Artificial Intelligence Technology Solutions Inc. 10-Q

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, 2023 and August 31, 2022 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, 2023, as filed on June 14, 2023 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. We encourage everyone to ensure they have the most up to date news by visiting AITX at AITX News - AITX - Artificial Intelligence Technology Solutions. - 26 - Table of Contents Management Discussion and Analysis Results of Operations for the Three Months Ended August 31, 2023 and 2022 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, 2023 August 31, 2022 Dollars Percentage Revenues $ 386,363 $ 267,484 $ 118,879 44% Gross profit 297,349 233,270 64,079 27% Operating expenses 3,342,601 3,411,702 (69,101 ) (2% ) Loss from operations (3,045,252 ) (3,178,432 ) 133,180 (4% ) Other income (expense), net (1,714,476 ) (994,433 ) (720,043 ) 72% Net Loss $ (4,759,728 ) $ (4,172,865 ) $ (586,863 ) 14% Revenue The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change August 31, 2023 August 31, 2022 Dollars Percentage Device rental activities $ 343,543 $ 228,214 $ 115,329 51% Direct sales of goods and services 42,820 39,270 3,550 9% $ 386,363 $ 267,484 $ 118,879 44% Total revenue for the three-month period ended August 31, 2023 was $386,363 which represented an increase of $118,879 compared to total revenue of $267,484 for the three months ended August 31, 2022. This increase is a result of higher rental sales in the current year’s quarter. Rental activities increased by 51% over the prior year’s quarter as the Company continues to grow its core business. Gross profit Total gross profit for the three-month period ended August 31, 2023 was $297,349, which represented an increase of $64,079 compared to gross profit of $233,270 for the three months ended August 31, 2022. The gross profit increased due to the higher sales.. The gross profit % of 77% for the three-month period ended August 31, 2023 was lower than the gross profit % of 87% for the prior year’s corresponding period. Operating Expenses Period Three Months Ended Three Months Ended Change August 31, 2023 August 31, 2022 Dollars Percentage Research and development $ 794,548 $ 963,786 $ (169,238 ) (18% ) General and administrative 2,294,471 2,238,442 56,029 3% Depreciation and amortization 191,041 145,793 45,248 31% Operating lease cost and rent 62,541 63,681 (1,140 ) (2% ) Operating expenses $ 3,342,601 $ 3,411,702 $ (69,101 ) (2% ) - 27 - 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, 2023 and August 31, 2022, were $3,342,601 and $3,411,702, respectively. The overall decrease of $69,101 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $56,029. In comparing the three months ended August 31, 2023 and August 31, 2022 the decrease in G&A was primarily due to decreases in wages and salaries of $130,629 due to reduction in force, stock-based compensation of $68,727, office expenses of $12,885, travel $43,876, and bad debts expense of $31,270 due to fewer slow payers. These decreases were partially offset by an increase in professional fees of $173,170 mostly due compliance and audit fees increase and other G&A increases. ● Research and development decreased by $169,238 due to a reduction in funding on development of future products. ● Depreciation and amortization increased by $45,248 due to large increases in revenue earning devices, demo devices, tooling and computer equipment. ● Operating lease cost and rent decreased by $1,140. Other Income (Expense) Other income (expense) consisted of interest. Other income (expense) during the three months ended August 31, 2023 and August 31, 2022, was ($1,714,476) and ($994,433), respectively. The $720,043 increase in other expense was primarily attributable to the increase in interest and amortization of debt due to higher loans. Net loss We had a net loss of $4,759,728 for the three months ended August 31, 2023, compared to a net loss of $4,172,865 for the three months ended August 31, 2022. The increase in net loss of $586,863 is primarily a result of higher other expenses consisting of interest and debt amortization costs. This increase was partially offset by higher gross profit and lower operating expenses. Results of Operations for the Six Months Ended August 31, 2023 and 2022 The following table shows our results of operations for the six months ended August 31, 2023 and 2022. 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, 2023 August 31, 2022 Dollars Percentage Revenues $ 771,571 $ 652,641 $ 118,930 18% Gross profit 591,046 324,703 266,343 82% Operating expenses 6,585,273 6,999,791 (414,518 ) (6% ) Loss from operations (5,994,227 ) (6,675,088 ) 680,681 (10% ) Other income (expense), net (3,320,692 ) (2,169,463 ) (1,151,229 ) 53% Net loss $ (9,314,919 ) $ (8,844,551 ) $ (470,368 ) 5% The following table presents revenues from contracts with customers disaggregated by product/service: Six Months Ended Six Months Ended Change August 31, 2023 August 31, 2022 Dollars Percentage Device rental activities $ 581,692 $ 468,019 $ 113,673 24% Direct sales of goods and services 189,879 184,622 5,257 3% $ 771,571 $ 652,641 $ 118,930 18% - 28 - Table of Contents Total revenue for the six-month period ended August 31, 2023 was $771,571 which represented an increase of $118,930 compared to total revenue of $652,641 for the six months ended August 31, 2022. This increase is a result of higher rental sales as the Company deployed 81more units when comparing these periods. Gross profit Total gross profit for the six-month period ended August 31, 2023 was $591,046 which represented an increase of $266,343, compared to gross profit of $324,703 for the six months ended August 31, 2022. The gross profit increased due to the higher sales and higher margin sales. The gross profit % of 77% for the six month period ended August 31, 2023 was higher than the gross profit % of 50% for the prior year’s corresponding period. The direct sales for the six months ended August 31, 2023 consisted of higher proportion of training revenue at higher gross profit vs unit sales for the six months ended August 31, 2022. The gross profit % of 77% for the six month period ended August 31, 2023 was higher than the gross profit % of 50% for the prior year’s corresponding period. Operating Expenses Period Six Months Ended Six Months Ended Change August 31, 2023 August 31, 2022 Dollars Percentage Research and development $ 1,686,305 $ 1,987,521 $ (301,216 ) (15% ) General and administrative 4,414,902 4,638,834 (223,932 ) (5% ) Depreciation and amortization 358,983 239,788 119,195 50% Operating lease cost and rent 125,083 133,648 (8,565 ) (6% ) Operating expenses $ 6,585,273 $ 6,999,791 $ (414,518 ) (6% ) 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, 2023 and August 31, 2022, were $6,585,273 and $6,999,791, respectively. The overall decrease of $ 414,518 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses decreased by $ 223,932 . In comparing the six months ended August 31, 2023 and August 31, 2022 the decrease may be partially explained by the following decreases: wages and salaries by $181,156, stock based compensation by $114,506, subcontractors by $26,541, sales and marketing by $49,346, travel by $39,971, investor relations stock agents and regulatory expenses by $35,772, bad debts expense $120,270 and office expense by $19,972. These were partially offset by increases in the following account: professional fees by $259,677 and other G& A increases. ● Research and development decreased by $301,216 due to a reduction in funding on development of future products. ● Depreciation and amortization increased by $119,195 due to the acquisition of ERP computer software, computer equipment tooling, and 81 new revenue earning devices. ● Operating lease cost and rent decreased by $8,565 due to one less lease in the current period. Other Income (Expense) Other income (expense) during the six months ended August 31, 2023 and August 31, 2022, was ($3,320,692) and ($2,169,463), respectively. The $1,151,229 increase in other expense was primarily attributable to the increase in interest and debt amortization expense which is a result of higher loans in 2023. Net loss We had a net loss of 9,314,919 for the six months ended August 31, 2023, compared to a net loss of $8,844,551 for the six months ended August 31, 2022. The increase in net loss of $470,368 is primarily a result of higher other expenses consisting of interest and debt amortization costs. This increase was partially offset by higher gross profit and lower operating expenses - 29 - Table of Contents Liquidity, Capital Resources and Cash Flows Management believes that we will continue to incur losses for the immediate future. Therefore, we will need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern. As of August 31, 2023, we had a cash balance of $1,512,112, accounts receivable of $260,671, device parts inventory of $1,689,930 and $28,753,936 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, 2023 February 28, 2023 Current assets $ 4,137,971 $ 3,438,992 Current liabilities 28,753,936 16,049,593 Working capital $ (24,615,965 ) $ (12,610,601 ) As of August 31, 2023 and February 28, 2023, we had a cash balance of $1,512,112 and $939,759, respectively. Summary of Cash Flows Summary of Cash Flows Six Months Ended August 31, 2023 Six Months Ended August 31, 2022 Net cash used in operating activities $ (6,335,216 ) $ (6,754,462 ) Net cash used in investing activities $ (3,463 ) $ (207,197 ) Net cash provided by financing activities $ 6,911,032 $ 2,676,586 Net cash used in operating activities. Net cash used in operating activities for the six months ended August 31, 2023 was $6,335,216 which included a net loss of $9,314,919, non-cash activity such as the bad debts expense of $24,730, reduction of right of use asset of $58,220, accretion of lease liability $66,864, stock based compensation of $228,434, gain on settlement of debt of ($38,740) , change in operating assets and liabilities of $968,783, amortization of debt discount of $1,258,198, increase in related party accrued payroll and interest of $54,230 and depreciation and amortization of $358,983 to derive the uses of cash in operations. Net cash used in investing activities. Net cash used in investing activities for the six months ended August 31, 2023 was $3,463, which was the purchase of fixed assets, Net cash provided by financing activities. Net cash provided by financing activities was $6,911,032 for the six months ended August 31, 2023. This consisted of share proceeds net of issuance costs of 6,115,032, proceeds from loans payable of $1,050,000, reduced by repayments on loans payable of $254,000. Off-Balance Sheet Arrangements None. - 30 - Table of Contents Critical Accounting Policies and Estimates Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K for the year ended February 28, 2023, as filed on June 14, 2023. Related Party Transactions For both the three months ended August 31, 2023 and August 31, 2022 , the Company had no repayments of net advances from its loan payable-related party. At August 31, 2023, the loan payable-related party was $260,746 and $206,516 at February 28, 2023. Included in the balance due to the related party at August 31, 2023 is $172,265 of deferred salary and interest, $145,500 of which bears interest at 12%. At February 28, 2023, included in the balance due to the related party is $108,000 of deferred salary with $108,000 bearing interest at 12%. The accrued interest included in loan at August 31, 2023 and February 28, 2023 was $23,515 and $15,660 respectively. Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months and six ended August 31, 2023, the Company accrued $62,000 (2022-$63,000) and $125,000 (2022-$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, 2023 and February 28, 2023 there was $1,104,000 and $979,000 of incentive compensation payable. During the three months ended August 31, 2023 and 2022, the Company was charged $777,260 and $957,395, respectively for fees for research and development from a company partially owned by a principal shareholder. During the six months ended August 31, 2023 and 2022, the Company was charged $1,659,275 and $1,959,129, respectively for fees for research and development from a company partially owned by a principal shareholder. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for a smaller reporting company.