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, 2024 and August 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 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. - 28 - Table of Contents Management Discussion and Analysis Results of Operations for the Three Months Ended August 31, 2024 and 2023 The following table shows our results of operations for the three months ended August 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 August 31, 2024 August 31, 2023 Dollars Percentage Revenues $ 1,344,183 $ 386,363 $ 957,820 248 % Gross profit 559,218 185,774 373,444 201 % Operating expenses 3,173,092 3,231,026 (57,934 ) (2 )% Loss from operations (2,613,874 ) (3,045,252 ) 431,378 14 % Other income (expense), net (1,316,449 ) (1,714,476 ) 398,027 23 % Net Loss $ (3,930,323 ) $ (4,759,728 ) $ 829,405 17 % Revenue The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change August 31, 2024 August 31, 2023 Dollars Percentage Device rental activities $ 1,065,898 $ 343,543 $ 722,355 210 % Direct sales of goods and services 278,285 42,820 235,465 550 % $ 1,344,183 $ 386,363 $ 957,820 248 % Total revenue for the three-month period ended August 31, 2024 was $1,344,183 which represented an increase of $957,820 compared to total revenue of $386,363 for the three months ended August 31, 2023. Rental activities increased by 210% over the prior year’s quarter and direct sales by $235,465 as the Company continues to grow its core business. Gross profit Total gross profit for the three-month period ended August 31, 2024 was $559,218, which represented an increase of $373,444 compared to gross profit of $185,774 for the three months ended August 31, 2023. The gross profit increased due to the higher sales. The gross profit % of 42% for the three-month period ended August 31, 2024 was lower than the gross profit % of 48% for the prior year’s corresponding period. Operating Expenses Period Three Months Ended Three Months Ended Change August 31, 2024 August 31, 2023 Dollars Percentage Research and development $ 677,410 $ 794,548 $ (117,138 ) (15 )% General and administrative 2,324,953 2,294,471 30,482 1 % Depreciation and amortization 107,762 79,466 28,296 36 % Operating lease cost and rent 62,967 62,541 426 1 % Operating expenses $ 3,173,092 $ 3,231,026 $ (57,934 ) (2 )% - 29 - 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, 2024 and August 31, 2023, were $3,173,092 and $3,231,026, respectively. The overall decrease of $57,934 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $30,482. In comparing the three months ended August 31, 2024 and August 31, 2023 the increase in G&A was primarily due to increases in wages and salaries of $348,837 and subcontractors of $46,581. These increases were partially offset by decreases in: professional fees of $170,274, stock-based compensation of $58,984, production supplies of $19,712, marketing of $19,712, freight of $4,362 and travel of $79,408 ● Research and development decreased by $117,138 due to a reduction in funding on development of future products. ● Depreciation and amortization increased by $28,926 due to increases in revenue earning devices, demo devices, warehouse equipment and computer equipment. ● Operating lease cost and rent increased by $426. Other Income (Expense) Other income (expense) consisted of interest. Other income (expense) during the three months ended August 31, 2024 and August 31, 2023, was ($1,316,449) and ($1,714,476), respectively. The $398,027 decrease in other expense was primarily attributable to the application of ASU-2020 06 in the current year which resulted in lower amortization expense. Net loss We had a net loss of $3,930,323 for the three months ended August 31, 2024, compared to a net loss of $4,759,728 for the three months ended August 31, 2023. The decrease in net loss of $829,405 is primarily a result of higher gross profit and lower other expense. Results of Operations for the Six Months Ended August 31, 2024 and 2023 The following table shows our results of operations for the six months ended August 31, 2024 and 2023. 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, 2024 August 31, 2023 Dollars Percentage Revenues $ 2,526,983 $ 771,571 $ 1,755,412 228 % Gross profit 1,244,552 382,507 862,045 225 % Operating expenses 6,691,682 6,376,734 314,948 5 % Loss from operations (5,447,130 ) (5,994,227 ) 547,097 9 % Other income (expense), net (2,677,552 ) (3,320,692 ) 643,140 19 % Net loss $ (8,124,682 ) $ (9,314,919 ) $ 1,190,237 13 % The following table presents revenues from contracts with customers disaggregated by product/service: Six Months Ended Six Months Ended Change August 31, 2024 August 31, 2023 Dollars Percentage Device rental activities $ 2,046,434 $ 581,692 $ 1,464,742 252 % Direct sales of goods and services 480,549 189,879 290,670 153 % $ 2,526,983 $ 771,571 $ 1,755,412 228 % - 30 - Table of Contents Total revenue for the six-month period ended August 31, 2024 was $2,526,983 which represented an increase of $1,755,412 compared to total revenue of $771,571 for the six months ended August 31, 2023. This increase is a result of an increase in rental sales of $1,464,742 as the Company deployed more units as well as an increase in direct sales of $290,670. Gross profit Total gross profit for the six-month period ended August 31, 2024 was $1,244,552 which represented an increase of $862,045, compared to gross profit of $382,507 for the six months ended August 31, 2023. The gross profit increased due to the higher sales. The gross profit % was 49% for both the six month period ended August 31, 2024 and 2023. Operating Expenses Period Six Months Ended Six Months Ended Change August 31, 2024 August 31, 2023 Dollars Percentage Research and development $ 1,318,120 $ 1,686,305 $ (368,185 ) (22 )% General and administrative 5,045,144 4,414,902 630,932 14 % Depreciation and amortization 203,438 150,444 52,994 35 % Operating lease cost and rent 124,980 125,083 (103 ) 0 % Operating expenses $ 6,691,682 $ 6,376,734 $ 314,948 5 % 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, 2024 and August 31, 2023, were $6,691,682 and $6,376,734, respectively. The overall increase of $314,948 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $630,932. In comparing the six months ended August 31, 2024 and August 31, 2023 the increase may be partially explained by the following decreases: wages and salaries by $478,383, subcontractors by $94,505, professional fees by $173,272, commissions by $110,694. freight by $121,524, installation costs by$85,403, and RMC costs by $164,710. These were partially offset by decreases in the following accounts: professional fees by $144,064, stock-based compensation by $91,382, travel by $66,762, repairs and maintenance by $66,478, sales and marketing by $41,630, production supplies by $38,244 and other general and administrative decreases. ● Research and development decreased by $368,185 due to a reduction in funding on development of future products. ● Depreciation and amortization increased by $52,994 due to the acquisition of revenue earning devices, demo devices, warehouse equipment and computer equipment. ● Operating lease cost and rent decreased by $103. Other Income (Expense) Other income (expense) during the six months ended August 31, 2024 and August 31, 2023, was ($2,677,552) and ($3,320,692), respectively. The $643,140 decrease in other expense was primarily attributable to the application of ASU-2020 06 in the current year which resulted in lower amortization expense. Net loss We had a net loss of $8,124,682 for the six months ended August 31, 2024, compared to a net loss of $9,314,919 for the six months ended August 31, 2023. The decrease in net loss of $1,190,237 is a result of higher gross profit and a reduction on other expense. - 31 - 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, 2024, we had a cash balance of $543,133, accounts receivable of $650,293, device parts inventory of $2,063,229 and $37,080,711in 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 $ 4,090,105 $ 3,616,566 Current liabilities 37,080,711 21,715,651 Working capital $ (32,990,606 ) $ (18,099,085 ) As of August 31, 2024 and February 29, 2024, we had a cash balance of $543,133 and $105,926, respectively. Summary of Cash Flows Summary of Cash Flows Six Months Ended August 31, 2024 Six Months Ended August 31, 2023 Net cash used in operating activities $ (6,433,906 ) $ (6,335,216 ) Net cash used in investing activities $ (77,868 ) $ (3,463 ) Net cash provided by financing activities $ 6,948,981 $ 6,911,032 Net cash used in operating activities. Net cash used in operating activities for the six months ended August 31, 2024 was $6,433,906 which included a net loss of $8,124,682 non-cash activity such as the bad debts expense of $11,995, inventory provision of $111,000, reduction of right of use asset of $63,821, accretion of lease liability $61,159, stock based compensation of $166,646, loss on settlement of debt of $6,520, change in operating assets and liabilities of $472,840, amortization of debt discount of $129,333, increase in related party accrued payroll and interest of $22,151 and depreciation and amortization of $645,311 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, 2024 was $77,868, $23,724 for the purchase of fixed assets, $4,144 for acquisition of trademarks and $50,000 for a convertible note receivable. Net cash provided by financing activities. Net cash provided by financing activities was $6,948,981 for the six months ended August 31, 2024. This consisted of share proceeds net of issuance costs of 6,893,169, proceeds from loans payable of $350,000, reduced by repayments on loans payable of $183,000, proceeds on the issuance of Series B redeemable convertible preferred shares of $278,000 reduced by redemption of those same Series B redeemable convertible preferred shares of $389,188. Off-Balance Sheet Arrangements None. - 32 - 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 29, 2024, as filed on May 29, 2024. Related Party Transactions For both the three months ended August 31, 2024 and August 31, 2023 , the Company had no repayments of net advances from its loan payable-related party At August 31, 2024 the loan payable-related party was $279,589 and $257,438 at February 29, 2024. Included in the balance due to the related party at August 31, 2024 is $203,057 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 August 31, 2024 and February 29, 2024 was $41,549 and $32,468, 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 $0 (2023-$62,000) and $0 (2023-$125,000) 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 August 31, 2024 and February 29, 2024 there was $2,500,000 and $2,500,000 of incentive compensation payable. At August 31, 2024 deferred compensation for CEO was $204,091. For the 6 months ended August 31, 2024,the net change was a decrease of $334,676 comprising of cash repayment of $505,000 offset by accruals and adjustments of $170,324. At February 29, 2024 deferred compensation for CEO was $538,767. During the three months ended August 31, 2024 and 2023, the Company was charged $777,260 and $777,260, respectively for fees for research and development from a company partially owned by a principal shareholder. During the six months ended August 31, 2024 and 2023, the Company was charged $1,289,830 and $1,659,275, 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.