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 months ended May 31, 2024 and May 31, 2023 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/A for the year ended February 29, 2024, as filed on May 29, 2024 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 May 31, 2024 and 2023 The following table shows our results of operations for the three months ended May 31, 2024 and 2023. The historical results presented below are not necessarily indicative of the results that may be expected for any future period. Period Three Months Ended Three Months Ended Change May 31, 2024 May 31, 2023 Dollars Percentage Revenues $ 1,182,800 $ 385,208 $ 797,592 207 % Gross profit 887,207 373,866 513,341 137 % Operating expenses 3,720,463 3,322,843 397,620 12 % Loss from operations (2,833,256 ) (2,948,977 ) 115,721 4 % Other income (expense), net (1,361,103 ) (1,606,216 ) (245,113 ) 15 % Net loss $ (4,194,359 ) $ (4,555,193 ) $ (360,834 ) (8 %) Revenue The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change May 31, 2024 May 31, 2023 Dollars Percentage Device rental activities $ 980,536 $ 238,149 $ 742,387 312 % Direct sales of goods and services 202,264 147,059 55,205 38 % $ 1,182,800 $ 385,208 $ 797,592 207 % Total revenue for the three-month period ended May 31, 2024 was $1,182,800 which represented an increase of $797,592 compared to total revenue of $385,208 for the three months ended May 31, 2023. Rental activities increased by $742,387 or 312%, as the Company continues to grow its product line and customer base. Direct sales grew by 38% driven by higher training revenue for the three months ended May 31, 2024. Gross profit Total gross profit for the three-month period ended May 31, 2024 was $887,207 which represented an increase of $513,341 compared to gross profit of $373,866 for the three months ended May 31, 2023. The increase is consistent with the increase in revenues as well as changes in product mix. And inventory adjustments. The gross profit % of 75% for the three-month period ended May 31, 2024 compares with the gross profit % of 97% for the three month period ended May 31, 2023. The prior period gross margin % is higher due to inventory adjustments. Operating Expenses Period Change Three Months Ended May 31, 2024 Three Months Ended May 31, 2023 Dollars Percentage Research and development $ 640,710 $ 891,757 $ (251,047 ) (28 )% General and administrative 2,720,191 2,200,602 519,589 24 % Depreciation and amortization 297,549 167,942 129,607 77 % Operating lease cost and rent 62,013 62,542 (529 ) (1 )% Operating expenses $ 3,720,463 $ 3,322,843 $ 397,620 12 % - 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 May 31, 2024 and May 31, 2023, were $3,720,463 and $3,322,463, respectively. The overall increase of $397,620 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $519,589. In comparing the three months ended May 31, 2024 and May 31, 2023 this increase was primarily due to the following increases: wages and salaries by $129,516, freight and duties by $125,886, installation $30,754, RMC costs by $72,603, commissions by $63,883, travel by $12,646, professional fees by $70,954, subcontractors by $47,924, insurance by $13,585 and other G& A increases. ● Research and development decreased by $251,047 due to a reduction in funding on development of future products. ● Depreciation and amortization increased by $129,607 due to large increases in revenue earning devices, demo devices, as well as some fixed assets. ● Operating lease cost and rent decreased by $529. Other Income (Expense) Other income (expense) during the three months ended May 31, 2024 and May 31, 2023, was ($1,361,103) and ($1,606,216), respectively. The $245,113 decrease in other expense was primarily attributable to the amortization of debt discount decreasing because of the elimination of the unamortized relative fair value discount in the current quarter as a result of our implementation of ASU 2020-06. Net loss We had a net loss of $4,194,359 for the three months ended May 31, 2024, compared to a net loss of $4,555,193 for the three months ended May 31, 2023. The decrease in net loss of $360,834 is due to a number of factors: higher gross profit is reduced by higher general and administrative and depreciation in the three months ended May 31, 2024. - 28 - 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 May 31, 2024, we had a cash balance of $193,103, accounts receivable(net) of $616,464, device parts inventory(net) of $1,830,467 and $28,749,738 in current liabilities. At the current cash consumption rate, we will need to consider additional funding sources going forward. We are taking proactive measures to reduce operating expenses and drive growth in revenue. The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results. Capital Resources The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated: May 31, 2024 February 29, 2024 Current assets $ 3,094,192 $ 3,616,566 Current liabilities 28,749,738 21,715,651 Working capital $ (25,655,546 ) $ (18,099,085 ) As of May 31, 2024 and February 29, 2024, we had a cash balance of $193,103 and $105,926, respectively. Summary of Cash Flows Three Months Ended May 31, 2024 Three Months Ended May 31, 2023 Net cash used in operating activities $ (3,045,831 ) $ (2,991,003 ) Net cash used in investing activities $ (21,728 ) $ (3,463 ) Net cash (used in) provided by financing activities $ 3,154,736 $ 2,341,909 Net cash used in operating activities. Net cash used in operating activities for the three months ended May 31, 2024 was $3,045,831 which included a net loss of $4,194,359, non-cash activity such as inventory provision $210,000 ,bad debts expense of $13,000, reduction of right of use asset of $31,425, accretion of lease liability $31,065, stock based compensation of $83,323, change in operating assets and liabilities of $436,966, amortization of debt discount of $27,625, increase in related party accrued payroll and interest of $17,575 and depreciation and amortization of $297,549 to derive the uses of cash in operations. Net cash used in investing activities. Net cash used in investing activities for the three months ended May 31, 2024 was $21,728 which was the purchase of fixed assets of $19,132 and an acquisition of trademark of $2,596. Net cash provided by financing activities. Net cash provided by financing activities for the three months ended May 31, 2024 was $3,154,736. This consisted of share proceeds net of issuance costs of 2,682,592, proceeds from loans payable of $350,000, reduced by repayments on loans payable of $27,000. We also had proceeds on issuance of Series B Convertible Redeemable Preferred Shares of $278,000 reduced by a redemption on those shares of $128,856. Off-Balance Sheet Arrangements None. - 29 - 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 May 31, 2024 and May 31, 2023 , the Company had no repayments of net advances from its loan payable-related party. At May 31, 2024, the loan payable-related party was $275,013 and $257,438 at February 29, 2024. Included in the balance due to the related party at May 31, 2024 is $198,481 of deferred salary and interest, $152,513 of which bears interest at 12%. As of February 29, 2024, included in the balance due to the related party is $140,013 of deferred salary all of which bears interest at 12%. The accrued interest included in loan at May 31, 2024 and February 29, 2024 was $36,974 and $32,468, respectively. Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months ended May 31, 2024 the Company accrued $0 (three months ended May 31 2023-$63,000) of incentive compensation plan payable with a corresponding recognition of stock based compensation due to the expectation of additional awards being met. This will be payable in Series G Preferred Shares which are redeemable at the Company’s option at $1,000 per share. At May 31, 2024 and February 29, 2024 there was $2,500,000 and $2,500,000 of incentive compensation payable. During the three months ended May 31, 2024 and 2023, the Company was charged $631,584 and $882,015, 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.