Artificial Intelligence Technology Solutions Inc. 10-K/A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and the notes to those financial 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 the Risk Factors, Forward-Looking Statements and Business sections in this report. 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. Overview AITX was incorporated in Florida on March 25, 2010. AITX reincorporated into Nevada on February 17, 2015. AITX’ 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. - 24 - Table of Contents Results of Operations The following table shows our results of operations for the years ended February 28, 2026 and February 28, 2025. The historical results presented below are not necessarily indicative of the results that may be expected for any future period. Period Year Ended Year Ended Change February 28, 2026 February 28, 2025 Dollars Percentage Revenues $ 7,745,336 $ 6,130,886 $ 1,614,450 26 % Gross profit 5,533,700 3,744,564 1,789,136 48 % Operating expenses 17,477,097 17,691,437 (214,340 ) (1 )% Loss from operations (11,943,397 ) (13,946,873 ) 2,003,476 14 % Other income (expense), net (2,566,854 ) (4,988,719 ) 2,421,865 49 % Net loss $ (14,510,251 ) $ (18,935,592 ) $ 4,425,341 23 % The following table presents revenues from contracts with customers disaggregated by product/service: Year Ended Year Ended Change February 28, 2026 February 28, 2025 Dollars Percentage Device rental activities $ 6,920,336 $ 5,050,255 $ 1,870,081 37 % Direct sales of goods and services 825,000 1,080,631 (255,631 ) (24 )% $ 7,745,336 $ 6,130,886 $ 1,614,450 26 % Revenue Total revenue for the year ended February 28, 2026, was $7,745,336, which represented an increase of $1,614,450 or 26% compared to total revenue of $6,130,886 for the year ended February 28, 2025. Rental activities increased by $1,870,081 or 37%, as the Company continues to grow its product line and customer base. Direct sales were $255,631 or 24% lower than the prior year because most customers chose the Company’s rental model. Gross profit Total gross profit for the year ended February 28, 2026 was $5,533,700, which represented an increase of $1,789,136, compared to total gross profit of $3,744,564 for the year ended February 28, 2025. The increase is a result of the increase in revenues above, and gross profit % which was 71% for the year ended February 28, 2026 was 61% for the prior year. The gross profit % increased as the increase in higher margin rental activities in the product mix, and overhead being allocated over a higher sales base. Operating expenses Operating expenses for the years ended February 28, 2026 and February 28, 2025 comprised of the following: Period Change Year Ended February 28, 2026 Year Ended February 28, 2025 Dollars Percentage Research and development $ 4,128,155 $ 3,462,558 $ 665,597 19 % General and administrative 12,933,696 13,559,009 (625,313 ) (5 )% Depreciation and amortization 141,051 429,139 (288,088 ) (67 )% Operating lease cost and rent 251,883 240,731 11,152 5 % Loss on disposal of fixed assets 22,312 - 22,312 - % Operating expenses $ 17,477,097 $ 17,691,437 $ (214,340 ) (1 )% - 25 - Table of Contents Our operating expenses were comprised of general and administrative expenses, research and development, depreciation and amortization, operating lease and rent and a loss on disposal of fixed assets. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and rent. Our operating expenses during the years ended February 28, 2026 and February 28, 2025 were $17,477,097 and $17,691,437, respectively. The overall $214,340 decrease in operating expenses was primarily attributable to the following changes in operating expenses: ● Research and development expenses increased by $665,597 as the Company continued to focus on current product development , new software solutions and improvements. ● General and administrative expenses decreased by $625,313 primarily due to the following changes: Following is a summary of account decreases: — For the year ended February 28, 2026 stock based compensation to CEO in equity awards was $1,500,000 with a charge of $315,848 for the Employee Stock Option Plan (ESOP) all totaling $1,815,848 compared with stock based compensation to CEO in equity awards was $$1,500,000 and a charge of $331,685 for the ESOP all totaling $$1,831,685 for the year ended February 28, 2025. This represents an decrease of $15,837 in stock based compensation. The stock based compensation for the CEO is payable in Series G and has been deferred until after a year. — Wages, salaries and payroll levies for the CEO decreased by $1,388,989 which is explained by a $1,500,000 decrease in discretionary bonus charged, all of which was deferred compensation offset by a $100,000 increase in base salary increased and an $11,011 increase in payroll levies. — Professional fees decreased by $125,716 due to lower legal fees because of litigation in the prior year that has been resolved with no litigation in the current year. These decreases are partially offset by the following increases: — Wages, salaries and payroll levies for the staff increased by $91,609 due to staff increases (2). — Commissions increased by $198,781 due to higher revenues. — Office expense increased by $184,084 due to an increase in computer software purchases. — Insurance costs increased by $100,670 due to higher general and liability insurance costs. — Travel increased by $76,119 due to more overseas travel to explore and find lower cost suppliers. — RMC costs l increased by $79,102 due to higher revenues. — Marketing costs increased by $51,449 to promote new products. — Dues and subscriptions increased by $28,180 for new software subscriptions. — Bad debts expense increased by $54,723. — The remaining increases and offsetting decreases were distributed amongst other general and administrative accounts. ● Operating lease cost and rent increased by $11,152. These are due to new short -term leases in the current year. ● Depreciation and amortization decreased by $288,088 due to a change in allocation , based on experience for revenue earning devices used. ● Loss on disposal of fixed assets was $22,312 in the current year as older equipment was disposed of. - 26 - Table of Contents Other income (expense) Other income (expense) consisted of interest expense and gain on settlement of debt. Other income (expense) during the years ended February 28, 2025 and February 29, 2024, was ($2,566,584) and ($4,988,719), respectively. The change in other income (expense) was due to the following: ● Interest expense increased by $544,558 due to the following : Amortization of debt discounts increased by $264,835, and for the year ended February 28, 2026 was $536,070 compared with $271,235 for the year ended February 28, 2025. This increase was due to the amortization of new note discounts.. Interest expense was $4,147,535 for the year ended February 28, 2026, compared with $4,188,866 for the year ended February 28, 2025. This $41,331 decrease was due to the settlement of a $3.7 million loan which offset new interest on new loans. Deferred variable payment obligation (DVPO) expense was $1,260,469 for the year ended February 28, 2026, compared with $996,881 for the year ended February 28, 2025. This $263,588 increase was a result of the increase in revenues. ● Gain on settlement of debt increased by $2,999,423 to a gain on settlement of a $3.7 million loan offset by a loss on settlement of accrued interest during the current year. The Company’s loss from operations for the year ended February 28, 2026 was $11,943,397 which represented a decrease in loss of $2,003,476 compared to a loss of $13,946,873 for the year ended February 28, 2025. The higher revenues and gross profit in 2026 along with the decrease in operating expenses contributed to this change. Note that the Company had a net loss of $14,510,251 for the year ended February 28, 2026, as compared to net loss of $18,935,592 for the year ended February 28, 2025. This $4,425,341 change is mostly attributable to a the lower loss from operations and gain on settlement of debt. Going Concern The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern. For the year ended February 28, 2026, the Company had negative cash flow from operating activities of $9,344,534. As of February 28, 2026 the Company has an accumulated deficit of $171,121,742 and negative working capital of $17,017,745. Management does not anticipate having positive cash flow from operations in the near future. These factors raise substantial doubt about the Company’s ability to continue as a going concern for the twelve months following the issuance of these financial statements. The Company does not have the resources at this time to repay all its credit and debt obligations, make any payments in the form of dividends to its shareholders or fully implement its business plan. Without additional capital, the Company will not be able to remain in business. At the same time management points to its successful history with maintaining Company operations and reminds all with reasonable confidence this will continue. Management has plans to address the Company’s financial situation as follows: Management is committed to raise either non-dilutive funds or minimally dilutive funds. There is no assurance that these funds will be able to be raised nor can we provide assurance that these possible raises may not have dilutive effects. In May 2026, the Company entered into an equity financing agreement whereby an investor will purchase up to $10,000,000 of the Company’s common stock at a discount over a two-year period. There remains approximately $10 million left to issue under this arrangement. Management believes that it has the necessary support to continue operations by continuing its funding methods in the following ways : growing revenues ,through equity proceeds, and issuing debt. - 27 - Table of Contents Capital Resources The following table summarizes total current assets, liabilities and working capital for the period indicated: February 28, 2026 February 28, 2025 Current assets $ 2,935,003 $ 5,028,543 Current liabilities 19,952,748 7,576,681 Working capital $ (17,017,745 ) $ (2,548,138 ) As of February 28, 2026 and February 28, 2025, we had a cash balance of $109,043 and $865,975, respectively. Summary of Cash Flows Year Ended February 28, 2026 Year Ended February 28, 2025 Net cash used in operating activities $ (9,344,534 ) $ (12,196,388 ) Net cash provided by (used in) investing activities $ (12,861 ) $ (79,965 ) Net cash provided by financing activities $ 8,600,463 $ 13,036,402 Net cash used in operating activities for the year ended February 28, 2026 was $9,344,534, which included a net loss of $14,510,251, non-cash activity such as the gain on settlement of debt of $3,434,685, amortization of debt discount of $536,078, penalty added to the face value of loan of $24,510, stock based compensation of $1,815,848, reduction in right of use asset $141,217, accretion of lease liability $103,956, increase in related party accrued payroll and interest $132,268, inventory recovery of ($290,000), loss on disposal of revenue earning devices and fixed assets of $93,249, bad debts expense $138,405, depreciation and amortization of $2,122,730 and change in operating assets and liabilities of $3,782,141. Net cash provided by (used in) investing activities. Net cash used in investing activities for the year ended February 28, 2026 was $12,861. This consisted of the purchase of fixed assets of ($10,863), purchase of trademarks of ($1,998). Net cash provided by (used in) financing activities. Net cash provided by financing activities was $8,600,463 for the year ended February 28, 2026. This consisted of share proceeds net of issuance costs of $5,219,853, and proceeds from loans payable $4.808,171 offset by repayments of loans payable of $1,302,561 and redemption of Series C Preferred Shares of ($125,000). Off-Balance Sheet Arrangements We do not have any outstanding off-balance sheet guarantees, interest rate swap transactions or foreign currency forward contracts. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in an unconsolidated entity that provides financing, liquidity, market risk or credit support to us or that engages in leasing, hedging or research and development services with us. Significant Accounting Policies Use of Estimates In order to prepare financial statements in conformity with accounting principals generally accepted in the United States, management must make estimates, judgements and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from resolution currently anticipated by management and on which the financial statements are based. The most significant estimates included in these consolidated financial statements are those associated with the assumptions used to value equity instruments used in debt settlements, amendments and extensions. - 28 - Table of Contents Revenue Earning Devices Revenue earning devices are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful life of 48 months. The Company continually evaluates revenue earning devices to determine whether events or changes in circumstances have occurred that may warrant revision of the estimated useful life or whether the devices should be evaluated for possible impairment. The Company uses a combination of the undiscounted cash flows and market approaches in assessing whether an asset has been impaired. The Company measures impairment losses based upon the amount by which the carrying amount of the asset exceeds the fair value. Fixed Assets Fixed assets are stated at cost. Depreciation is provided on the straight-line method based on the estimated useful lives of the respective assets which range from three to five years. Major repairs or improvements are capitalized. Minor replacements and maintenance and repairs which do not improve or extend asset lives are expensed currently. Computer equipment 3 years Furniture and fixtures 3 years Office equipment 4 years Warehouse equipment 5 years Demo Devices 4 years Vehicles 3 years Leasehold improvements 5 years, the life of the lease The Company periodically evaluates the fair value of fixed assets whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is recognized in income. Research and Development Research and development costs are expensed in the period they are incurred in accordance with ASC 730, Research and Development unless they meet specific criteria related to technical, market and financial feasibility, as determined by Management, including but not limited to the establishment of a clearly defined future market for the product, and the availability of adequate resources to complete the project. If all criteria are met, the costs are deferred and amortized over the expected useful life or written off if a product is abandoned. At February 28, 2026 and February 28, 2025, the Company had no deferred development costs. Sales of Future Revenues The Company has entered into transactions, as more fully described in footnote 11, in which it has received funding from investors in exchange for which it will make payments to those investors based on the level of sales of certain revenue categories, generally based on a percentage of sales for those certain revenues. The Company determines whether these agreements constitute sales of future revenues or are in substance debt based on the facts and circumstances of each agreement, with the following primary criteria determinative of whether the agreement constitutes a sale of future revenues or debt: ● Does the agreement purport, in substance, to be a sale ● Does the Company have continuing involvement in the generation of cash flows due the investor ● Is the transaction cancellable by either party through payment of a lump sum or other transfer of assets ● Is the investors rate of return implicitly limited by the terms of the agreement ● Does the Company’s revenue for a reporting period underlying the agreement have only a minimal impact on the investor’s rate of return ● Does the investor have recourse relating to payments due In the event a transaction is determined to be a sale of future revenues, it is recorded as deferred revenue and amortized using the sum-of-the-revenue method. In the event a transaction is determined to be debt, it is recorded as debt and amortized using the effective interest method. As of the date of these financial statements, the Company has determined that all such agreements are debt. - 29 - Table of Contents Revenue Recognition ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” , supersedes the revenue recognition requirements and industry specific guidance under Revenue Recognition (Topic 605) . Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Topic 606 defines a five-step process that must be evaluated and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing accounting principles generally accepted in the United States of America (“U.S. GAAP”) including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. Distinguishing Liabilities from Equity The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity , to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares. Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity. Our CEO and Chairman holds sufficient shares of the Company’s voting stock that give sufficient voting rights under the articles of incorporation and bylaws of the Company such that the CEO and Chairman can at any time unilaterally vote to increase the number of authorized shares of common stock of the Company without the need to call a general meeting of common shareholders of the Company Initial Measurement The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received. Subsequent Measurement – Financial Instruments Classified as Liabilities The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other income (expenses). Fair Value of Financial Instruments ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles. ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). - 30 - Table of Contents The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows: ● Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date. ● Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means. ● Level 3 – Inputs that are unobservable for the asset or liability. Measured on a Recurring Basis The following table presents information about our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fell: Amount at Fair Value Measurement Using Fair Value Level 1 Level 2 Level 3 February 28, 2026 Assets Investment at cost $ 100,000 $ 50,000 $ — $ 50,000 Liabilities Incentive compensation plan payable – revaluation of equity awards payable in Series G shares $ 5,500,000 $ — $ — $ 5,500,000 February 28, 2025 Liabilities Incentive compensation plan payable – revaluation of equity awards payable in Series G shares $ 4,000,000 $ — $ — $ 4,000,000 The carrying amounts of the Company’s financial assets and liabilities, such as cash, accounts receivable, prepaid expenses and advances, accounts payable and accrued expenses, approximate their fair values because of the short maturity of these instruments. Earnings (Loss) per Share Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) available to common shareholders (numerator) by the weighted average number of shares outstanding (denominator) during the period. Diluted EPS give effect to all dilutive potential common shares outstanding during the period using the treasury stock method and convertible preferred stock using the if-converted method. In computing diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options and/or warrants. Diluted EPS excluded all dilutive potential shares if their effect is anti-dilutive. Basic loss per common share is computed based on the weighted average number of shares outstanding during the period. Diluted loss per share is computed in a manner similar to the basic loss per share, except the weighted-average number of shares outstanding is increased to include all common shares, including those with the potential to be issued by virtue of convertible debt and other such convertible instruments. Diluted loss per share contemplates a complete conversion to common shares of all convertible instruments only if they are dilutive in nature with regards to earnings per share. - 31 - Table of Contents