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 nine months ended November 30, 2024 and November 30, 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 November 30, 2024, and 2023 The following table shows our results of operations for the three months ended November 30, 2024, and 2023. The historical results presented below are not necessarily indicative of the results that may be expected for any future period. Period Change Three Months Ended November 30, 2024 Three Months Ended November 30, 2023 Dollars Percentage Revenues $ 1,750,968 $ 596,980 $ 1,153,988 193 % Gross profit 1,173,830 347,236 826,594 238 % Operating expenses 3,476,728 2,732,187 744,541 27 % Loss from operations (2,302,898 ) (2,384,951 ) 82,053 (3 )% Other income (expense), net (1,401,076 ) (1,581,533 ) 180,457 (11 )% Net loss $ (3,703,974 ) $ (3,966,484 ) $ 262,510 (7 )% Revenue The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change November 30, 2024 November 30, 2023 Dollars Percentage Device rental activities $ 1,429,112 $ 416,062 $ 1,013,050 243 % Direct sales of goods and services 321,856 180,918 140,938 78 % $ 1,750,968 $ 596,980 $ 1,153,988 193 % Total revenue for the three-month period ended November 30, 2024, was $1,750,968 which represented an increase of $1,153,988 compared to total revenue of $596,980 for the three months ended November 30, 2023. There has been a large increase in revenues as a result of higher rental activities growing each quarter through the deployment of new revenue earning devices. Gross profit Total gross profit for the three-month period ended November 30, 2024, was $1,173,830, which represented an increase of $826,594 compared to gross profit of 347,236 for the three months ended November 30, 2023. The gross profit increased due to the higher sales and higher proportion of rental activities at higher margins than direct sales. The gross profit % of 67% for the three-month period ended November 30, 2023, was higher than the gross profit % of 58% for the prior year’s corresponding period. Operating Expenses Period Change Three Months Ended November 30, 2024 Three Months Ended November 30, 2023 Dollars Percentage Research and development $ 579,045 $ 557,126 $ 21,919 4 % General and administrative 2,733,547 2,009,047 724,500 36 % Depreciation and amortization 106,261 101,933 4,328 4 % Operating lease cost and rent 57,875 64,081 (6,206 ) (10 )% 3,476,728 2,732,187 744,541 27 % - 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 November 30, 2024, and November 30, 2023, were $3,476,728 and $2,732,187, respectively. The overall increase of $744,541 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $724,500. In comparing the three months ended November 30, 2024, and November 30, 2023, this increase was primarily due to the following increases: wages and salaries $421,996, commissions by $65,064, repairs and maintenance by $158,813 and RMC costs by $108,919. These were partially offset by decreases in other G& A accounts. ● Research and development increased by $21,919 as the Company continues to develop new hardware and software solutions.. ● Depreciation and amortization increased by $4,328 due to small increases in demo devices, and warehouse equipment. ● Operating lease cost and rent decreased by $6,206 due to one less lease in the current period. Other Income (Expense) Other income (expense) during the three months ended November 30, 2024, and November 30, 2023, was ($1,401,076) and ($1,581,533), respectively. The $180,457 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 $3,703,974 for the three months ended November 30, 2024, compared to a net loss of $3,966,484 for the three months ended November 30, 2023. The decrease in net loss of $262,510 is due to a number of factors: higher gross profit offset and lower other expenses offset by higher general and administrative in the three months ended November 30, 2024. Results of Operations for the Nine Months Ended November 30, 2024, and 2023 The following table shows our results of operations for the nine months ended November 30, 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 Change Nine Months Ended November 30, 2024 Nine Months Ended November 30, 2023 Dollars Percentage Revenues $ 4,277,951 $ 1,368,551 $ 2,909,400 213 % Gross profit 2,860,255 729,743 2,130,512 292 % Operating expenses 10,610,283 9,108,923 1,501,360 16 % Loss from operations (7,750,028 ) (8,379,180 ) 629,152 (8 )% Other income (expense), net (4,078,628 ) (4,902,225 ) 823,597 (17 )% Net loss $ (11,828,656 ) $ (13,281,405 ) $ 1,452,749 (11 )% The following table presents revenues from contracts with customers disaggregated by product/service: Nine Months Ended Nine Months Ended Change November 30, 2024 November 30, 2023 Dollars Percentage Device rental activities $ 3,475,546 $ 997,754 $ 2,477,792 248 % Direct sales of goods and services 802,405 370,797 431,608 116 % $ 4,277,951 $ 1,368,551 $ 2,909,400 213 % - 30 - Table of Contents Total revenue for the nine-month period ended November 30, 2024, was $4,277,951 which represented an increase of $2,909,400 compared to total revenue of $1,368,551 for the nine months ended November 30, 2023. This 213% increase was because of higher rental activities due to 272 new deployments year to date November 30, 2023. Gross profit Total gross profit for the nine-month period ended November 30, 2024, was 2,860,255 which represented an increase of $2,130,512, compared to gross profit of $729,743 for the nine months ended November 30, 2023. The gross profit increased due to the 213% higher sales and higher proportion of rental activities at higher margins than direct sales. The gross profit percentage of 67% for the nine-month period ended November 30, 2024, was higher than the gross profit percentage of 53% for the prior year’s corresponding period. Operating Expenses Period Change Nine Months Ended November 30, 2024 Nine Months Ended November 30, 2023 Dollars Percentage Research and development $ 1,897,165 $ 2,243,431 $ (346,266 ) (15 )% General and administrative 8,220,564 6,423,951 1,796,613 28 % Depreciation and amortization 309,699 252,377 57,322 23 % Operating lease cost and rent 182,855 189,164 (6,309 ) (3 )% Operating expenses $ 10,610,283 $ 9,108,923 1,501,360 16 % 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 November 30, 2024 and November 30, 2023, were $10,610,283 and $9,108,923, respectively. The overall increase of $1,501,360 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses increased by $1,796,613. In comparing the nine months ended November 30, 2024, and November 30, 2023 the increase may be partially explained by the following increases: wages and salaries by $900,370, subcontractors by $143,935, insurance by $82,352, freight and duty by $117,773, installation expenses by $100,768, repairs and maintenance by $90,355 RMC costs by $273,629, dues and subscriptions by $30,146, and office expenses $38,246. These were partially offset by decreases in the following accounts: professional fees by $84,522, stock-based compensation by $87,927 and other G& A decreases. ● Research and development decreased by $346,266 due to a reduction in funding on development of future products especially in the first two quarters of the current year. ● Depreciation and amortization increased by $57,322 due to the acquisition of demo devices, computer equipment and warehouse equipment. ● Operating lease cost and rent decreased by $6,309 due to one less lease in the current period. Other Income (Expense) Other income (expense) during the nine months ended November 30, 2024, and November 30, 2023, was ($4,078,628) and (4,902,225), respectively. The $823,597 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 $11,828,656 for the nine months ended November 30, 2024, compared to a net loss of $13,281,405 for the nine months ended November 30, 2023. The decrease in net loss of $1,452,749 is due to a number of factors: higher gross profit offset and lower other expenses offset by higher general and administrative in the nine months ended November 30, 2024. - 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 November 30, 2024, we had a cash balance of $84,231, accounts receivable of $1,249,792, device parts inventory of $1,883,530 and $41,294,464 in current liabilities. At the current cash consumption rate, we will need to consider additional funding sources going forward. We are taking proactive measures to reduce operating expenses and drive growth in revenue. The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results. Capital Resources The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated: November 30, 2024 February 29, 2024 Current assets $ 4,000,413 $ 3,616,566 Current liabilities 41,294,464 21,715,651 Working capital $ (37,294,051 ) $ (18,099,085 ) As of November 30, 2024 and February 29, 2024, we had a cash balance of $84,231 and $105,926, respectively. Summary of Cash Flows Summary of Cash Flows Nine Months Ended November 30, 2024 Nine Months Ended November 30, 2023 Net cash used in operating activities $ (8,894,284 ) $ (9,378,427 ) Net cash used in investing activities $ (77,868 ) $ (10,044 ) Net cash provided by financing activities $ 8,950,457 $ 8,546,190 Net cash used in operating activities. Net cash used in operating activities for the nine months ended November 30, 2024, was $8,894,284 which included a net loss of $11,828,656, non-cash activity such as the bad debts expense of $37,995, inventory provision of $150,000, reduction of right of use asset of $91,152, accretion of lease liability $90,165, stock based compensation of $249,868, loss on settlement of debt of $6,520, change in operating assets and liabilities of $1,030,529, amortization of debt discount of $198,696, increase in related party accrued payroll and interest of $39,976 and depreciation and amortization of $1,039,371 to derive the uses of cash in operations. Net cash used in investing activities. Net cash used in investing activities for the nine months ended November 30, 2024, was $77,868 which was the purchase of fixed assets of $23,724, $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 $8,950,457 for the nine months ended November 30, 2024. This consisted of share proceeds net of issuance costs of 8,894,645, 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 November 30, 2024 and November 30, 2023 , the Company had no repayments of net advances from its loan payable-related party. At November 30, 2024, the loan payable-related party was $297,414 and $257,438 at February 29, 2024. Included in the balance due to the related party at November 30, 2024 is $222,754 of deferred salary and interest, $183,625 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 November 30, 2024 and February 29, 2024 was $28,267 and $32,468 respectively. Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months and six ended November 30, 2024, the Company accrued $0 (2023-$62,000) and $0 (2023-$187,000) 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 November 31, 2024 and February 29, 2024 there was $2,500,000 and $2,500,000 of incentive compensation payable. At November 30, 2024 deferred compensation for CEO was $598,635. For the nine months ended November 30, 2024, the net change was an increase of $59,868 comprising of net cash repayments and adjustments of $195,000 offset by accruals of $700,082. At February 29, 2024 deferred compensation for CEO was $538,767. During the three months ended November 30, 2024 and 2023, the Company was charged $556,175 and $526,723, respectively for fees for research and development from a company partially owned by a principal shareholder. During the nine months ended November 30, 2024 and 2023, the Company was charged $1,846,005 and $2,185,998, 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.