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.
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Results of Operations
The following table shows our results of operations for the years ended February 28, 2025 and February 29, 2024. 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, 2025
February 29, 2024
Dollars
Percentage
Revenues
Gross profit
Operating expenses
Loss from operations
Other income (expense), net
Net loss
The following table presents revenues from contracts with customers disaggregated by product/service:
Year Ended
Year Ended
Change
February 28, 2025
February 29, 2024
Dollars
Percentage
Device rental activities
Direct sales of goods and services
Revenue
Total revenue for the year ended February 28, 2025, was $6,130,886, which represented an increase of $3,903,327 or 175% compared to total revenue of $2,227,559 for the year ended February 29, 2024. Rental activities increased by $3,424,048 or 211%, as the Company continues to grow its product line and customer base. Direct sales grew by $479,279 or 80% driven by higher monitoring (RMC) revenue on new installations for the year ended February 28, 2025.
Gross profit
Total gross profit for the year ended February 28, 2025 was $3,744,564, which represented an increase of $3,178,747, compared to total gross profit of $1,096,457 for the year ended February 29, 2024. The increase is a result of the increase in revenues above, and gross profit % which was 61% for the year ended February 28, 2025 was also 25% 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. Also, in the prior year there was a higher inventory provision for the permanent impairment in value of two products that the Company discontinued in their current form. This resulted in an unusually low gross profit % for the year ended February 29, 2024.
Operating expenses
Operating expenses for the years ended February 28, 2025 and February 29, 2024 comprised of the following:
Period
Change
Year Ended
February 28, 2025
Year Ended
February 29, 2024
Dollars
Percentage
Research and development
General and administrative
Depreciation and amortization
Impairment on revenue earning devices
Operating lease cost and rent
(Gain) loss on disposal of fixed assets
Operating expenses
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Our operating expenses were comprised of general and administrative expenses, research and development, depreciation and amortization, operating lease and rent and a (gain) 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, 2025 and February 29, 2024 were $17,691,437and $14,555,229, respectively. The overall $3,126,208 increase in operating expenses was primarily attributable to the following changes in operating expenses:
Research and development expenses increased by $16,273 as the Company continued to focus on current product development and improvements. The Company moved
General and administrative expenses increased by $3,601,629 primarily due to the following changes:
For the year ended February 28, 2025 stock based compensation to CEO in equity awards was $1,500,000 with a charge of $331,685 for the Employee Stock Option Plan (ESOP) all totaling $1,831,685 compared with stock based compensation to CEO in equity awards was $1,521,000 and a charge of $272,599 for the ESOP all totaling $1,793,599 for the year ended February 29, 2024. This represents an increase of $38,086 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 increased by $1,500,000 in discretionary bonus charged, all of which is deferred compensation and will not be paid out this year. Base salary increased by $20,000.
Wages, salaries and payroll levies for the staff increased by $732,953 due to staff increases (6).
Commissions increased by $274,208 due to increased revenues.
Office expense increased by $45,157.
Insurance costs increased by $117,181 due to more employees and higher health insurance costs.
Repairs and maintenance increased by $137,901 due to repair of more active revenue earning devices in the field.
The remaining increases and offsetting decreases were distributed amongst other general and administrative accounts such as installation expense, dues and subscriptions, marketing, travel, and production supplies amongst others.
Operating lease cost and rent decreased by $19,675. There was a vehicle lease that expired during the current fiscal year.
Depreciation and amortization increased by $105,732 due to the increase in demo devices, computer equipment, warehouse equipment in fixed assets.
(Gain) loss on disposal of fixed assets decreased by $16,426 due to a vehicle disposal in 2024 that yielded a gain.
There was no impairment on revenue earning devices for the year ended February 28, 2025. Impairment on revenue earning devices was $584,177 for the year ending February 29,2024 due to the discontinuance of two products in their present form.
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 ($4,988,719) and ($6,719,304), respectively.
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The change in other income (expense) was due to the following:
Interest expense decreased by $1,301,063. Amortization of debt discounts decreased by $2,112,829, and for the year ended February 28, 2025 was $271,234 compared with $2,384,163 for the year ended February 29, 2024. This decrease was due to many notes maturing in the prior year and being fully amortized. Interest expense was $4,188,866 for the year ended February 28, 2025, compared with $4,011,681 for the year ended February 28, 2024. This $177,195 increase was due to $350,000 of new notes this year and a full years interest on the prior year’s $1,750,000 new notes, many of which were issued in the last two quarters. Deferred variable payment obligation (DVPO) expense was $996,881 for the year ended February 28, 2025, compared with $362,200 for the year ended February 29, 2024. This $634,881 increase was a result of the large increase in revenues.
Gain on settlement of debt increased by $429,522 due to a write-off of accounts payable and vehicle loans that were greater than six years old during the current fiscal year.
The Company’s loss from operations for the year ended February 28, 2025 was $13,946,873 which represented an decrease in loss of $42,539 compared to a loss of $13,989,412 for the year ended February 29, 2024. The higher revenues and gross profit in 2024 were partially offset by higher operating expenses for the reasons set out above. Note that the Company had a net loss of $18,935,592 for the year ended February 28, 2025, as compared to net loss of $20,708,716 for the year ended February 29, 2024. This $1,773,124 change is mostly attributable to a decrease in amortization expense.
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, 2025, the Company had negative cash flow from operating activities of $12,196,388. As of February 28, 2025 the Company has an accumulated deficit of $156,496,930 and negative working capital of $2,548,138. 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 September 2024, the Company entered into an equity financing agreement whereby an investor will purchase up to $30,000,000 of the Company’s common stock at a discount over a two-year period. There remains approximately $24 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 non-convertible debt.
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Capital Resources
The following table summarizes total current assets, liabilities and working capital for the period indicated:
February 28, 2025
February 29, 2024
Current assets
Current liabilities
Working capital
As of February 28, 2025 and February 29, 2024, we had a cash balance of $865,975 and $$105,926, respectively.
Summary of Cash Flows
Year Ended
February 28, 2025
Year Ended
February 29, 2024
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Net cash used in operating activities for the year ended February 28, 2025 was $12,196,388, which included a net loss of $18,935,592, non-cash activity such as the gain on settlement of debt of $468,262, amortization of debt discount of $271,234, stock based compensation of $1,831,685, reduction in right of use asset $119,151, accretion of lease liability $118,502, increase in related party accrued payroll and interest $71,927, inventory provision of ($494,000), bad debts expense $83,682, depreciation and amortization of $1,480,636 and change in operating assets and liabilities of $3,724,649.
Net cash provided by (used in) investing activities.
Net cash used in investing activities for the year ended February 28, 2025 was $79,965. This consisted of the purchase of fixed assets of ($23,724), purchase of trademarks of ($6,241) and purchase of investment of ($50,000).
Net cash provided by (used in) financing activities.
Net cash provided by financing activities was $13,036,402 for the year ended February 28, 2025. This consisted of share proceeds net of issuance costs of $12,702,010, proceeds from the issuance of Series B Preferred Shares of $278,000, proceeds from the issuance of Series C Preferred Shares of $278,580 and proceeds from loans payable $350,000 offset by repayments of loans payable of $183,000 and redemption of Series B Preferred Shares of ($389,188).
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.
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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, 2025 and February 29, 2024, 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.
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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).
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:
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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, 2025
Assets
Investment at cost
Liabilities
Incentive compensation plan payable – revaluation of equity awards payable in Series G shares
February 29, 2024
Liabilities
Incentive compensation plan payable – revaluation of equity awards payable in Series G shares
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.
Recently Issued Accounting Pronouncements
Recently Issued Accounting Standards During the Year
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) : Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity . Under ASU 2020-06, the embedded conversion features are no longer separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives under Topic 815, or that do not result in substantial premiums accounted for as paid-in capital. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost, as long as no other features require bifurcation and recognition as derivatives. The new guidance also requires the if-converted method to be applied for all convertible instruments. The amendments in ASU 2020-06 are effective for public entities, excluding smaller reporting companies as defined, for fiscal years beginning after December 15, 2021. For all other entities, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. A reporting entity is not permitted to adopt the guidance in an interim period, other than the first interim period of its fiscal year. The Company adopted the standard using a modified retrospective approach. The adjustment to the Company’s accumulated deficit at March 1, 2024 was $4,175,535 with a corresponding adjustment to loans payable.
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