Artificial Intelligence Technology Solutions Inc.: Form 10-Q for the period ended Aug 31, 2024

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.

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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.

Revenue

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

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

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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 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

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

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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

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.

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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 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:

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

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.

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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 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.

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 August 31, 2024. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of August 31, 2024, 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 August 31, 2024, 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 August 31, 2024, 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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