Artificial Intelligence Technology Solutions Inc.: Form 10-Q for the period ended Nov 30, 2023

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.

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Management Discussion and Analysis

Results of Operations for the Three Months Ended November 30, 2023 and 2022

The following table shows our results of operations for the three months ended November 30, 2023 and 2022. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

Revenue

The following table presents revenues from contracts with customers disaggregated by product/service:

Total revenue for the three-month period ended November 30, 2023 was $596,980 which represented an increase of $194,581 compared to total revenue of $402,399 for the three months ended November 30, 2022. This increase is a result of higher rental activities in the current year’s quarter due to 84 new deployments this quarter.

Gross profit

Total gross profit for the three-month period ended November 30, 2023 was $461,066, which represented an increase of $184,627 compared to gross profit of $276,439 for the three months ended November 30, 2022. 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 77% for the three-month period ended November 30, 2022 was higher than the gross profit % of 69% for the prior year’s corresponding period.

Operating Expenses

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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, 2023 and November 30, 2022, were $2,847,017 and $3,090,941, respectively. The overall decrease of $244,924 was primarily attributable to the following changes in operating expenses of:

• General and administrative expenses decreased by $114,721. In comparing the three months ended November 30, 2023 and November 30, 2022 this decrease was primarily due to the following decreases: stock based compensation by $28,598, sales and marketing by $79,451, travel by $30,478, insurance $35,606 and bad debts expense $77,135. These were partially offset by increases in the following accounts: subcontractors by $37,415, wages and salaries $72,071 and other G& A increases.
• Research and development decreased by $256,187 due to due to a reduction in funding on development of future products.
• Depreciation and amortization increased by $122,908 due to large increases in revenue earning devices, demo devices, tooling and computer equipment.
• Operating lease cost and rent increased by $3,076 due to one less lease in the current period.

Other Income (Expense)

Other income (expense) during the three months ended November 30, 2023 and November 30, 2022, was ($1,581,533) and ($1,271,158), respectively. The $310,375 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 $3,966,484 for the three months ended November 30, 2023, compared to a net loss of $4,085,660 for the three months ended November 30, 2022. The decrease in net loss of $119,176 is due to a number of factors: higher gross profit and lower general and administrative and other expense offset by higher other expenses in the three months ended November 30, 2023.

Results of Operations for the Nine Months Ended November 30, 2023 and 2022

The following table shows our results of operations for the nine months ended November 30, 2023 and 2022. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

Revenue

The following table presents revenues from contracts with customers disaggregated by product/service:

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Total revenue for the nine-month period ended November 30, 2023 was $1,368,551 which represented an increase of $313,511 compared to total revenue of $1,055,040 for the nine months ended November 30, 2022. This 30% increase was because of higher rental activities due to 220 new deployments year to date November 30, 2023.

Gross profit

Total gross profit for the nine-month period ended November 30, 2023 was 1,052,112 which represented an increase of $450,970, compared to gross profit of $601,142 for the nine months ended November 30, 2022. The gross profit increased due to the 30% higher sales and higher proportion of rental activities at higher margins than direct sales. The gross profit % of 77% for the nine-month period ended November 30, 2023 was higher than the gross profit % of 57% for the prior year’s corresponding period.

Operating Expenses

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, 2023 and November 30, 2022, were $9,431,292 and $10,090,732, respectively. The overall decrease of $659,440 was primarily attributable to the following changes in operating expenses of:

• General and administrative expenses decreased by $338,651. In comparing the six months ended November 30, 2023 and November 30, 2022 the decrease may be partially explained by the following decreases: wages and salaries by $18,426, stock based compensation by $143,104, sales and marketing by $128,797, travel by $70,449 and bad debts expense $197,405. These were partially offset by increases in the following accounts: professional fees by $68,350, subcontractors by $63,956 , dues and subscriptions by $ $25,977 and other G& A increases.
• Research and development decreased by $557,493 due to a reduction in funding on development of future products.
• Depreciation and amortization increased by $242,103 due to the acquisition of ERP computer software, computer equipment tooling, and 220 new revenue earning devices.
• Operating lease cost and rent decreased by $5,489 due to one less lease in the current period.

Other Income (Expense)

Other income (expense) during the nine months ended November 30, 2023 and November 30, 2022, was ($4,902,225) and (3,440,621), respectively. The 1,461,604 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 $13,281,405 for the nine months ended November 30, 2023, compared to a net loss of $12,930,211 for the nine months ended November 30, 2022. The increase in net loss of $351,194 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.

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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, 2023, we had a cash balance of $97,478, accounts receivable of $505,438, device parts inventory of $2,220,159 and $16,459,125 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:

As of November 30, 2023 and February 28, 2023, we had a cash balance of $97,478 and $939,759, respectively.

Summary of Cash Flows

Net cash used in operating activities.

Net cash used in operating activities for the nine months ended November 30, 2023 was $9,378,427 which included a net loss of $13,281,405, non-cash activity such as the bad debts expense of $26,730, reduction of right of use asset of $88,378, accretion of lease liability $99,248, stock based compensation of $337,896, gain on settlement of debt of ($38,740) , change in operating assets and liabilities of $966,052, amortization of debt discount of $1,755,897, increase in related party accrued payroll and interest of $92,770 and depreciation and amortization of $574,746 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, 2023 was $10,044 which was the purchase of fixed assets of $13,903 offset by reimbursement of security deposit $3,859.

Net cash provided by financing activities.

Net cash provided by financing activities was $8,546,100 for the nine months ended November 30, 2023. This consisted of share proceeds net of issuance costs of 7,527,190, proceeds from loans payable of $1,400,000, reduced by repayments on loans payable of $381,000.

Off-Balance Sheet Arrangements

None.

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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 November 30, 2023 and November 30, 2022 , the Company had no repayments of net advances from its loan payable-related party At November 30, 2023, the loan payable-related party was $299,286 and $206,516 at February 28, 2023. Included in the balance due to the related party at November 30, 2023 is $222,754 of deferred salary and interest, $183,625 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 November 30, 2023 and February 28, 2023 was $28,267 and $15,660 respectively.

Pursuant to the amended Employment Agreement with its Chief Executive Officer, for the three months and nine ended November 30, 2023, the Company accrued $62,000 (2022-$138,000) and $187,000 (2022-$362,500) 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 November 30, 2023 and February 28, 2023 there was $1,166,000 and $979,000 of incentive compensation payable.

During the three months ended November 30, 2023 and 2022, the Company was charged $526,723 and $794,460, respectively for fees for research and development from a company partially owned by a principal shareholder.

During the nine months ended November 30, 2023 and 2022, the Company was charged $2,185,998 and $2,735,589, respectively for fees for research and development from a company partially owned by a principal shareholder.

Management’s Report on Internal Control over Financial Reporting

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) as of November 30, 2023. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of November 30, 2023, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

1. As of November 30, 2023, we did not maintain effective controls over our control environment. Specifically, we have not developed and effectively communicated to our employees our accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

2. As of November 30, 2023, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.

Our management, including our principal executive officer and principal financial officer, do not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

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