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, 2026 and May 31, 2025 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, 2026, as filed on June 9, 2026 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. - 29 - Table of Contents Management Discussion and Analysis Results of Operations for the Three Months Ended May 31, 2026 and 2025 The following table shows our results of operations for the three months ended May 31, 2026 and 2025. 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, 2026 May 31, 2025 Dollars Percentage Revenues $ 1,831,202 $ 1,854,837 $ (23,635 ) (1 )% Gross profit 1,183,824 1,233,501 (49,677 ) (4 )% Operating expenses 3,893,188 4,412,170 (518,982 ) (12 )% Loss from operations (2,709,364 ) (3,178,669 ) 469,305 15 % Other expense, net (3,006,474 ) (1,415,349 ) (1,591,125 ) (112 )% Net loss $ (5,715,838 ) $ (4,594,018 ) $ (1,121,820 ) (24 )% Revenue The following table presents revenues from contracts with customers disaggregated by product/service: Three Months Ended Three Months Ended Change May 31, 2026 May 31, 2025 Dollars Percentage Device rental activities $ 1,613,095 $ 1,627,286 $ (14,191 ) (1 )% Direct sales of goods and services 218,107 227,551 (9,444 ) (4 )% $ 1,831,202 $ 1,854,837 $ (23,635 ) (1 )% Total revenue for the three-month period ended May 31, 2026 was $1,831,202which represented a decrease of $23,635 or 1% compared to total revenue of 1,854,837 for the three months ended May 31, 2025. The decrease in revenue was attributable to a significant drop in the sales for one major customer due to their internal cost cutting initiatives. This major customer previously represented about 48% of the Company’s revenues for the three months ended May 31, 2025 represented 21% of the Company’s revenues for the three months ended May 31, 2026. The Company managed to mitigate this reduction by gaining new customers and diversifying its customer base. For the three months ended May 31, 2026, two customers accounted for 36% of total revenue and for the three months ended May 31, 2025, two customers accounted for 65% of total revenue. The Company expects to see sales growth through new mobile products and software starting in the second quarter of this fiscal year. The mobile products will see a slow steady rollout over the fiscal year due to the capital intensive nature of these products. Gross profit Total gross profit for the three-month period ended May 31, 2026 was $1,183,824which represented a decrease of $49,677 compared to gross profit of $1,233,501 for the three months ended May 31, 2025. The decrease is consistent with the decrease in revenues as well as changes in product mix. The gross profit % of 65% for the three-month period ended May 31, 2026 compared with the gross profit % of 67% for the three month period ended May 31, 2025. - 30 - Table of Contents Operating Expenses Period Change Three Months Ended May 31, 2026 Three Months Ended May 31, 2025 Dollars Percentage Research and development $ 885,593 $ 1,087,619 $ (202,026 ) (19 )% General and administrative 2,907,577 3,232,211 (324,634 ) (10 )% Depreciation and amortization 32,646 34,121 (1,475 ) (4 )% Operating lease cost and rent 67,372 58,219 9,153 16 % Operating expenses $ 3,893,188 $ 4,412,170 $ (518,982 ) (12 )% 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, 2026 and May 31, 2025, were $3,893,188 and $4,412,170, respectively. The overall decrease of $518,982 was primarily attributable to the following changes in operating expenses of: ● General and administrative expenses decreased by $324,634. In comparing the three months ended May 31, 2026 and May 31, 2025 this decrease was primarily due to the following decreases: wages and salaries by $227,585, professional fees by $45,167, stock based compensation by $19,847, production supplies by $45,525, RMC costs by $59,948, marketing by $53,486, freight and duty costs by $49,508 and dues and subscriptions by $27,858. These costs were partially offset by increases in subcontractor by $198,837 and with other net G& A account decreases. ● Research and development decreased by $202,026 due to a decrease in software development as the product is being released. ● Depreciation and amortization decreased by $1,475. ● Operating lease cost and rent increased by $9,153 due to one new lease in 2026. Other Expense Other expense during the three months ended May 31, 2026 and May 31, 2025, was $3,006,474 and $1,415,349, respectively. The $1,591,125 increase in other expense was primarily attributable to a $885,525 increase in interest expense due to an approximately $338,000 increase in debt discount amortization expense, an approximately $204,000 increase in interest on DVPO balance with the balance due to the switch to some notes (see Note 11) to compounding interest and interest on approximately $2.7 million increase in loans payable. The $707,600 loss on settlement was on the exchange of loans payable and accrued interest for the three months ended May 31, 2026 Net loss We had a net loss of $5,715,838 for the three months ended May 31, 2026, compared to a net loss of $4,594,018 for the three months ended May 31, 2025. The increase in net loss of $1,121,820 is due to a number of factors: higher other expenses is reduced by lower operating expenses for the three months ended May 31, 2026. 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. - 31 - Table of Contents As of May 31, 2026, we had a cash balance of $94,643, accounts receivable (net) of $974,897, device parts inventory(net) of $1,378,950 and $44,890,383 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, 2026 February 28, 2026 Current assets $ 3,005,227 $ 2,935,003 Current liabilities 44,890,383 19,952,748 Working capital $ (41,885,156 ) $ (17,017,745 ) As of May 31, 2026 and February 28, 2026, we had a cash balance of $94,643 and $109,043, respectively. Summary of Cash Flows Three Months Ended May 31, 2026 Three Months Ended May 31, 2025 Net cash used in operating activities $ (2,759,307 ) $ (3,321,185 ) Net cash used in investing activities $ (16,438 ) $ (9,720 ) Net cash provided by financing activities $ 2,761,345 $ 2,789,777 Net cash used in operating activities. Net cash used in operating activities for the three months ended May 31, 2026 was $2,759,307 which included a net loss of $5,715,838, non-cash activity such as bad debts expense of $70,000, reduction of right of use asset of $38,013, accretion of lease liability $23,281, stock based compensation of $60,508, change in operating assets and liabilities of $1,255,482, amortization of debt discount of $385,493, decrease in related party accrued payroll and interest of $129,687 and depreciation and amortization of $545,841 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, 2026 was $16,438 which was the purchase of fixed assets of $15,600 and an acquisition of trademark of $838. Net cash provided by financing activities. Net cash provided by financing activities for the three months ended May 31, 2026 was $2,761,345. This consisted of share proceeds net of issuance costs of $823,480 , proceeds on the issuance of Series C Preferred Shares of $200,000, proceeds from loans payable of $2,714,028 reduced by repayments on loans payable of $976,163. 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 28, 2026, as filed on June 9, 2026. Related Party Transactions For both the three months ended May 31, 2026, and May 31, 2025, the Company had repayments of net advances of $129,687 and $0, respectively. At May 31, 2026, the loan payable-related party was $331,946 and $461,633 at February 28, 2026. Included in the balance due to the related party at May 31, 2026, is $255,414 of deferred salary and interest, $157,513 of which bears interest at 12%. As of February 28, 2026, included in the balance due to the related party is $285,638 of deferred salary all of which bears interest at 12%. The accrued interest included in the loan at May 31, 2026, and February 28, 2026, was $84,956, and $79,268, respectively. During the three months ended May 31, 2026, the Company paid out gross payments to the CEO of $71,105 offset by a bonus accrual of $250,000, which yields a net change of $178,895 relating to deferred compensation for CEO. This was all in accordance with a December 2023 board action allowing for $1 million of annual discretionary compensation as well as a February 28, 2026, board action which provided an additional $1.5 million in compensation. During the three months ended May 31, 2025, the Company paid out gross payments to the CEO of $1,496,687 offset by a bonus accrual of $250,000, which yielded a net change of $1,246,687 relating to deferred compensation for CEO. The balance of deferred compensation for CEO was $1,990,751 and $1,811,856 at May 31, 2026, and February 28, 2026, respectively For the three months ended May 31, 2026, the Company accrued $0 (three months ended May 31, 2025-$0) of incentive compensation plan payable to the CEO. This will be payable in Series G Preferred Shares, which are redeemable at the Company’s option at $1,000 per share. On May 31, 2026, and February 28, 2026, there was $5,500,000 and $5,500,000 incentive compensation payable. During the three months ended May 31, 2026, and 2025, the Company was charged $390,130 and $736,875, respectively for fees for research and development from a company partially owned by a principal shareholder. The principal shareholder received no compensation from this partially owned research and development company, and the fees were spent on core development projects. As at May 31, 2026, and February 28, 2026, the balance due to this company was $76,532 and $160,557, respectively. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable for a smaller reporting company.