UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549  FORM 10-Q  [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934  FOR THE QUARTERLY PERIOD ENDED AUGUST 31, 2018  OR  [_]TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934  FOR THE TRANSITION PERIOD FROM _______________ TO _______________  COMMISSION FILE NUMBER: 0-55079  ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. (Exact name of registrant as specified in its charter)  Nevada27-2343603(State or other jurisdiction of Incorporation or organization)(I.R.S. Employer Identification Number)701 North Green Valley Parkway, Suite 200
Henderson, Nevada89074(Address of principal executive offices)(Zip code)  (702) 990-3271 (Registrant’s telephone number, including area code)  ON THE MOVE SYSTEMS CORP. (Former name, former address and former fiscal year, if changed since last report)  Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [_]  Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X]   No [_]  Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  Large accelerated filer[_]Accelerated filer[_]Non-accelerated filer[_]Smaller reporting company[X]Emerging growth company[_]  If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [_]  Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [_]   No [X]  Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 7,508.089 shares of common stock were issued and outstanding as of October 19, 2018.    PAGEPART IFINANCIAL INFORMATIONITEM 1.Financial Statements3Consolidated Balance Sheets as of August 31, 2018 and February 28, 2018 (Unaudited)3Consolidated Statements of Operations for the Three and Six Months Ended August 31, 2018 and 2017 (Unaudited)4Consolidated Statements of Cash Flows for the Six Months Ended August 31, 2018 and 2017 (Unaudited)5Notes to the Consolidated Financial Statements (Unaudited)6ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations23ITEM 3.Quantitative and Qualitative Disclosures About Market Risk28ITEM 4.Controls and Procedures28PART IIOTHER INFORMATIONITEM 1.Legal Proceedings29ITEM 1A.Risk Factors29ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds29ITEM 3.Defaults Upon Senior Securities29ITEM 4.Mine Safety Disclosures29ITEM 5.Other Information29ITEM 6.Exhibits29SIGNATURES30
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PART 1 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
CONSOLIDATED BALANCE SHEETS
(Unaudited)

August 31, 2018February 28, 2018ASSETSCurrent assets:Cash$16,456$24,773Accounts receivable18,37328,000Device parts inventory265,584316,113Prepaid expenses and deposits70,27783,103Note receivable, net of allowance for bad debt of $40,000 and $0, respectively—40,000Total current assets370,690491,989Revenue earning devices, net of accumulated depreciation of $14,788 and $0, respectively173,902—Fixed assets, net of accumulated depreciation of $65,122  and $36,632, respectively123,566158,205Intangible asset, net49,52156,248Security deposit30,21630,141Total assets$747,895$736,583LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts payable and accrued expenses$1,259,413$487,243Advances payable8,5941,594Balance due on acquisition of WeSecure25,00025,000Customer deposits10,00010,000Current portion of convertible notes payable, net of discount of $2,689,736 and $3,418,636, respectively3,513,7972,117,946Loan payable - related party452,050316,142Loans payable175,000—Vehicle loan - current portion17,83017,830Current portion of accrued interest payable1,001,024694,592Derivative liability16,548,05831,113,844Total current liabilities23,010,76634,784,191Convertible notes payable, net of discount of $389,255 and $832,373, respectively175,74495,060Accrued interest payable73,57655,917Vehicle loan55,34864,332Total liabilities23,315,43434,999,500Shareholders’ deficit:Preferred Stock, undesignated; 15,645,650 shares authorized; no shares issued and outstanding——Series E Preferred Stock, $0.001 par value; 4,350,000 shares authorized; 4,350,000 shares issued and outstanding4,3504,350Series F Convertible Preferred Stock, $1.00 par value; 4,350 shares authorized; 3,450 shares issued and outstanding3,4503,450Common Stock, $0.001 par value; 480,000,000 shares authorized 2,718,001 and 1,250,600  shares issued and outstanding, respectively2,7181,250Additional paid-in capital3,078,7981,232,062Preferred stock to be issued174,070—Accumulated deficit(25,830,925)(35,504,029)Total shareholders’ deficit(22,567,539)(34,262,917)Total liabilities and shareholders’ deficit$747,895$736,583
The accompanying notes are an integral part of these unaudited consolidated financial statements.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three Months
Ended
August 31, 2018Three Months
Ended
August 31, 2017Six Months
Ended
August 31, 2018Six Months
Ended
August 31, 2017Revenues$10,175$35,000$26,841$35,000Cost of goods sold31,250—35,509—Gross profit (loss)(21,075)35,000(8,668)35,000Operating expenses:Research and development64,50182,997233,13189,633General and administrative898,290423,0812,282,217729,990Depreciation and amortization29,56014,95851,41333,694Loss on impairment of fixed assets4,73992,9424,73992,942Total operating expenses997,090613,9782,571,500946,259Loss from operations(1,018,165)(578,978)(2,580,168)(911,259)Other income (expense), net:Change in fair value of derivative liabilities(1,859,253)751,24115,992,640751,241Interest expense(1,531,674)(2,836,447)(3,684,758)(2,848,795)Loss on settlement of debt(322,755)—(54,610)—Total other income (expense), net(3,713,682)(2,085,206)12,253,272(2,097,554)Net income (loss)$(4,731,847)$(2,664,184)$9,673,104$(3,008,813)Net income (loss) per share – basic$(2.52)$(60.08)$6.07$(135.71)Net income (loss) per share – diluted$—$—$0.02$—Weighted average common shares outstanding – basic1,878,32044,3431,594,29622,171Weighted average common shares outstanding – diluted282,622,770653,504553,464,608631,332
The accompanying notes are an integral part of these unaudited consolidated financial statements.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)

Six Months
Ended
August 31, 2018Six Months
Ended
August 31, 2017CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)$9,673,104$(3,008,813)Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization51,41333,694Provision for note receivable40,000—Loss on impairment of fixed assets4,73992,942Stock-based compensation540,069—Change in fair value of derivative liabilities(15,992,640)(751,241)Interest expense related to penalties from debt defaults221,055—Interest expense related to derivative liability in excess of face value of debt684,7812,823,125Amortization of  debt discount2,352,222—Loss on settlement of debt54,610—Changes in operating assets and liabilities:Accounts receivable9,627(7,222)Deposits on robots—(150,000)Prepaid expenses12,826—Device parts inventory50,529—Accounts payable and accrued expenses784,17224,665Accrued interest payable403,79926,400Customer deposits—(10,000)Net cash used in operating activities(1,109,694)(926,450)CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of fixed assets(188,690)(64,437)Cash paid for security deposit(75)(25,747)Cash acquired in reverse capitalization—2,022Net cash used in investing activities(188,765)(88,162)CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from convertible notes payable, net818,108200,000Proceeds from loans payable171,040—Net borrowings on loan payable - related party135,90823,262Loan from OMVS to RAD prior to the reverse recapitalization—752,500Repayment of vehicle loan(8,984)(3,903)Proceeds from sale of preferred shares174,070—Net cash provided by financing activities1,290,142971,859Net change in cash(8,317)(42,753)Cash, beginning of period24,77356,907Cash, end of period$16,456$14,154Supplemental disclosure of cash and non-cash transactions:Cash paid for interest$3,213$2,870Cash paid for taxes$—$—Noncash investing and financing activities:Transfer of devices from deposits to revenue earning devices$—$62,600Debt discount from derivative liabilities$924,009$565,000Conversion of convertible notes and interest to shares of common stock$550,913$—Release of derivative liability on conversion of convertible notes payable$757,222$—Settlement and exchange of convertible notes payable$575,286$—Capitalization of accrued interest to convertible notes payable$58,288$—
The accompanying notes are an integral part of these unaudited consolidated financial statements.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL INFORMATION

Artificial Intelligence Technology Systems Inc. (formerly known as On the Move Systems Corp.) (“AITX” or the “Company”) was incorporated in Florida on March 25, 2010 and reincorporated in Nevada on February 17, 2015. On August 24, 2018, Artificial Intelligence Technology Systems Inc, changed its name from On the Move Systems Corp (“OMVS”).

Robotic Assistance Devices, LLC (“RAD”), was incorporated in the State of Nevada on July 26, 2016 as a LLC. On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc. through the issuance of 10,000 common shares to its sole shareholder.

On August 28, 2017, AITX completed the acquisition of RAD (the “Acquisition”), whereby AITX acquired all the ownership and equity interest in RAD for 3,350,000 shares of AITX Series E Preferred Stock and 2,450 shares of Series F Convertible Preferred Stock. AITX’s prior business focus was transportation services, and AITX was exploring the on-demand logistics market by developing a network of logistics partnerships. As a result of the closing of the Acquisition, AITX has succeeded to the business of RAD, in which AITX purchased all of the outstanding shares of capital stock of RAD. As a result, AITX’s business going forward will consist of one segment activity which is the delivery of artificial intelligence and robotic solutions for operational, security and monitoring needs.

The Acquisition was treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of AITX’s operations were disposed of as part of the consummation of the transaction. Therefore, no goodwill or other intangible assets were recorded by AITX as a result of the Acquisition. RAD is treated as the accounting acquirer as its stockholders control the Company after the Acquisition, even though AITX was the legal acquirer.  As a result, the assets and liabilities and the historical operations that are reflected in these financial statements are those of RAD as if RAD had always been the reporting company.

2. GOING CONCERN

The accompanying unaudited 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 six months ended August 31, 2018, the Company had negative cash flow from operating activities of $1,109,694. As of August 31, 2018, the Company has an accumulated deficit of $25,830,925 and negative working capital of $22,640,076. Management does not anticipate having positive cash flow from operations in the near future. These factors raise a 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 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.

Management has plans to address the Company’s financial situation as follows:

In the near term, management plans to continue to focus on raising the funds necessary to implement the Company’s business plan. Management will continue to seek out debt financing to obtain the capital required to meet the Company’s financial obligations. There is no assurance, however, that lenders will continue to advance capital to the Company or that the new business operations will be profitable. The possibility of failure in obtaining additional funding and the potential inability to achieve profitability raises doubts about the Company’s ability to continue as a going concern.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and in conformity with the instructions on Form 10-Q and Rule 8-03 of Regulation S-X and the related rules and regulations of the Securities and Exchange Commission (“SEC”) and should be read in conjunction with the audited financial statements and notes thereto in the Company’s latest Annual Report filed with the SEC on Form 10-K. The unaudited consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Robotic Assistance Devices, Inc., On the Move Experience, LLC and OMV Transports, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations for the three and six months ended August 31, 2018 are not necessarily indicative of the results that may be expected for the entire year.

Cash

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents consist of cash on deposit with banks and money market instruments. The Company places its cash and cash equivalents with high-quality, U.S. financial institutions and, to date has not experienced losses on any of its balances.

Accounts Receivable

Accounts receivable are comprised of balances due from customers, net of estimated allowances for uncollectible accounts. In determining collectability, historical trends are evaluated, and specific customer issues are reviewed on a periodic basis to arrive at appropriate allowances.

Device Parts Inventory

Device parts inventory is stated at the lower of cost or market using the weighted average cost method. The Company records a valuation reserve for obsolete and slow-moving inventory, relying principally on specific identification of such inventory. The Company uses these device parts in the assembly of revenue earning devices (and demo devices) as well as research and development. Depending on use, the Company will transfer the parts to the corresponding asset or expense if used in research and development.  A charge to income is taken when factors that would result in a need for an increase in the valuation, such as excess or obsolete inventory, are noted.

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.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)


Demo Devices4 yearsVehicles3 yearsComputer equipment3 yearsOffice equipment4 yearsLeasehold improvements5 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.

Intangible Assets

The Company’s intangible assets are stated at cost and amortized on a straight-line basis over their five year expected useful life. The Company periodically determines if there is any impairment in value every year.

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 August 31, 2018 and February 28, 2018, the Company had no deferred development costs.

Contingencies

Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that it is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.

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. The Company adopted Topic 606 on March 1, 2018, using the modified retrospective method applied to contracts that were not completed as of March 1, 2018. Under the modified retrospective method, prior period financial positions and results will not be adjusted. The cumulative effect adjustment recognized in the opening balances included no significant changes as a result of this adoption. While the Company does not expect fiscal year 2019 net earnings to be materially impacted by revenue recognition timing changes, Topic 606 requires certain changes to the presentation of revenues and related expenses beginning March 1, 2018. Refer to Note 4 – Revenue from Contracts with Customers for additional information.

Income Taxes

On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc., through the issuance of 10,000 common shares to its sole shareholder. Prior to the conversion on July 25, 2017, income taxes are not provided in the financial statements as presented as RAD was an LLC and the income or loss flowed through to the shareholder for the two months ended February 28, 2017.Thereafter, income taxes will be accounted for under the asset and liability method from that date forward. Deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities, and net operating loss and other tax credit carry-forwards. These items are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. RAD will record a valuation allowance to reduce the deferred income tax assets to the amount that is more likely than not to be realized.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Leases

Lease agreements are evaluated to determine if they are capital leases meeting any of the following criteria at inception: (a) transfer of ownership; (b) bargain purchase option; (c) the lease term is equal to 75 percent or more of the estimated economic life of the leased property; or (d) the present value at the beginning of the lease term of the minimum lease payments, excluding that portion of the payments representing executory costs such as insurance, maintenance, and taxes to be paid by the lessor, including any profit thereon, equals or exceeds 90 percent of the excess of the fair value of the leased property to the lessor at lease inception over any related investment tax credit retained by the lessor and expected to be realized by the lessor.

If at its inception, a lease meets any of the four lease criteria above, the lease is classified by the Company as a capital lease; and if none of the four criteria are met, the lease is classified by the Company as an operating lease.

Operating lease payments are recognized as an expense in the income statement on a straight-line basis over the lease term, whereby an equal amount of rent expense is attributed to each period during the term of the lease, regardless of when actual payments are made. This generally results in rent expense in excess of cash payments during the early years of a lease and rent expense less than cash payments in the later years. The difference between rent expense recognized and actual rental payments is recorded as deferred rent and included in liabilities.

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.

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).


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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:

Fair Value Measurement UsingAmount at
Fair ValueLevel 1Level 2Level 3August 31, 2018LiabilitiesDerivative liability – conversion features pursuant to convertible notes payable$16,548,058$—$—$16,548,058February 28, 2018LiabilitiesDerivative liability – conversion features pursuant to convertible notes payable$31,113,844$—$—$31,113,844
See Note 13, for specific inputs used in determining fair value.

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.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The anti-dilutive shares of common stock outstanding for the three and six months ended August 31, 2018 and 2017 were as follows:

For the Three Months
Ended August 31,For the Six Months
Ended August 31,2018201720182017Numerator:Net income (loss)$(4,731,847)$(2,664,184)$9,673,104$(3,008,813)Effect of common stock equivalentsAdd: interest expense on convertible debt186,366—410,184—Less: tax effect of decrease in interest expense(39,137)—(86,139)—Net income (loss) adjusted for common stock equivalents$(4,584,618)$(2,664,184)$9,997,149$(3,008,813)Denominator:Weighted average – basic1,878,32044,3431,594,29622,171Net income (loss) per share – basic$(2.52)$(60.08)$6.07$(135.71)Dilutive effect of common stock equivalents:Stock options and warrants2,294—16,436—Convertible debt271,365,054—542,476,774—Preferred stock9,377,1023,518,5829,377,1023,518,582Denominator:Weighted average shares – diluted282,622,7703,562,925553,464,6083,540,753Net income per share – diluted$(0.02)$(0.75)$0.02$(0.85)
Recently Adopted Accounting Pronouncements

See discussion of the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, above.

In August 2016, the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 will make eight targeted changes to how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU 2016-15 is effective for fiscal years beginning after December 15, 2017. The Company adopted this standard on March 1, 2018, on a retrospective basis.  There was no impact of the standard on the Company’s consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230)”, requiring that the statement of cash flows explain the change in the total cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. This guidance is effective for fiscal years, and interim reporting periods therein, beginning after December 15, 2017, with early adoption permitted. The Company adopted this standard on March 1, 2018, on a retrospective basis.  There was no impact of the standard on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU 2017-09, Modification Accounting for Share-Based Payment Arrangements. The standard amends the scope of modification accounting for share-based payment arrangements and provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under ASC 718. The new standard is effective for fiscal years beginning after December 15, 2017. There was no impact on the financial statements of adopting this new standard on March 1, 2018.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Recently Issued Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which is effective for public entities for annual reporting periods beginning after December 15, 2018. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company is currently evaluating the effects of ASU 2016-02 on its unaudited condensed financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its unaudited condensed consolidated financial statements and related disclosures.

In September 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 using a modified retrospective adoption method. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently assessing the impact this accounting standard will have on its financial statements and related disclosures.

Subsequent Events

The Company has evaluated all transactions through the date the consolidated financial statements were issued for subsequent event disclosure.

4. REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue is earned primarily from two sources: 1) direct sales of goods or services and 2) short-term rentals.

As disclosed in the revenue recognition section of Note 3 – Accounting Polices, the Company adopted Topic 606 in accordance with the effective date on March 1, 2018. Note 3 includes disclosures regarding the Company’s method of adoption and the impact on the Company’s financial statements. Upon adoption of Topic 842, also referred to above in Note 3, the Company plans to account for revenue earned from rental activities where an identified asset is transferred to the customer and the customer has the ability to control that asset, will be accounted for under this topic. Until the Company adopts Topic 842, revenues from rental activities are recognized in accordance with Topic 606. The Company is currently evaluating the effects of Topic 842 on its unaudited condensed financial statements.

Revenue is recognized on direct sales of goods or services when persuasive evidence of an arrangement exists, goods are delivered and/or services are rendered, sales price is determinable, and collection is reasonably assured. The Company recognizes revenue from its device rental activities when persuasive evidence of a contract exists, the performance obligations have been satisfied, the transaction price is fixed or determinable and collection is reasonably assured. Performance obligations associated with device rental transactions are satisfied over the rental period. Rental periods are short-term in nature. Therefore, the Company has elected to apply the practical expedient which eliminates the requirement to disclose information about remaining performance obligations. Payments are due from customers at the completion of the rental, except for customers with negotiated payment terms, generally net 30 days or less, which are invoiced and remain as accounts receivable until collected


- 12 -

ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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

Three Months Ended
August 31, 2018Six Months Ended
August 31, 2018Device rental activities$10,175$26,431Direct sales of goods and services—410$10,175$26,841
5. PREPAID EXPENSE AND DEPOSITS

Prepaid expense and deposits on device parts expected to be received within one year were comprised of the following:

August 31, 2018February 28, 2018Deposits on device parts$7,070$—Software licenses5,800—Prepaid insurance32,24222,076Prepaid travel—10,488Prepaid trade show expenses25,16550,539$70,277$83,103
6. REVENUE EARNING DEVICES

Revenue earning devices s consisted of the following:

August 31, 2018February 28, 2018Revenue earning devices$188,690$—Less: Accumulated depreciation(14,788)—$173,902$—
During the six months ended August 31, 2018, the Company made total additions to revenue earning devices of $188,690.

Depreciation expense was $11,579 and $14,788 for the three and six months ended August 31, 2018, respectively, and $6,594 and $13,706 for the three and six months ended August 31, 2017, respectively.

7. FIXED ASSETS

Fixed assets consisted of the following:

August 31, 2018February 28, 2018Automobile$136,317$136,318Computer equipment17,36317,361Office equipment5,68011,829Leasehold improvements29,32829,329188,688194,837Less: Accumulated depreciation(65,122)(36,632)$123,566$158,205
During the six months ended August 31, 2018, the Company made no additions to fixed assets and wrote -off fixed assets having a net book value of $4,739 and recorded a corresponding loss on impairment of fixed assets.

During the six months ended August 31, 2017 the Company acquired total fixed assets of $64,437. Due to several demo robots becoming non-operational during the six months ended August 31, 2017, the Company wrote down fixed assets with a net book value of $92,942 to $0 as loss on impairment of fixed assets.


- 13 -

ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Depreciation expense was $14,886 and $29,898 for the three and six months ended August 31, 2018, respectively, and $8,364 and $19,988 for the three and six months ended August 31, 2017, respectively.

8. INTANGIBLE ASSET

Intangible asset consisted of the following:

August 31, 2018February 28, 2018Intangible asset$61,901$61,901Less accumulated amortization(12,380)(5,653)$49,521$56,248
On October 2, 2017, the Company acquired goods and other intangibles through an asset purchase agreement with WeSecure Robotics, Inc. (“WeSecure”) in exchange for $125,000 payable in 5 monthly $25,000 installments commencing in October 2017 and ending February 2018. The intangible asset primarily consisted of customer relationships and lists acquired as a part of the asset purchase agreement. The Company is treating this transaction as a business combination under ASU 2017-01 – Business Combinations: Clarifying the Definition of a Business.

Under the asset purchase agreement, the two principals of WeSecure were also hired on an at will basis: one as a sales director for a salary of $8,000 per month and the other as a consultant at $1,000 per month. The salary has been committed to until September 1, 2019, regardless of employment within the Company, In addition, the two principals will receive collectively a commission of $500/month for each SMP robot rented by an identified customer for one year, as long as the customer stays with the Company for two years and an additional year of commission if the two principals remain employed with the Company through September 1, 2020. They will also receive a commission of 5% of net revenues on sales to identified customers for non-SMP robots for 2 years.  In addition, the Company agreed to issue 4,500 options to the two principals to purchase shares its common stock at an exercise price of $5.00 per share that vest on October 2, 2021.

The purchase price was allocated to the following assets as a part of this transaction:

Assets Acquired:Cash$17,000Robots, parts, and equipment46,099Intangible assets61,901Total assets acquired$125,000
Amortization expense was $3,095 and $6,727 for the three and six months ended August 31, 2018, respectively, and $0 for both the three and six months ended August 31, 2017.

At both August 31, 2018 and February 28, 2018, the balance due on acquisition to WeSecure was $25,000. The acquisition was to be fully paid by February 28, 2018 per the agreement, however no notices have been sent.

9. NOTE RECEIVABLE

On March 13, 2017, the Company loaned $40,000 to a third party vendor. The note bore interest at 18% per annum and was payable on April 13, 2017. The note was not repaid by the due date. The note was subsequently amended to bear interest of 2% per month plus a $10,000 fee. It was payable on December 31, 2017 and is secured in senior rank on all assets of the borrower. The Company evaluated the note receivable to determine whether its lending activities create a variable interest entity that would require consolidation and determined that it does not create a variable interest entity. Based on the current information available, the Company recorded a full allowance for this note of $40,000, with a corresponding adjustment to bad debt expense.


- 14 -

ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

10. CONVERTIBLE NOTES PAYABLE

Convertible notes payable consisted of the following:

BalanceBalanceInterestConversionAugust 31,February 28,IssuedMaturityRateRate per Share20182018February 28, 2011February 26, 2013 *18%$0.015(3)$32,600$32,600January 31, 2013February 28, 2017 *25%$0.010(3)119,091119,091May 31, 2013November 30, 2016 *25%$0.010(3)261,595261,595August 31, 2014November 30, 2016 *25%$0.002(3)355,652355,652November 30, 2014November 30, 2016 *25%$0.002(3)103,950103,950February 28, 2015February 28, 2017 *25%$0.001(3)63,35763,357May 31, 2015August 31, 2017 *25%$1.000(3)65,38365,383August 31, 2015August 31, 2017 *25%$0.300(3)91,62991,629November 30, 2015November 30, 201810%$0.300(3)269,791269,791February 29, 2016February 28, 201910%60% discount(2)95,24595,245May 31, 2016May 31, 201910%$0.003(3)35,10035,100July 18, 2016July 18, 201710%49% discount(2)3,5003,500December 31, 2016December 31, 20208%35% discount(2)65,00065,000January 15, 2017January 15, 20218%35% discount(2)50,00050,000January 15, 2017January 15, 20218%35% discount(2)100,000100,000January 16, 2017January 16, 20218%35% discount(2)150,000150,000March 8, 2017March 8, 202010%40% discount(2)100,000100,000March 9, 2017March 9, 20218%35% discount(2)50,00050,000March 21, 2017March 21, 2018 *22%40% discount(2)—30,000April 4, 2017December 4, 2017 *10%40% discount(2)—12,066April 19, 2017April 19, 2018 *24%50% discount(2)96,25096,250April 20, 2017January 30, 2018 *22%40% discount(1)—28,000April 26, 2017April 26, 2018 *0%$0.106767May 1, 2017May 1, 20218%35% discount50,00050,000May 4, 2017May 4, 2018 *24%40% discount143,000150,000May 15, 2017May 15, 2018 *0%$0.101,2801,280May 17, 2017May 17, 202010%40% discount(1)85,00085,000June 7, 2017June 7, 2018 *24%40% discount(2)200,000200,000June 16, 2017June 16, 2018 *0%$0.10750750July 6, 2017July 6, 2018 *24%40% discount(2)200,000200,000August 8, 2017August 8, 20188%40% discount(2)125,000125,000July 28, 2017July 28, 201815%50% discount(2)—116,875August 29, 2017August 29, 2018 *24%50% discount(2)147,500247,500September 1 ,2017September 1 ,20180%lower of 50%
discount/ $0.50187,000187,000September 12, 2017September 12, 20188%40% discount(2)—128,000September 25, 2017September 25, 201815%50% discount(2)—398,750October 4, 2017May 4, 2018 *24%40% discount(2)150,000150,000October 16, 2017October 16, 201815%50% discount(2)345,000345,000November 22, 2017November 22, 201815%50% discount(2)500,250500,250December 28, 2017August 28, 2017 *10%40% discount(2)36,50060,500December 29, 2017December 29, 201815%50% discount(2)330,000330,000January 9, 2018January 9, 20198%40% discount(2)82,50082,500January 30, 2018January 30, 201915%50% discount(2)300,000300,000February 21, 2018February 21, 201915%50% discount(2)300,000300,000March 14, 2018March 14, 201910%40% discount(2)50,000—March 16, 2018March 16, 201915%50% discount(2)95,000—June 7, 2017June 7, 2018 *8%40% discount(2)200,000—April 9, 2018April 9, 201915%50% discount(2)55,000—March 21, 2017March 21, 2018 *24%40% discount(2)15,000—March 21, 2017March 21, 2018 *24%40% discount(2)40,000—April 17, 2018April 17, 20198%45% discount(2)——April 20, 2018April 20, 20198%40% discount(2)49,904—May 2, 2018December 2, 201810%40% discount(2)77,000—May 4, 2018May 4, 201912%50% discount(2)102,765—May 14, 2018December 14, 201810%50% discount(2)51,725—May 23, 2018May 23, 201910%50% discount(2)110,000—June 6, 2018June 6, 201915%50% discount(2)296,279—June 19, 2018March 19, 201915%50% discount(2)110,649—July 6, 2017July 6, 2018 *8%40% discount(2)95,000—August 1, 2018August 1, 201915%50% discount(2)32,500—August 23, 2018August 23, 20198%45% discount(2)95,720—6,768,5326,136,681Less: current portion of convertible notes payable(6,203,533)(5,536,582)Less: discount on noncurrent convertible notes payable(389,255)(505,039)Noncurrent convertible notes payable, net of discount$175,744$95,060Current portion of convertible notes payable$6,203,533$5,536,582Less: discount on current portion of convertible notes payable(2,689,736)(3,418,636)Current portion of convertible notes payable, net of discount$3,513,797$2,117,946

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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

__________
*The indicated notes were in default as of August 31, 2018(1)The note is convertible beginning six months after the date of issuance.(2)The notes are convertible at a discount (as indicated) to the average market price and are accounted for and evaluated under ASC 480 as discussed in Note 3.(3)The conversion price is not subject to adjustment from forward or reverse stock splits.
During the three months ended August 31, 2018 and 2017, the Company incurred original issue discounts of $13,960 and $565,000, respectively, and derivative discounts of $123,401 and $0, respectively, related to new convertible notes payable. These amounts are included in discounts on convertible notes payable and are being amortized to interest expense over the life of the convertible notes payable. During the three months ended August 31, 2018 and 2017, the Company recognized interest expense related to the amortization of debt discount of $1,218,459 and $0, respectively. The Company recorded penalty interest of $35,265 during the three months ended August 31, 2018.

During the six months ended August 31, 2018 and 2017, the Company incurred original issue discounts of $62,853 and $565,000, respectively, and derivative discounts of $924,009 and $0, respectively, related to new convertible notes payable. These amounts are included in discounts on convertible notes payable and are being amortized to interest expense over the life of the convertible notes payable. During the six months ended August 31, 2018 and 2017, the Company recognized interest expense related to the amortization of debt discount of $2,352,222 and $0, respectively. The Company recorded penalty interest of $221,055 during the six months ended August 31, 2018.

All the notes above are unsecured. As of August 31, 2018, the Company had total accrued interest payable of $1,074,600, of which $1,001,024 is classified as current and $73,576 is classified as noncurrent.

Convertible notes issued

On January 5, 2018, the Company issued an additional convertible promissory note to an investor with an aggregate principal amount of $250,000, due on January 5, 2019 for cash proceeds of $225,000 payable in tranches, with an original issue discount of $25,000. Each tranche matures one year after disbursement. The promissory note is convertible into common shares of the Company and a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 25 trading days prior to conversion, and has a 10% per annum interest rate commencing on January 5, 2018. On March 14, 2018, this note was amended to include the issuance of warrants to purchase 333,333 shares of the Company’s common stock with an exercise price of $0.15 with a 3-year maturity, and to change the date of the note to March 14, 2018, coinciding with the payment of the first tranche of $50,000 including cash proceeds of $43,000, fees of $2,000 and an original issue discount of $5,000.

On March 1, 2018, the Company issued a convertible redeemable note to an investor with an aggregate principal amount of $95,000, due on March 1, 2019 for cash proceeds of $95,000. The promissory note is convertible into units of the Company comprised of one share of common stock and one warrant to purchase a share of common stock with a three-year maturity and a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 15% per annum interest rate.

In March 2018 and April 2018, an investor paid the Company $200,000 in exchange for a June 7, 2017 back end note for $200,000 that matured on June 7, 2018. The note is convertible into common shares of the Company and a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has an 8% per annum interest rate.

On April 9, 2018, the Company issued a convertible redeemable note to an investor with an aggregate principal amount of $55,000, due on April 9, 2019 for cash proceeds of $55,000. The promissory note is convertible into units of the Company comprised of one share of common stock and one warrant to purchase a share of common stock with a three-year maturity and a conversion price equal to 50% of the lowest bid price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 15% per annum interest rate.


- 16 -

ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

In April 2018, the Company received $76,000 of proceeds from an investor for two back-end notes with a total principal amount of $80,000, including original issue discounts of $4,000 and a one-year maturity. The back-end notes are convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and have an 8% per annum interest rate.

On May 2, 2018, the Company received $70,000 of proceeds from an investor for a promissory note with a principal amount of $77,000, including an original issue discounts of $7,000 and an eight-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 10% per annum interest rate.

On May 4, 2018, the Company received $71,500 of proceeds from an investor for a promissory note with a principal amount of $82,500, including an original issue discounts of $19,892 and a one-year maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 12% per annum interest rate.

On May 23, 2018, the Company received $90,108 of proceeds from an investor for a promissory note with a principal amount of $110,000, including an original issue discounts of $19,892 and an eight-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 40 trading days prior to conversion, and has a 10% per annum interest rate.

In July and August 2018, the Company received $85,000 of proceeds from an investor for a back end note date July 6, 2017 principal amount of $95,000, including an original issue discounts of $10,000 and a twelve-month maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 60% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has an 8% per annum interest rate.

On July and August 2018, the Company received $32,500 of proceeds from an investor for a promissory note with a principal amount of $32,500, and a one-year maturity. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 15% per annum interest rate commencing on August 1, 2018.

During the six months ended August 31, 2018 the Company also had the following activity:

●a debt holder transferred debt of $344,040, including accrued interest to third parties, who exchanged it for new convertible notes totaling $344,040; $100,000 with a one-year maturity, maturing on April 17, 2019, and bearing interest at 8% per annum; $144,404, with a one-year maturity, maturing on April 20, 2019, and bearing interest at 8% per annum; and $100,000 with an eight-month maturity, maturing on December 14, 2018, bearing interest at 10% per annum. A gain on settlement of debt of $268,145 was recorded that includes the amount of associated derivative liability that was written off.●a debt holder transferred debt of $299,200, including accrued interest to third parties, who exchanged it for a replacement convertible note totaling $299,200; with the same term and conditions, a one-year maturity, maturing on September 25, 2018, and bearing interest at 15%  per annum. A loss on settlement of debt of $484,484 was recorded that includes the amount of associated derivative liability that was written off.●a debt holder transferred debt of $132,149, including accrued interest to third parties, who exchanged it for a replacement convertible note totaling $132,149; with an eight-month maturity, maturing on March 19, 2019, and bearing interest at 15%  per annum. A gain on settlement of debt of $71,100 was recorded that includes the amount of associated derivative liability that was written off.●the Company exchanged a replacement note issued on April 17,2018 for principal of $100,000 and a one-year maturity, maturing on April 17, 2019, and bearing interest at 8% per annum  for another replacement note issued on August 23, 2018 for principal of $100,000 and a one-year maturity, maturing on August 23, 2019, and bearing interest at 8% per annum.  A gain on settlement of debt of $90,629 was recorded that includes the amount of associated derivative liability that was written off.

- 17 -

ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Conversions to common stock

During the six months ended August 31, 2018, holders of certain convertible notes payable elected to convert principal and accrued interest in the amounts shown below into shares of common stock. No gain or loss was recognized on conversions as they occurred within the terms of the agreement that provided for conversion.

Conversion DatePrincipal
ConvertedInterest
ConvertedFees
ConvertedTotal Amount
ConvertedShares
IssuedApril 16, 2018$132,160$—$—$132,16064,000April 26, 201814,500—50015,00014,286May 1, 201826,250——26,25025,000May 3, 20185,000——5,0004,762May 7, 201827,900——27,90030,000May 10, 201832,400——32,40040,000May 11, 201814,500—50015,00018,519May 15, 20187,060—5007,56016,000May 15, 20188,000——8,0009,877May 21, 201820,250——20,25025,000May 22, 20186,075——6,0759,000May 24, 201813,0563,300—16,35620,969May 30, 20188,182——8,18215,152May 30, 201815,000——15,00030,000June 7, 20182,922——2,9226,640June 18, 201817,000——17,00040,000June 19, 201814,500—50015,00029,412June 28, 201818,000——18,00040,000June 28, 2018(7,060)—(500)(7,560)(16,000)July 5, 201814,500—50015,00035,714July 5, 20188,818——8,81828,524July 11, 201810,200——10,20040,000July 11, 201814,500—50015,00049,020July 19, 201816,000—50016,50050,000July 19, 201811,0001,365—12,36544,055July 23, 201814,500—50015,00071,429July 25, 20185,000——5,00023,810July 31, 201811,0001,455—12,45564,195August 24, 2018—15,300—15,300102,000August 27, 20185,500—5006,000100,000August 29, 20184,280—5004,780113,814August 30, 20186,000——6,000100,000August 31, 201820,000——20,000111,111August 31, 20187,500—5008,000111,112$524,493$21,420$5,000$550,9131,467,401
11. RELATED PARTY TRANSACTIONS

For the six months ended August 31, 2018, the Company received net advances of $135,908 from its loan payable with a related party. At August 31, 2018, the balance due to the related party was $452,050, and $316,142 at February 28, 2018.

During the three and six months ended  August 31, 2018, the Company paid $60,768 and $196,108 in consulting fees for research and development to a company owned by a principal shareholder.


- 18 -

ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

12. OTHER DEBT – VEHICLE LOAN

In December 2016, the RAD entered into a vehicle loan for $47,704 secured by the vehicle. The loan is repayable over 5 years maturing November 9, 2021, and repayable $1,019 per month including interest and principal. The principal repayments were $8,984 and $3,903 for the six months ended August 31, 2018 and 2017, respectively. The balances of the amounts owed on the vehicle loan were $73,178 and $82,162 as of August 31, 2018 and February 28, 2018, respectively, of which $17,830 and $17,830 were classified as current and $55,348 and $64,332 as long-term, respectively.

13. LOANS PAYABLE

Loans payable consisted of the following:

AnnualInterestDateMaturityTypePrincipalRateJune 11, 2018June 11, 2019Promissory note(3)$48,00025%June 20, 2018August 20, 2018Promissory note(4)50,00020%July 30, 2018December 1, 2018Promissory note(2)12,00015%August 10, 2018September 1, 2018Promissory note(4)10,00025%August 16, 2018August 16, 2019Promissory note(1)25,00025%August 16, 2018October 1 ,2018Promissory note(4)10,00025%August 23, 2018October 20,2018Promissory note(4)20,00020%$175,000__________
(1)Repayable in 12 monthly installments of $2,376, commencing September 16, 2018 and secured. by the revenue earning devices of the Company having a net book value of  at least $25,000.(2)Including an original issue discount of $3,000.(3)Repayable in 12 monthly installments of $4,562, commencing August 11, 2018 and secured  by the revenue earning devices of the Company having a net book value of  at least $48,000. The Company also granted warrants to purchase 2,500 shares of the Company’s common stock, with a 3-year term and an exercise price of $3.00.(4)Note is in default. No notice has been given by the note holder.
14. DERIVATIVE LIABILITES

As of August 31, 2018, the Company revalued the fair value of all of the Company’s derivative liabilities associated with the conversion features on the convertible notes payable and determined that it had total derivative liabilities of $16,548,058.

The Company estimated the fair value of the derivative liabilities using the Monte-Carlo model using the following key assumptions during the six months August 31, 2018:

Strike price$1.00 - $0.001Fair value of Company common stock$0.0739 - $0.0110Dividend yield0.00%Expected volatility258% - 116%Risk free interest rate1.20% - 2.32%Expected term (years)0.00 - 3.66

- 19 -

ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

During the three and six months ended August 31, 2018, the Company released $75,092 and $757,222, respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes.

The changes in the derivative liabilities (Level 3 financial instruments) measured at fair value on a recurring basis for the six months ended August 31, 2018 were as follows:

Balance as of February 28, 2018$31,113,844Release of derivative liability on conversion of convertible notes payable(757,222)Debt discount due to derivative liabilities924,009Derivative liability in excess of face value of debt recorded to interest expense684,781Increase in derivative liability due to debt settlement575,286Change in fair value of derivative liabilities(15,992,640)Balance as of August  31, 2018$16,548,058
15. SHAREHOLDERS’ EQUITY (DEFICIT)

Summary of Preferred Stock Activity

During the six months ended August 31, 2018, the Company received $174,070 for the sale of 65 Series F preferred shares. As of the reporting date, these shares have not been issued and are included in preferred stock to be issued on the balance sheet.

Summary of Common Stock Activity

On August 24, 2018, the Company undertook a 100:1 reverse stock split. The share capital has been retrospectively adjusted accordingly to reflect this reverse stock split, except for the conversion price of certain convertible notes as the conversion price is not subject to adjustment from forward and reverse stock splits (see Note 10).

During the six months ended August 31, 2018, the Company issued 1,467,401 shares of its common stock for the conversion of debt and related interest and fees totaling $550,913, including $524,493 for of principal, $21,420 interest, $5,000 in fees in connection with debt converted during the period, as well as the release of the related derivative liability (see Note 11).

Summary of Stock Option Activity

As part of the asset purchase agreement described in Note 8, the Company issued 4,500 options to purchase shares at an exercise price of $5.00 per share that vest on October 2, 2021.

The options have a grant date fair value of $27,843, based on the Black-Scholes Option Pricing model with the following assumptions:

Strike price$0.05Fair value of Company’s common stock$0.06Dividend yield0.00%Expected volatility303.81%Risk free interest rate1.94%Expected term (years)4.00
The Company will amortize the $27,843 over the four-year term on a straight-line basis as stock-based compensation. For the three and six months periods ended August 31, 2018, the Company amortized $4,593 and $6,346, respectively, to stock-based compensation with a corresponding adjustment to additional paid-in capital. At August 31, 2018, the unamortized expense was $18,657 and the intrinsic value was $0.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

During the six months ended August 31, 2018, the Company issued the following warrants as part of debt conversions (see Note 10):

●On April 16, 2018, the Company issued warrants to purchase 64,000 shares of the Company’s common stock in connection with its issuance of 64,000 shares of the Company’s common stock to an investor. The warrants have an exercise price of $2.00 per share and a three-year term.●On June 6, 2018, the Company issued warrants to purchase 6,640 shares of the Company’s common stock in connection with its issuance of 6,640 shares of the Company’s common stock to an investor. The warrants have an exercise price of $0.44 per share and a three-year term.●On August 24, 2018, the Company issued warrants to purchase 102,000 shares of the Company’s common stock in connection with its issuance of 102,000 shares of the Company’s common stock to an investor. The warrants have an exercise price of $0.15 per share and a three-year term.
The Company also issued 2,500 warrants with an exercise price of $3.00 per share and a 3-year term on June 11, 2018, in connection with a loan payable (see Note 13).

The above warrants have an aggregate grant date fair value of $533,723, based on the Black-Scholes Option Pricing model with the following assumptions:

Strike price$0.15-$3.00Fair value of Company’s common stock$0.50 -$7.00Dividend yield0.00%Expected volatility305.71%-336.6%Risk free interest rate2.52%-2.68%Expected term (years)3.00-5.00
The Company recorded $533,723 to stock-based compensation with a corresponding adjustment to additional paid-in capital.

16. COMMITMENTS AND CONTINGENCIES

Litigation

Occasionally, the Company may be involved in claims and legal proceedings arising from the ordinary course of its business. The Company records a provision for a liability when it believes that is both probable that a liability has been incurred, and the amount can be reasonably estimated. If these estimates and assumptions change or prove to be incorrect, it could have a material impact on the Company’s condensed consolidated financial statements. Contingencies are inherently unpredictable, and the assessments of the value can involve a series of complex judgments about future events and can rely heavily on estimates and assumptions.

In February 2016, the Company received notice that it had been sued in the Clark County District Court of Nevada. The plaintiff alleges that the Company obtained certain trade secrets through a third party also named in the suit. The Company believes the suit is without merit and intend to vigorously defend it. An arbitration was conducted on May 9, 2017, and the Plaintiff filed a Notice of Trial de Novo, seeking a review of the merit dismissal. The outcome of this matter is uncertain and there is no specific timeline available as of the date of this filing.

Operating Lease

The Company’s principal facility is located in Orange County, California. The lease agreement includes, escalating lease payments, renewal provisions and other provisions. The lease began in April 2017 and expires in March 2022. Rent expense is recorded over the lease terms on a straight-line basis.  The security deposit of $25,747 was recorded as a long-term asset as of August 31, 2017.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
(FORMERLY ON THE MOVE SYSTEMS CORP.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

The Company also leases premises in Northern California. The lease began in August 2017 and expires in August 2020. The security deposit of $5,126 was paid on September 1, 2017. The Company shares premises with a supplier, who is the co-lessee. Through agreement with the supplier, the Company agreed to pay 75% of the lease costs and the supplier agreed to pay 25%.

On February 1, 2018, the Company entered into an additional lease for premises for a robotic control center. The lease runs from February 1, 2018 to January 31, 2021 for $550 per month.

The Company’s leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. Rent expense was $30,157 and $59,762 for the three and six months ended August 31, 2018. Rent expense was $16,317 and $ 26,222 for the three and six months ended August 31, 2017.

At August 31, 2018, the Company’s future minimum payments are as follows:

Twelve Months EndedAmountAugust 31, 2019$120,880August 31, 2020120,077August 31, 202172,284August 31, 202233,808$347,049
17. SUBSEQUENT EVENTS

Subsequent to August 31, 2018, convertible note holders converted $110,216 of principal, $1,859 interest and $3,500 in fees into 4,790,088 shares of the Company’s common stock.

Subsequent to August 31, 2018, the Company issued warrants to purchase 829,125 shares of the Company’s common stock in connection with its issuance of 829,125 shares of the Company’s common stock to an investor as a part of a debt conversion.

The warrants have a fair value of $61,983 based on the Black-Scholes option pricing model.

On September 13, 2018, the Company received $53,000 of proceeds from an investor for a promissory note with a principal amount of $53,000, maturing on June 13, 2019. The promissory note is convertible into common shares of the Company at a conversion price equal to 55% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 12% per annum interest rate.

On September 18, 2018, the Company received $50,000 of proceeds from an investor for a promissory note with a principal amount of $50,000, maturing on March 17, 2019. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 10% per annum interest rate.

On September 20, 2018, the Company received $39,350 of proceeds from an investor for a promissory note with a principal amount of $39,350, maturing on September 20, 2019. The promissory note is convertible into common shares of the Company at a conversion price equal to 50% of the lowest trading price of the Company’s common stock for the last 20 trading days prior to conversion, and has a 15% per annum interest rate.


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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 and six months ended August 31, 2018 and August 31, 2017 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/A for the year ended February 28, 2018, as filed on June 22, 2018 with the SEC as well as Form 8-K as filed with the SEC on August 31, 2017. 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 Systems Inc.

Overview

Artificial Intelligence Technology Systems Inc. (formerly On the Move Systems Corp.) was incorporated in Florida on March 25, 2010 and reincorporated in Nevada on February 17, 2015. On August 24, 2018 AITX changed its name from On the Move Systems Corp. (“OMVS”).

Robotic Assistance Devices, LLC (“RAD”), was incorporated in the State of Nevada on July 26, 2016 as a LLC. On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc. through the issuance of its 10,000 authorized common shares to its sole shareholder.

On August 28, 2017, AITX completed the acquisition of RAD (the “Acquisition”), whereby AITX acquired all the ownership and equity interest in RAD for 3,350,000 shares of AITX Series E Preferred Stock and 2,450 shares of Series F Convertible Preferred Stock. AITX’s prior business focus was transportation services, and AITX was exploring the on-demand logistics market by developing a network of logistics partnerships. As a result of the closing of the Acquisition, AITX has succeeded to the business of RAD, in which AITX purchased all of the outstanding shares of capital stock of RAD. As a result, AITX’s business going forward will consist of one segment activity which is the delivery of artificial intelligence and robotic solutions for operational, security and monitoring needs.

The Acquisition was treated as a reverse recapitalization effected by a share exchange for financial accounting and reporting purposes since substantially all of AITX’s operations were disposed of as part of the consummation of the transaction. Therefore, no goodwill or other intangible assets were recorded by AITX as a result of the Acquisition. RAD is treated as the accounting acquirer as its stockholders control the Company after the Acquisition, even though AITX was the legal acquirer.  As a result, the assets and liabilities and the historical operations that are reflected in these financial statements are those of RAD as if RAD had always been the reporting company.

Results of Operations for the Three Months Ended August 31, 2018 and 2017

The following table shows our results of operations for the three months ended August 31, 2018 and 2017. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.


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PeriodChangeThree Months
Ended
August 31, 2018Three Months
Ended
August 31, 2017DollarsPercentageRevenues$10,175$35,000$(24,825)(71%)Gross profit (loss(21,075)35,000(56,075)(160%)Operating expenses997,090613,978383,11262%Loss from operations(1,018,165)(578,978)(439,187)76%Other income (expense), net(3,713,682)(2,085,206)(1,628,476)78%Net loss$(4,731,847)$(2,664,184)$(2,067,663)78%
Revenue

Total revenue for the three-month period ended August 31, 2018 was $10,175, which represented a decrease of $24,825, compared to total revenue of $35,000 for the period ended August 31, 2017. The decrease resulted from commencing the leasing of the new  revenue earning devices, compared to the older models from 2017 which are no longer in use.

Gross profit (loss)

Total gross profit (loss) for the three-month period ended August 31, 2018 was ($21,075), which represented a decrease of $56,075, compared to total gross profit of $35,000 for the three months ended August 31, 2017. The decrease resulted from commencing the leasing of revenue earning devices in 2018, less the device parts inventory reserve, which resulted in a gross loss for this period.

Operating Expenses

PeriodChangeThree Months
Ended
August 31, 2018Three Months
Ended
August 31, 2017DollarsPercentageResearch and development$64,501$82,997$(18,496)(22%)General and administrative898,290423,081475,209112%Depreciation and amortization29,56014,95814,60298%Loss on impairment of fixed assets4,73992,942(88,203)(95%)Operating expenses$997,090$613,978$383,11262%
Our operating expenses were comprised of general and administrative expenses, research and development, depreciation and a loss on impairment 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 three-month period ended August 31, 2018 and August 31, 2017, were $997,090 and $613,978, respectively. The overall increase of $383,112 was primarily attributable to the following changes in operating expenses of:

●General and administrative expenses increased by $475,209, primarily due to the increase in stock-based compensation due to the issuance in warrants for the three months ended August 31, 2017 of $60,673, higher salary and wages of approximately $185,000 due to an increase in staff from 8 to 15 people, with the remainder increases the result of the start of RAD and AITXS’s combined operations in 2018 versus only RAD’s operations that were starting up in 2017.●Research and development decreased by $18,496 due to higher fees paid to consultants in 2017●Depreciation and amortization increased by $14,602 due to additions to fixed assets.  Loss on impairment of fixed assets decreased by $88,203 because the old revenue earning devices were written off in 2017.

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Other Income (Expense)

Other income (expense) consisted of the change of fair value of derivative instruments and interest. Other income (expense) during the three months ended August 31, 2018 and August 31, 2017, was ($3,713,682) and ($2,085,206), respectively. The $1,628,476 increase in other expense was primarily attributable to the change in the fair value of derivatives, interest expense, including interest expense related to derivative liability in excess of the face value of debt) and loss on settlement of debt. Fair value of derivatives was largely affected by the change in the market price of the Company’s common stock during the current period.

●Change in fair value of derivative liabilities increased by $2,610,494 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock.●Interest expense decreased by $1,304,773 due to a decrease in interest expense related to the derivative liability in excess of debt partially offset by an increase in interest expense on debt.●Loss (gain) on settlement of debt increased by $322,755 due to an increase in debt transfers this quarter.
Net Loss

We had a net loss of $4,731,847 for the three months ended August 31, 2018, compared to the net loss of $2,664,184 for the three months ended August 31, 2017. The change is primarily the result of the change in the fair value of the derivative liabilities and other items discussed above.

Results of Operations for the Six Months Ended August 31, 2018 and 2017

The following table shows our results of operations for the six months ended August 31, 2018 and August 31, 2017. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

PeriodChangeSix Months
Ended
August 31, 2018Six Months
Ended
August 31, 2017DollarsPercentageRevenues$26,841$35,000$(8,159)(23%)Gross profit (loss)(8,668)35,000(43,668)(125%)Operating expenses2,571,500946,2591,625,241172%Loss from operations(2,580,168)(911,259)(1,668,909)183%Other income (expense), net12,253,272(2,097,554)14,350,826(684%)Net income (loss)$9,673,104$(3,008,813)$12,681,917421%
Revenue

Total revenue for the six-month period ended August 31, 2018 was $26,841, which represented a decrease of $8,159, compared to total revenue of $35,000 for the six-month period ended August 31, 2017. The decrease resulted from commencing the leasing of the new  revenue earning devices, compared to the older models from 2017 which are no longer in use.

Gross profit (loss)

Total gross profit (loss) for the six-month period ended August 31, 2018 was ($8,668), which represented a decrease of $43,668 compared to total gross profit of $35,000 for the six months ended August 31, 2017. The decrease resulted from commencing the leasing of revenue earning devices in 2018, less the device parts inventory reserve, which resulted in a gross loss for this period.


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Operating Expenses

PeriodChangeSix Months
Ended
August 31, 2018Six Months
Ended
August 31, 2017DollarsPercentageResearch and development$233,131$89,633$143,498160%General and administrative2,282,217729,9901,552,227212%Depreciation and amortization51,41333,69417,71953%Loss on impairment of fixed assets4,73992,942(88,203)(95%)Operating expenses$2,571,500$946,259$1,625,241171%
Our operating expenses were comprised of general and administrative expenses, research and development, depreciation and a loss on impairment 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 six-month period ended August 31, 2018 and 2017 were $2,571,500 and $946,259, respectively. The overall increase of $1,625,241 in operating expenses was primarily attributable to the following increases in operating expenses of:

●General and administrative expenses – $1,522,227 primarily due to the increase in stock-based compensation due to the issuance in warrants for the six months ended August 31, 2018 of $540,069, higher salary and wages of approximately $259,000 due to an increase in staff from in staff from 8 to 15 people, with the remainder increases the result of the start of RAD and AITXS’s combined operations in 2018 versus only RAD’s operations that were starting up in 2017.●Research and development – $143,498 due to higher consulting fees paid in in first quarter of 2018 for development of new devices.●Depreciation and amortization – $17,719 due to additions to fixed assets.●Loss on impairment of fixed assets decreased by $88,203 because the old revenue earning devices were written off in 2017
Other Income (Expense)

Other income (expense) consisted of the change of fair value of derivative instruments and interest expense. Other income (expense) during the six months ended August 31, 2018 and 2017, was $12,253,272 and ($2,097,554), respectively. The $14,350,826 decrease in other expense was primarily attributable to the change in the fair value of derivatives and interest expense, including interest expense related to derivative liability in excess of the face value of debt and loss on settlement of debt. Fair value of derivatives was largely affected by the change in the market price of the Company’s common stock during the current period.

●Change in fair value of derivative liabilities decreased by $15,921,399 due to the re-valuation of derivative liability on convertible notes based on the change in the market price of the Company’s common stock.●Interest expense increased by $835,963 due to a decrease in interest expense related to the derivative liability in excess of debt partially offset by am increase in interest expense on debt.●Loss (gain) on settlement of debt increased by $54,610 due to an increase in debt transfers this quarter.
Net Income (Loss)

We had a net income of $9,673,104 for the six months ended August 31, 2018, compared to net loss of $3,008,813 for the six months ended August 31, 2017. The change is primarily the result of the change in the fair value of the derivative liabilities and other items discussed above.


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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. For the six months ended August 31, 2018, we have generated revenue and are trying to achieve positive cash flows from operations.

As of August 31, 2018, we had a cash balance of $16,456, accounts receivable of $18,373 and $23,010,766 in current liabilities. At the current cash consumption rate, we may 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:

August 31, 2018February 28, 2018Current assets$370,690$491,989Current liabilities(1)23,010,76634,784,191Working capital (deficit)$(22,640,076)$(34,292,202)__________
(1)As of August 31, 2018 and February 28, 2018, current liabilities included approximately $16.5 million and $31.1 million, respectively, of derivative liabilities that are expected to be settled in shares of the Company in accordance with the various conversion terms.
As of August 31, 2018 and February 28, 2018, we had a cash balance of $16,456 and $24,773, respectively.

Summary of Cash Flows.

For the Six
Months Ended
August 31, 2018For the Six
Months Ended
August 31, 2017Net cash used in operating activities$(1,109,694)$(926,450)Net cash used in investing activities$(188,765)$(88,162)Net cash provided by financing activities$1,290,142$971,859
Net cash used in operating activities.

Net cash used in operating activities for the six months ended August 31, 2018 was $1,109,694, which included a net income of $9,673,104, non-cash activity such as the change in fair value of derivative liabilities of $15,992,640, loss on settlement of debt of $54,610, change in operating assets of $1,260,953, interest expense related to derivative liabilities in excess of face value of debt of $684,781, amortization of debt discount of $2,352,222, penalties from debt defaults of $221,055, loss on impairment of fixed assets $4,739, stock-based compensation of $540,069, and depreciation and amortization of $51,413 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, 2018 was $188,765. This consisted primarily of the purchase of fixed assets of $188,690.

Net cash provided by financing activities.

Net cash provided by financing activities was $1,290,142 for the six months ended August 31, 2018. This consisted of proceeds from convertible notes payable of $818,108, proceeds from loans payable $171,040, net borrowings from loan payable – related party of $135,908, and proceeds from the sale of preferred stock of $174,070, offset by payments of vehicle loans of $8,984.


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Off-Balance Sheet Arrangements

None.

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are further discussed in our Annual Report on Form 10-K/A for the year ended February 28, 2018 filed with the SEC on June 22, 2018 and should be read in conjunction with the Original filing on Form 10-K filed with the SEC on June 14, 2018.

Related Party Transactions

For the six months ended August 31, 2018, the Company received net advances of $135,908 from its loan payable with a related party. At August 31, 2018, the balance due to the related party was $452,050, and $316,142 at February 28, 2018.

During the six months ended August 31, 2018, the Company paid $196,108 in consulting fees for research and development to a company owned by a principal shareholder.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable for a smaller reporting company.

ITEM 4. CONTROLS AND PROCEDURES

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, 2018. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of August 31, 2018, 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, 2018, we did not maintain effective controls over the 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, 2018, 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, who is the same person, does 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.

Change in Internal Controls Over Financial Reporting

There was no change in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.


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PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On October 12, 2015, we received notice that the Company had been sued in the United States District Court for the Central District of California. The plaintiff alleges that we obtained certain trade secrets through a third party also named in the suit. The case was dismissed in December 2015 for lack of jurisdiction.

In February 2016, we received notice that the Company had been sued in the Clark County District Court of Nevada. The plaintiff alleges that we obtained certain trade secrets through a third party also named in the suit. We believe the suit is without merit and intend to vigorously defend it. An Arbitration was conducted on May 9, 2017, Plaintiff filed a Notice of trial de Novo, seeking a review of the merit dismissal. It is counsel’s opinion this Trial de Novo is without merit and the Company should prevail.

ITEM 1A. RISK FACTORS

This item is not applicable to smaller reporting companies.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Each issuance of securities was issued without registration in reliance of the exemption from registration Section 3(a)9 of the Securities Act of 1933.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

The Company has not defaulted upon senior securities.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable to the Company.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

3.1Articles of Incorporation (1)3.2Bylaws (2)14Code of Ethics (2)21Subsidiaries of the Registrant (3)31.1Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer and principal financial and accounting officer. (3)32.1Section 1350 Certification of principal executive officer and principal financial accounting officer. (3)101XBRL data files of Financial Statement and Notes contained in this Quarterly Report on Form 10-Q. (4)__________
(1)Incorporated by reference to our Form 10-KT file with the Securities and Exchange Commission on March 12, 2018.(2)Incorporated by reference to our Form S-1 filed with the Securities and Exchange Commission on August 4, 2010.(3)Filed or furnished herewith.(4)To be submitted by amendment.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Artificial Intelligence Systems Inc.Date: November 1, 2018BY: /s/ Garett ParsonsGarett ParsonsPresident, Chief Executive Officer, Chief Financial Officer, 
Principal Accounting Officer, Treasurer and Director

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