning devices. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (21) |
Original $300,000 note may be pre-payable at any time. The note balance includes an original issue discount of $25,000 and was issued with a warrant to purchase 230,000,000 shares at an exercise price of $0.00165 per share with a 3-year term and having a relative fair value of $125,814. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $125,814 with a corresponding adjustment to paid in capital for the relative value of the warrant. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (22) |
Original $82,500 note may be pre-payable at any time. The note balance includes an original issue discount of 7,500 and was issued with a warrant to purchase 100,000,000 shares at an exercise price of $0.002 per share with a 3-year term and having a relative fair value of $54,545. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $54,545 with a corresponding adjustment to paid in capital for the relative value of the warrant. The loan and accrued interest were fully paid in March 2022. |
| |
|
| (23) |
This promissory note was issued as part of a debt settlement whereby $2,683,357 in convertible notes and associated accrued interest of $1,237,811 totaling $3,921,168 was exchanged for this promissory note of $3,921,168, and a warrant to purchase 450,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a relative fair value of $990,000. This note is secured by a general security charging all of the Company’s present and after-acquired property. |
| |
|
| (24) |
This promissory note was issued as part of a debt settlement whereby $1,460,794 in convertible notes and associated accrued interest of $1,593,544 totaling $3,054,338 was exchanged for this promissory note of $3,054,338, and a warrant to purchase 250,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a relative fair value of $550,000. This note is secured by a general security charging all of the Company’s present and after-acquired property. |
| |
|
| (25) |
This promissory note was issued as part of a debt settlement whereby $103,180 in convertible notes and associated accrued interest of $62,425 totaling $165,605 was exchanged for this promissory note of $165,605, and a warrant to purchase 80,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a fair value of $176,000. |
| |
|
| (26) |
This promissory note was issued as part of a debt settlement whereby $235,000 in convertible notes and associated accrued interest of $75,375 totaling $310,375 was exchanged for this promissory note of $310,375, and a warrant to purchase 25,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a fair value of $182,500. |
- 23 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (27) |
The note, with an original principal amount of $350,000, may be pre-payable at any time. The note balance includes an original issue discount of $35,000 and was issued with a warrant to purchase 50,000,000 shares at an exercise price of $0.025 per share with a 3-year term and having a relative fair value of $271,250. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $271,250 with a corresponding adjustment to paid in capital for the relative fair value of the warrant. For the three and six months ended August 31, 2022, the Company recorded amortization expense of $17,267 and $30,238, respectively, with an unamortized discount of $246,525 at August 31, 2022. |
| |
|
| (28) |
This promissory note was issued as part of a debt settlement whereby $9,200 in convertible notes and associated accrued interest of $6,944 totaling $16,144 was exchanged for this promissory note of $25,000. This note is secured by a general security charging all of the Company’s present and after-acquired property. |
| |
|
| (29) |
This promissory note was issued as part of a debt settlement whereby $79,500 in convertible notes and associated accrued interest of $28,925 totaling $108,425 was exchanged for this promissory note of $145,000. This note is secured by a general security charging all of the Company’s present and after-acquired property. |
| |
|
| (30) |
The note, with an original principal amount of $550,000, may be pre-payable at any time. The note balance includes an original issue discount of $250,000 and was issued with a warrant to purchase 50,000,000 shares at an exercise price of $0.025 per share with a 3-year term and having a relative fair value of $380,174. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $380,174 with a corresponding adjustment to paid in capital. For the three and six months ended August 31, 2022, the Company recorded amortization expense of $28,290 and $51,527, respectively, with an unamortized discount of $315,705 at August 31, 2022. |
| |
|
| (31) |
The note, with an original principal balance of $1,650,000, may be pre-payable at any time. The note balance includes an original issue discount of $150,000 and was issued with a warrant to purchase 100,000,000 shares at an exercise price of $0.135 per share with a 3-year term and having a relative fair value of $1,342,857. The discount and warrant are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $1,342,857 with a corresponding adjustment to paid in capital for the relative fair value of the warrant. For the three and six months ended August 31, 2022, the Company recorded amortization expense of $59,503 and $102,378, respectively, with an unamortized discount of $1,309,454 at August 31, 2022. The maturity date was extended from February 22, 2022 to February 22, 2024 on February 28, 2022 in exchange for warrants to purchase 50,000,000 at an exercise price of $.0164 and a 3 year term. These warrants have a fair value of $950,000 recorded as interest expense with a corresponding adjustment to paid in capital recorded in the year ended February 28, 2022. |
| |
|
| (32) |
The note, with an original principal balance of $2,750,000, may be pre-payable at any time. The note balance includes an original issue discount of $50,000 and was issued with a warrant to purchase 170,000,000 shares at an exercise price of $0.064 per share with a 3-year term and having a relative fair value of $2,035,033. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $2,035,033 with a corresponding adjustment to paid in capital. For the three and six months ended August 31, 2022, the Company recorded amortization expense of $106,009 and $ $198,719, respectively, with an unamortized discount of $1,051,026 at August 31, 2022. The maturity date was extended from June 8, 2022 to June 8, 2024 on February 28, 2022 in exchange for warrants to purchase 85,000,000 at an exercise price of $.0164 and a 3 year term. These warrants have a fair value of $1,615,000 recorded as interest expense with a corresponding adjustment to paid in capital recorded in the year ended February 28, 2022. |
| |
|
| (33) |
This loan, with an original principal balance of $4,000,160, was in exchange for 184 Series F preferred shares from a former director. The interest and principal are payable at maturity. The loan is unsecured. For the quarter ended August 31, 2022 there was a $36,000 repayment on the note. |
- 24 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| (34) |
The note, with an original principal balance of $1,650,000, may be pre-payable at any time. The note balance includes an original issue discount of $150,000 and was issued with a warrant to purchase 250,000,000 shares at an exercise price of $0.037 per share with a 3-year term and having a relative fair value of $1,284,783, The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $1,284,783 with a corresponding adjustment to paid in capital. For the three and six months ended August 31, 2022, the Company recorded amortization expense of $31,420 and $62,840, respectively. with an unamortized discount of $1,339,594 at August 31, 2022. |
| |
|
| (35) |
This note was transferred from convertible notes payable because in August 2022 it was no longer convertible due to restrictions placed on the lender. |
| |
|
| (36) |
Original $170,000 note may be pre-payable at any time. The note balance includes an original issue discount of $20,000. Principal and interest due at maturity. Secured by a general security charging all of RAD’s present and after-acquired property. For the three and six months ended August 31, 2022, the Company recorded amortization expense of $1,459 with an unamortized discount of $18,541 at August 31, 2022. |
| |
|
| (37) |
Original $400,000 note may be pre-payable at any time. The note balance includes an original issue discount of $50,000. Principal and interest due at maturity. Secured by a general security charging all of RAD’s present and after-acquired property. As the note is dated after August 31, 2022 there was no amortization expense an unamortized discount of $50,000 at August 31, 2022. |
| |
|
| (38) |
A warrant holder exchanged 955,000,000 warrants for a promissory note of $3,000,000, bearing interest at 15% with a two year maturity. The fair value of the warrants was determined to be $2,960,500 with a corresponding adjustment to paid-in capital and a debt discount of $39,500 which will be amortized over the term of the loan. Principal and interest due at maturity. There was no amortization expense and an unamortized discount of $39,500 at August 31, 2022. |
13. DERIVATIVE LIABILITIES
As of August 31, 2022, and February 28, 2022 the Company
revalued the fair value of all of the Company’s derivative liabilities associated with the conversion features on the convertible
notes payable and determined that it had a total derivative liability of $0, and $7,587, respectively. For both the three and six months
ended August 31, 2022, the Company recorded a change in far value of derivative liabilities of $3,595 and a gain on settlement of debt
(with a corresponding adjustment to derivative liabilities) of $3,992.
14. STOCKHOLDERS’ EQUITY (DEFICIT)
Summary or Preferred Stock Activity
No preferred stock activity during the period.
Summary of Preferred Stock Warrant Activity
Schedule of Summary of stock Option Activity
| |
|
Number of Series C Preferred Warrants |
|
Weighted Average Exercise Price |
|
Weighted Average Remaining Years |
| Outstanding at March 1, 2022 |
|
329 |
|
$1.00 |
|
4.50 |
| Issued |
|
— |
|
— |
|
— |
| Exercised |
|
— |
|
— |
|
— |
| Forfeited and cancelled |
|
— |
|
— |
|
— |
| Outstanding at August 31, 2022 |
|
329 |
|
$1.00 |
|
4.25 |
- 25 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Summary of Common Stock Activity
The Company increased authorized common shares from
5,000,000,000 to 6,000,000,000 on July 8, 2022.
During the six months ended, August 31, 2022, the
Company issued 325,572,711 common shares with gross proceeds of $3,748,939 and net proceeds of $3,536,489 after issuance costs of $212,450,
issued 9,688,179 shares through the cashless exercise of 61,378,210 warrants, cancelled 17,116,894 shares and issued 10,000,000 shares
for $118,500 as payment for services. As of August 31, 2022 proceeds receivable
from an offering of $281,000 was collected prior to the issuance of these financials statements.
The table below represent the common shares issued,
issuable and outstanding at August 31, 2022 and February 28, 2022:
| Common shares |
|
August 31, 2022 |
|
February 28, 2022 |
|
| Issued |
|
$ |
5,051,254,356 |
|
$ |
4,733,110,360 |
|
| Issuable |
|
|
12,100,000 |
|
|
2,100,000 |
|
| Issued, issuable and outstanding |
|
$ |
5,063,354,356 |
|
$ |
4,735,210,360 |
|
Summary of Common Stock Warrant Activity
| |
|
Number of Warrants |
|
Weighted Average Exercise Price |
|
Weighted Average Remaining Years |
| Outstanding at March 1, 2022 |
|
1,216,845,661 |
|
$0.07 |
|
2.38 |
| Issued |
|
94,000,000 |
|
$0.009 |
|
4.94 |
| Adjusted(1) |
|
66,750,000 |
|
$0.011 |
|
1.41 |
| Exercised |
|
(61,378,210 |
) |
$0.011 |
|
(1.41) |
| Forfeited, extinguished and cancelled |
|
(955,000,000 |
) |
$0.008 |
|
(1.61) |
| Outstanding at August 31, 2022 |
|
361,217,451 |
|
$0.07 |
|
2.77 |
__________
| (1) |
Required dilution adjustment per warrant agreement |
For the three months and six months ended August 31,
2022 and August 31, 2021, the Company recorded a total of $0 and $0, 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 955,000,000
warrants for a promissory note of $3,000,000, bearing interest at 15% with a two year maturity. The fair value of the warrants was determined
to be 2,960,500 with a corresponding adjustment to paid-in capital and a debt discount of $39,500 which will be amortized over the term
of the loan.
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 5,000,000 to 100,000,000.
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.
- 26 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Operating Lease
On December 18, 2020, the Company entered into a 15-month
lease agreement for office space at 18009 Sky Park Circle Suite E, Irvine CA, 92614, commencing on December 18, 2020 through to March
31, 2022 with a minimum base rent of $3,859 per month. The Company paid a security deposit of $3,859.
On March 10, 2021, the Company entered into a 10 year
lease agreement for q manufacturing facility at 10800 Galaxie Avenue, Ferndale, Michigan, 48220, commencing on May 1, 2021 through to
April 30, 2031 with a minimum base rent of $15,880 per month. The base rent increase by 3% per annum commencing May 1, 2024. The Company
paid a security deposit of $15,880.
On September 30, 2021, the Company entered into a
3-year lease agreement for a vehicle commencing September 30, 2021 through to April 30, 2031 with a minimum base rent of $1,538 per month.
The Company paid a down payment of $18,462.
On January 28, 2022, the Company entered into a 2-year
lease agreement for office space at 1516 E Edinger, Santa Ana, California, 92705, commencing on February 1, 2022 through to January 31,
2024 with a minimum base rent of $1,500 per month. The Company paid a security deposit of $1,500.
The Company’s leases are accounted for as operating
leases. Rent expense and operating lease cost are recorded over the lease terms on a straight-line basis. Rent expense and operating lease
cost was $63,681 and $133,648 for the three and six months ended August 31, 2022, respectively, and $75,212 and $104,086 for the three
and six months ended August 31, 2021, respectively.
| Maturity of Lease Liabilities |
Operating
Leases |
|
| August 31, 2023 |
$ |
250,169 |
|
| August 31, 2024 |
|
239,669 |
|
| August 31, 2025 |
|
207,558 |
|
| August 31, 2026 |
|
207,558 |
|
| August 31, 2027 |
|
207,558 |
|
| August 31, 2028 and after |
|
761,046 |
|
| Total lease payments |
|
1,873,558 |
|
| Less: Interest |
|
(618,805 |
) |
| Present value of lease liabilities |
$ |
1,254,753 |
|
- 27 -
Table of Contents
ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
16. EARNINGS (LOSS) PER SHARE
The net income (loss) per common share amounts were
determined as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended |
|
For the Six Months Ended |
|
| |
|
August 31, |
|
August 31, |
|
| |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
| Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) available to common shareholders |
|
$ |
(4,172,865 |
) |
$ |
(4,832,373 |
) |
$ |
(8,844,551 |
) |
$ |
(40,737,291 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Effect of common stock equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Add: interest expense on convertible debt |
|
|
8,543 |
|
|
38,345 |
|
|
8,737 |
|
|
63,299 |
|
| Add (less) loss (gain) on settlement of debt |
|
|
(3,992 |
) |
|
— |
|
|
(3,992 |
) |
|
— |
|
| Add (less) loss (gain) on change of derivative liabilities |
|
|
(3,595 |
) |
|
193,063 |
|
|
(3,595 |
) |
|
372,502 |
|
| Net income (loss) adjusted for common stock equivalents |
|
|
(4,171,909 |
) |
|
(4,600,965 |
) |
|
(8,843,401 |
) |
|
(40,301,490 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average shares – basic |
|
|
4,970,040,852 |
|
|
3,890,435,903 |
|
|
4,884,349,362 |
|
|
3,689,985,692 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) per share – basic |
|
$ |
(0.00 |
) |
$ |
(0.00 |
) |
$ |
(0.00 |
) |
$ |
(0.01 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dilutive effect of common stock equivalents: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Convertible Debt |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| Preferred shares |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| Warrants |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted average shares – diluted |
|
|
4,970,040,852 |
|
|
3,890,435,903 |
|
|
4,884,349,362 |
|
|
3,689,985,692 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net income (loss) per share – diluted |
|
$ |
(0.00 |
) |
$ |
(0.00 |
) |
$ |
(0.00 |
) |
$ |
(0.01 |
) |
The anti-dilutive shares of common stock equivalents
for the three and six months ended August 31, 2022 and 2021 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Three Months Ended |
|
For the Six Months Ended |
|
| |
|
August 31, |
|
August 31, |
|
| |
|
2022 |
|
2021 |
|
2022 |
|
2021 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Convertible notes and accrued interest |
|
|
836,425,685 |
|
|
2,782,614 |
|
|
836,425,685 |
|
|
2,782,614 |
|
| Convertible Series F Preferred Shares |
|
|
— |
|
|
13,783,685,333 |
|
|
— |
|
|
13,783,685,333 |
|
| Stock options and warrants |
|
|
401,217,451 |
|
|
818,523,492 |
|
|
401,217,451 |
|
|
818,523,492 |
|
| Total |
|
|
1,237,643,136 |
|
|
14,604,991,439 |
|
|
1,237,643,136 |
|
|
14,604,991,439 |
|
17. SUBSEQUENT EVENTS
Subsequent to August 31, 2022 through to October 20,
2022:
— The Company issued
83,066,855 common shares pursuant to a share purchase agreement for gross proceeds of $592,623, issuance costs of $34,756 and net proceeds
of $557,866.
— On September 8, 2022 the Company
issued a promissory note to a lender for $475,000
with cash proceeds of $400,000
and an original issue discount of $75,000.
The loan bears interest at 15%,
matures in 1 year and has a general security charging all of the Company’s present and after-acquired property.
- 28 -
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion of our financial condition and results of operations
for the three and six months ended August 31, 2022 and August 31, 2021 should be read in conjunction with our unaudited consolidated financial
statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements
based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual
results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number
of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended February 28,
2022, as filed on May 27, 2022 with the SEC. We use words such as “anticipate,” “estimate,” “plan,”
“project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,”
“may,” “will,” “should,” “could,” and similar expressions to identify forward-looking
statements.
Unless expressly indicated or the context requires
otherwise, the terms “AITX”, the “Company”, “we”, “us”, and “our” refer to
Artificial Intelligence Technology Solutions Inc.
Overview
AITX was incorporated in Florida on March 25, 2010.
AITX reincorporated into Nevada on February 17, 2015. AITX’s fiscal year end is February 28 (February 29 during leap year). AITX
is located at 10800 Galaxie Ave., Ferndale Michigan, 48220, and our telephone number is 877-767-6268.
AITX’s mission is to apply Artificial Intelligence
(AI) technology to solve enterprise problems categorized as expensive, repetitive, difficult to staff, and outside of the core competencies
of the client organization.
A short list of basic examples include:
| |
1. |
Typical security guard-related functions such as monitoring a parking lot during and after hours and responding appropriately. This scenario applies to perimeters, interior yard areas, and related similar environments. |
| |
|
|
| |
2. |
Integrated hardware/software with AI-driven responses, simulating and expanding on what legacy or manned solutions could perform. |
| |
|
|
| |
3. |
Automation of common access control functions through technology utilizing facial recognition and machine vision, leapfrogging most legacy solutions in use today. |
RAD solutions are unique because they:
| |
1. |
Start with an AI-driven autonomous response utilizing cellular-optimized communications, while easily connecting to a human operator for a manned response, as needed. |
| |
|
|
| |
2. |
Use unique hardware purpose-built by RAD for delivery of these solutions. Various form factors have been customized to deliver this new functionality. |
| |
|
|
| |
3. |
Deliver services through RAD-developed software and cloud services, allowing enterprise IT groups to focus on core competencies instead of maintenance of complex video and security platforms. |
- 29 -
Table of Contents
Management Discussion and Analysis
Results of Operations for the Three Months Ended
August 31, 2022 and 2021
The following table shows our results of operations
for the three months ended August31, 2022 and 2021. The historical results presented below are not necessarily indicative of the results
that may be expected for any future period.
| |
|
Period |
|
|
|
| |
|
Three Months
Ended |
|
Three Months
Ended |
|
Change |
|
| |
|
August 31, 2022 |
|
August 31, 2021 |
|
Dollars |
|
Percentage |
|
| Revenues |
|
$ |
267,484 |
|
$ |
141,572 |
|
$ |
125,912 |
|
89% |
|
| Gross profit |
|
|
233,270 |
|
|
99,618 |
|
|
133,652 |
|
134% |
|
| Operating expenses |
|
|
3,411,702 |
|
|
3,383,990 |
|
|
27,712 |
|
1% |
|
| Loss from operations |
|
|
(3,178,432 |
) |
|
(3,284,372 |
) |
|
105,940 |
|
(3% |
) |
| Other income (expense), net |
|
|
(994,433 |
) |
|
(1,548,001 |
) |
|
553,568 |
|
36% |
|
| Net income (loss) |
|
$ |
(4,172,865 |
) |
$ |
(4,832,373 |
) |
$ |
659,508 |
|
14% |
|
Revenue
The following table presents revenues from contracts
with customers disaggregated by product/service:
| |
|
Three Months
Ended |
|
Three Months
Ended |
|
Change |
|
| |
|
August 31, 2022 |
|
August 31, 2021 |
|
Dollars |
|
Percentage |
|
| Device rental activities |
|
$ |
228,214 |
|
$ |
123,375 |
|
$ |
104,839 |
|
85% |
|
| Direct sales of goods and services |
|
|
39,270 |
|
|
18,197 |
|
|
21,073 |
|
116% |
|
| |
|
$ |
267,484 |
|
$ |
141,572 |
|
$ |
125,912 |
|
89% |
|
Total revenue for the three-month period ended August
31, 2022 was $267,484 which represented an increase of $125,912 compared to total revenue of $141,572 for the three months ended August
31, 2021. This increase is a result of higher rental sales in the current year’s quarter. Rental activities increased by 85% over
the prior year’s quarter as the Company continues to grow its core business. Direct sales was driven by an increase in training
revenue and grew by 116% over last year’s quarter.
Gross profit
Total gross profit for the three-month period ended
August 31, 2022 was $233,270, which represented an increase of $133,652 compared to gross profit of $99,618 for the three months ended
August 31, 2021. The gross profit increased due to the higher sales and inventory changes. The gross profit % of 87% for the three-month
period ended August 31, 2022 was higher than the gross profit % of 70% for the prior year’s corresponding period.
Operating Expenses
| |
|
Period |
|
|
|
| |
|
Three Months
Ended |
|
Three Months
Ended |
|
Change |
|
| |
|
August 31, 2022 |
|
August 31, 2021 |
|
Dollars |
|
Percentage |
|
| Research and development |
|
$ |
963,786 |
|
$ |
699,292 |
|
$ |
264,494 |
|
38% |
|
| General and administrative |
|
|
2,238,442 |
|
|
2,590,920 |
|
|
(352,478 |
) |
(14% |
) |
| Depreciation and amortization |
|
|
145,793 |
|
|
47,691 |
|
|
98,102 |
|
206% |
|
| Operating lease cost and rent |
|
|
63,681 |
|
|
75,212 |
|
|
(11,531 |
) |
(15% |
) |
| Gain loss on disposal of fixed assets |
|
|
— |
|
|
(29,125 |
) |
|
(29,125 |
) |
100% |
|
| Operating expenses |
|
$ |
3,411,702 |
|
$ |
3,383,990 |
|
$ |
27,712 |
|
1% |
|
- 30 -
Table of Contents
Our operating expenses were comprised of general and
administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional
services, automobile expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the three-month
period ended August 31, 2022 and August 31, 2021, were $3,411,702 and $3,383,990, respectively. The overall increase of $27,712 was primarily
attributable to the following changes in operating expenses of:
| ● |
General and administrative expenses decreased by $352,478. In comparing the three months ended August 31, 2022 and August 31, 2021 this decrease was primarily due to these changes increases in the following: wages and salaries of $350,555 due to staffing of new manufacturing facility and increases in office and management staff , insurance of $75,282 due to health plan for new employees and increased liability and property insurance due to new manufacturing facility, advertising , sales and marketing of $158,699, office expenses of $36,400 and bad debts expense due to a general provision of $40,000 on slow payers due to present economic factors. These increases offset these following decreases: stock based compensation of $949,700 for prior charges based on CEO incentive plan and travel $41,983 . |
| |
|
| ● |
Research and development increased by $264,494 due to funding development of new products as well as upgrades of existing products. Included in that increase is the increase in research and development paid to a related party of $394,557. |
| |
|
| ● |
Depreciation and amortization increased by $98,102 due to the acquisition of ERP computer software, computer equipment tooling, and 18 new revenue earning devices. |
| |
|
| ● |
Operating lease cost and rent decreased by $11,531 due to one less office lease for the three months ended August 31, 2022 comparing to the three months ended August 31, 2021 |
Other Income (Expense)
Other income (expense) consisted of the change of
fair value of derivative instruments, loss on settlement of debt and interest. Other income (expense) during the three months ended August
31, 2022 and August 31, 2021, was ($994,433) and ($1,548,001), respectively. The $553,568 increase in other income was primarily attributable
to the loss on settlement of debt realized in the prior year’s quarter.
| ● |
In comparing the three months ended August 31, 2022 and the three months ended August 31, 2021, the change in fair value of derivative liabilities decreased by $189,468. The change in fair value of derivative liabilities was due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock. As there was no derivative liabilities resulting from the conversion features of the convertible debt at August 31, 2022 the corresponding change in fair value was significantly lower when comparing the prior year’s quarter. |
| |
|
| ● |
Interest expense decreased by $811,753 due to a decrease in debt amortization expense. The three months ended August 31, 2021 had higher amortization due to debt settlements. |
| |
|
| ● |
Gain on settlement of debt was $3,992 the quarter ended August 31, 2022 and $72,709 in the quarter ended August 31, 2022. |
Net loss
We had a net loss of $4,172,865 for the three months
ended August 31, 2022, compared to a net loss of $4,832,373 for the three months ended August 31, 2021. The decrease in net loss of $659,508 is primarily as a result
higher revenues and lower other expense in the three months ended August 31, 2022 as well as and other items discussed above.
- 31 -
Table of Contents
Results of Operations for the Six Months Ended
August 31, 2022 and 2021
The following table shows our results of operations
for the six months ended August 31, 2022 and 2021. The historical results presented below are not necessarily indicative of the results
that may be expected for any future period.
Revenue
| |
|
Period |
|
|
|
| |
|
Six Months
Ended |
|
Six Months
Ended |
|
Change |
|
| |
|
August 31, 2022 |
|
August 31, 2021 |
|
Dollars |
|
Percentage |
|
| Revenues |
|
$ |
652,641 |
|
$ |
701,906 |
|
$ |
(49,265 |
) |
(7% |
) |
| Gross profit |
|
|
324,703 |
|
|
549,026 |
|
|
(224,323 |
) |
(41% |
) |
| Operating expenses |
|
|
6,999,791 |
|
|
5,984,944 |
|
|
1,014,847 |
|
17% |
|
| Loss from operations |
|
|
(6,675,088 |
) |
|
(5,435,918 |
) |
|
(1,239,170 |
) |
23% |
|
| Other income (expense), net |
|
|
(2,169,463 |
) |
|
(35,301,373 |
) |
|
33,131,910 |
|
94% |
|
| Net loss |
|
$ |
(8,844,551 |
) |
$ |
(40,737,291 |
) |
$ |
31,892,740 |
|
78% |
|
The following table presents revenues from contracts
with customers disaggregated by product/service:
| |
|
Six Months
Ended |
|
Six Months
Ended |
|
Change |
|
| |
|
August 31, 2022 |
|
August 31, 2021 |
|
Dollars |
|
Percentage |
|
| Device rental activities |
|
$ |
468,019 |
|
$ |
218,081 |
|
$ |
249,938 |
|
115% |
|
| Direct sales of goods and services |
|
|
184,622 |
|
|
483,825 |
|
|
(299,203 |
) |
(62% |
) |
| |
|
$ |
652,641 |
|
$ |
701,906 |
|
$ |
(49,265 |
) |
(7% |
) |
Total revenue for the six-month period ended August
31, 2022 was $652,641 which represented a decrease of $49,265 compared to total revenue of $701,996 for the six months ended August 31,
2021. The small decrease was a result of unusually large unit sales which includes sales of new units totaling $434,342 which occurred
in the six months ended August 31, 2021 .This was partially offset by a 115% increase in rental activities increased as the Company continues
to grow its rental business.
Gross profit
Total gross profit for the six-month period ended
August 31, 2022 was $324,703 which represented a decrease of $224,323, compared to gross profit of $549,026 for the six months ended August
31, 2021. The decrease resulted both from lower revenues noted above as well as cost of sales increases in 2022 due to inventory changes.
The gross profit percentage of 50% for the six-month period ended August 31, 2022 was lower than the margin of 78% for the prior year’s
corresponding period was primarily due to inventory adjustments due to shrinkage and obsolescence totaling $152,475, which occurred in
the first quarter. Before these adjustments the gross profit % for the six months ended August 31, 2022 would have been a comparable 73%.
Operating Expenses
| |
|
Period |
|
|
|
| |
|
Six Months
Ended |
|
Six Months
Ended |
|
Change |
|
| |
|
August 31, 2022 |
|
August 31, 2021 |
|
Dollars |
|
Percentage |
|
| Research and development |
|
$ |
1,987,521 |
|
$ |
1,333,937 |
|
$ |
653,584 |
|
49% |
|
| General and administrative |
|
|
4,638,834 |
|
|
4,490,712 |
|
|
148,122 |
|
3% |
|
| Depreciation and amortization |
|
|
239,788 |
|
|
85,334 |
|
|
154,454 |
|
181% |
|
| Operating lease cost and rent |
|
|
133,648 |
|
|
104,086 |
|
|
29,562 |
|
28% |
|
| (Gain) loss on disposal of fixed assets |
|
|
— |
|
|
(29,125 |
) |
|
29,125 |
|
(100% |
) |
| Operating expenses |
|
$ |
6,999,791 |
|
$ |
5,984,944 |
|
$ |
1,014,847 |
|
17% |
|
- 32 -
Table of Contents
Our operating expenses were comprised of general and
administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional
services, automobile expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the six-month
period ended August 31, 2022 and August 31, 2021, were $6,999,791 and $5,984,944, respectively. The overall increase of $1,014,847 was
primarily attributable to the following changes in operating expenses of:
| ● |
General and administrative expenses increased by $148,122. In comparing the six months ended August 31, 2022 and August 31, 2021 may be partially explained by the following increases: wages and salaries by $1,004,437, sales and marketing by $231,205, travel by $97,118, insurance by $178,077, duty and freight by $29,837, and office expense by $78,308. These were partially offset by decreases in the following accounts: production supplies by $109,037, professional fees by $408,682, subcontractor fees $100,294 and stock-based compensation $857,550. |
| |
|
| ● |
Research and development increased by $653,584 due to funding development of new products as well as upgrades of existing products. Included in that increase is the increase in research and development paid to a related party of $917,341. |
| |
|
| ● |
Depreciation and amortization increased by $154,454 due to the acquisition of ERP computer software, computer equipment tooling, and 54 new revenue earning devices. |
| |
|
| ● |
Operating lease cost and rent increased by $29,562 due the manufacturing facility lease, six full months for the six months ended August 31, 2022 compared to only 4 months for the six months ended August 31, 2021. |
| |
|
| ● |
(Gain) loss on disposal of fixed assets increase by $29,125 due to a vehicle sold in the prior year. |
Other Income (Expense)
Other income (expense) during the six months ended
August 31, 2022 and August 31, 2021, was ($2,169,463) and ($35,301,373), respectively. The $33,131,910 increase in other income was primarily
attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt.
| ● |
In comparing the six months ended August 31, 2022 and the six months ended August 31, 2021, the change in fair value of derivative liabilities decreased by $368,907 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock as well as reductions in derivative liability as a result of settlements on the underlying debt. |
| |
|
| ● |
Interest expense increased by $585,173 due to increases in loan and convertible notes payable |
| |
|
| ● |
Gain (loss) on settlement of debt was $3,992 the six months ended August 31, 2022 and ($32,911,652) in six months ended August 31, 2022. This current period the gain was a result of the reduction of the derivative liability , the prior year’s period has an amendment of the deferred variable payment obligation that led to a $33,015,215 loss which was partially offset by gains from accrued liabilities settlements and the debt exchange for common shares. This loss on settlement of debt was non-cash and has no effect on the cash flows of the Company. |
Net loss
We had a net loss of $8,844,551 for the six months
ended August 31, 2022, compared to a net loss of $40,737,291 for the six months ended August 31, 2021. The change is primarily the result
of the loss on settlement in the six months ended August 31, 2021 as well as the change in the fair value of the derivative liabilities
and other items discussed above.
Liquidity, Capital Resources and Cash Flows
Management believes that we will continue to incur
losses for the immediate future. Therefore, we will need additional equity or debt financing until we can achieve profitability and positive
cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern.
Our unaudited condensed consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification
of liabilities that may be necessary should we be unable to continue as a going concern. For the three months ended May 31, 2022, we have
generated revenue and are trying to achieve positive cash flows from operations.
- 33 -
Table of Contents
As of August 31, 2022, we had a cash balance of
$363,073, accounts receivable of $442,652, device parts inventory of $1,640,891 and $3,466,248 in current liabilities. At the
current cash consumption rate, we will need to consider additional funding sources going forward. We are taking proactive measures
to reduce operating expenses and drive growth in revenue.
The successful outcome of future activities cannot
be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business
plan or generate positive operating results.
Capital Resources
The following table summarizes total current assets,
liabilities and working capital (deficit) for the periods indicated:
| |
|
August 31, 2022 |
|
February 28, 2022 |
|
| Current assets |
|
$ |
3,296,568 |
|
$ |
7,050,436 |
|
| Current liabilities |
|
|
3,466,248 |
|
|
4,547,718 |
|
| Working capital |
|
$ |
(169,680 |
) |
$ |
2,502,718 |
|
As of August 31, 2022 and February 28, 2022, we had
a cash balance of $363,073 and $4,648,146, respectively.
