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, 2019  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)  not applicable (Former name, former address and former fiscal year, if changed since last report)  Securities registered pursuant to Section 12(b) of the Act:  None  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 every
Interactive Data File required to be submitted 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 such files). Yes [_]   No [X]  Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, 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[X]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: 3,664,686,859 shares of common stock were issued and outstanding as of November 6, 2019.    PAGEPART IFINANCIAL INFORMATIONITEM 1.Financial Statements3Condensed Consolidated Balance Sheets as of August 31, 2019 and February 28, 2019 (Unaudited)3Condensed Consolidated Statements of Operations for the Three and Six Months Ended August 31, 2019 and 2018 (Unaudited)4Condensed Consolidated Statements of Stockholders’ Deficit for the Six Months Ended August 31, 2019 and 2018 (Unaudited)5Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 31, 2019 and 2018 (Unaudited)6Notes to the Condensed Consolidated Financial Statements (Unaudited)7ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations26ITEM 3.Quantitative and Qualitative Disclosures About Market Risk31ITEM 4.Controls and Procedures31PART IIOTHER INFORMATIONITEM 1.Legal Proceedings32ITEM 1A.Risk Factors32ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds32ITEM 3.Defaults Upon Senior Securities33ITEM 4.Mine Safety Disclosures33ITEM 5.Other Information33ITEM 6.Exhibits33SIGNATURES34
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PART 1 – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS

August 31, 2019
(Unaudited)February 28, 2019
(*)ASSETSCurrent assets:Cash$5,575$21,192Accounts receivable57,18639,964Device parts inventory178,862273,496Prepaid expenses and deposits—18,778Vehicles held for disposal13,25113,251Total current assets254,874366,681Revenue earning devices, net of accumulated depreciation of 78,340 and $42,784 respectively272,978187,174Fixed assets, net of accumulated depreciation of $40,614 and $29,701, respectively26,28137,194Total assets$554,133$591,049LIABILITIES AND STOCKHOLDERS’ DEFICITCurrent liabilities:Accounts payable and accrued expenses$1,007,225$1,486,488Advances payable1,59412,637Balance owed WeSecure170,00025,000Customer deposits10,00010,000Current portion of deferred variable payment obligation10,0132,108Current portion of convertible notes payable, net of discount of $60,960 and $718,015, respectively5,814,1545,484,446Loan payable - related party1,153,904782,844Current portion of loans payable503,420321,946Vehicle loan - current portion57,28657,287Current portion of accrued interest payable1,651,2141,390,706Derivative liability3,310,2546,170,139Total current liabilities13,689,06415,743,601Convertible notes payable, net of discount of $213,509 and $302,105 respectively351,490262,895Loans payable140,535140,535Deferred variable payment obligation1,002,237190,392Accrued interest payable109,13885,344Total liabilities15,292,46416,422,767Commitments and ContingenciesStockholders’ deficit:Preferred Stock, undesignated; 15,645,650 shares authorized; no shares issued and outstanding at August 31, 2019 and February 28, 2019, respectively——Series E Preferred Stock, $0.001 par value; 4,350,000 shares authorized; 4,350,000 and 4,350,000 shares issued and outstanding, respectively4,3504,350Series F Convertible Preferred Stock, $1.00 par value; 4,350 shares authorized; 3,450 and 3,450 shares issued and outstanding, respectively3,4503,450Common Stock, $0.00001 par value; 5,000,000,000 shares authorized 1,364,306,415 and 200,261,790 shares issued and outstanding, respectively see Note 1613,6432,003Additional paid-in capital4,159,9783,393,603Preferred stock to be issued174,070174,070Accumulated deficit(19,093,822)(19,409,194)Total stockholders’ deficit(14,738,331)(15,831,718)Total liabilities and stockholders’ deficit$554,133$591,049__________
*Derived from audited information

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
CONDEDNSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)

Three Months EndedSix Months EndedAugust 31, 2019August 31, 2018August 31, 2019August 31, 2018Revenues$75,024$10,175$115,329$26,841Cost of Goods Sold—31,25020335,509Gross Profit (Loss)75,024(21,075)115,126(8,668)Operating expenses:Research and development108,09764,50155,944233,131General and administrative504,358840,752904,4491,751,719Depreciation and amortization25,25029,56046,46851,413Loss on impairment of fixed assets—4,739—4,739Total operating expenses637,705939,5521,006,8612,041,002Loss from operations(562,681)(960,627)(891,735)(2,049,670)Other income (expense), net:Change in fair value of derivative liabilities712,466(1,859,253)2,476,56715,992,640Interest expense(525,019)(1,531,674)(1,381,969)(3,684,758)Gain (loss) on settlement of debt—(322,755)112,509(54,610)Total other income (expense), net187,447(3,713,682)1,207,10712,253,272Net income (loss)$(375,234)$(4,674,309)$315,372$10,203,602Net income ( loss) per share - basic$—$(2.49)$(0.01)$6.40Net income (loss) per share - diluted$—$(2.49)$—$(0.01)Weighted average common share outstanding - basic543,026,4661,878,320305,487,1721,594,296Weighted average common share outstanding - diluted14,782,274,8321,878,32014,418,908,766550,921,512
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S DEFICIT (Unaudited)  Series ESeries FAdditionalTotalPreferred StockPreferred StockCommon StockPaid-InAccumulatedStockholders’SharesAmountSharesAmountSharesAmountCapitalDeficitDeficitBalance at February 28, 20184,350,000$4,3503,450$3,4501,250,600$12$1,233,300$(35,504,029)$(34,262,917)Preferred stock payable———174,070————174,070Adjustment to derivative liability——————757,222—757,222Common stock issued for debt conversion————1,467,95315468,848—468,863Common Stock adjustment for reverse split————(552)—82,050—82,050Stock based compensation——————9,571—9,571Net income (loss)———————10,203,60210,203,602Balance at August 31, 20184,350,000$4,3503,450$177,5202,718,001$27$2,550,991$(25,300,427)$(22,567,539)Balance at February 28, 20194,350,000$4,3503,450$177,520200,261,790$2,003$3,393,603$(19,409,194)$(15,831,718)Adjustment to derivative liability——————383,318—383,318Common stock issued for debt conversion————1,164,044,62511,640383,057—394,697Stock based compensation—————————Net income (loss)———————315,372315,372Balance at August 31, 20194,350,000$4,3503,450$177,5201,364,306,415$13,643$4,159,978$(19,093,822)$(14,738,331)  The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.  - 5 -


ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)  Six Months EndedAugust 31, 2019August 31, 2018CASH FLOWS USED IN OPERATING ACTIVITIES:Net income (loss)$315,372$10,203,602Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization46,46851,413Provision for note receivable—40,000Loss on impairment of fixed assets—4,739Stock based compensation—9,571Change in fair value of derivative liabilities(2,476,567)(15,992,640)Interest expense related to penalties from debt defaults—221,055Interest expense related to derivative liability in excess of face value of debt—684,781Amortization of debt discounts657,0582,352,222(Gain) loss on settlement of debt(112,509)54,610Changes in operating assets and liabilities:Accounts receivable(17,222)9,627Prepaid expenses18,77812,826Device parts inventory(3,153)50,529Accounts payable and accrued expenses(46,510)784,172Balance owed WeSecure(10,000)—Accrued interest payable504,616403,799Advances payable(11,043)—Net cash used in operating activities(1,134,712)(1,109,694)CASH FLOWS USED IN INVESTING ACTIVITIES:Purchase of fixed assets(23,572)(188,690)Cash paid for security deposit—(75)Net cash used in investing activities(23,572)(188,765)CASH FLOWS PROVIDED BY FINANCING ACTIVITIES:Proceeds from convertible notes payable, net—818,108Proceeds from deferred variable payment obligation819,750—Proceeds from loans payable263,429171,040Repayment of loans payable(100,038)—Net borrowings on loan payable - related party159,526135,908Repayment of vehicle loan—(8,984)Proceeds from sale of preferred shares—174,070Net cash provided by financing activities1,142,6671,290,142Net change in cash(15,617)(8,317)Cash, beginning of period21,19224,773Cash, end of period$5,575$16,456Supplemental disclosure of cash and non-cash transactions:Cash paid for interest$8,654$3,213Cash paid for taxes$—$—Noncash investing and financing activities:Debt discount from derivative liabilities$—$924,009Inventory converted to revenue earning devices$97,788$94,575Conversion of convertible notes and interest to shares of common stock$394,697$550,913Release of derivative liability on conversion of convertible notes payable$383,318$757,222Settlement and exchange of convertible notes payable$—$575,286Capitalization of accrued interest to convertible notes payable and loans payable$56,280$58,288  The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.  - 6 -   ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. GENERAL INFORMATION

Artificial Intelligence Technology Solutions Inc. (“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 Solutions 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, 2019, the Company had negative cash flow from operating activities of $1,134,712. As of August 31, 2019, the Company has an accumulated deficit of $19,093,822, and negative working capital of $13,434,190. 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 substantial doubts about the Company’s ability to continue as a going concern.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and in conformity with the condensing 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 as amended and filed on November 4, 2019. The unaudited condensed 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 six months ended August 31, 2019 are not necessarily indicative of the results that may be expected for the entire year.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Actual results could differ from those estimates. Estimates are used in the fair value calculation of the derivative liability, in determination of cash flows and fair value determinations in impairment testing.

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. There were no allowances provided for the six months ended August 31, 2019 and the year ended February 28, 2019.

Device Parts Inventory

Device parts inventory is stated at the lower of cost or net realizable value 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.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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.

Demo Devices4 yearsVehicles3 yearsComputer equipment3 yearsOffice equipment4 years
The Company periodically evaluates the fair value of fixed assets whenever events or changes in circumstances indicate that its carrying amounts may not be recoverable. Upon retirement or other disposition of fixed assets, the cost and related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is recognized in income.

Research and Development

Research and development costs are expensed in the period they are incurred in accordance with ASC 730, Research and Development unless they meet specific criteria related to technical, market and financial feasibility, as determined by Management, including but not limited to the establishment of a clearly defined future market for the product, and the availability of adequate resources to complete the project. If all criteria are met, the costs are deferred and amortized over the expected useful life or written off if a product is abandoned. At August 31, 2019 and February 28, 2019, 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 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.

Sales of Future Revenues

The Company has entered into transactions, as more fully described in footnote 10, in which it has received funding from investors in exchange for which it will make payments to those investors based on the level of sales of certain revenue categories, generally based on a percentage of sales for those certain revenues. The Company determines whether these agreements constitute sales of future revenues or are in substance debt based on the facts and circumstances of each agreement, with the following primary criteria determinative of whether the agreement constitutes a sale of future revenues or debt:

●Does the agreement purport, in substance, to be a sale●Does the Company have continuing involvement in the generation of cash flows due the investor●Is the transaction cancellable by either party through payment of a lump sum or other transfer of assets●Is the investors rate of return is implicitly limited by the terms of the agreement●Does the Company’s revenue for a reporting period underlying the agreement have only a minimal impact on the investor’s rate of return●Does the investor have recourse relating to payments due
In the event a transaction is determined to be a sale of future revenues, it is recorded as deferred revenue and amortized using the sum-of-the-revenue method. In the event a transaction is determined to be debt, it is recorded as debt and amortized using the effective interest method. As of the date of these financial statements, the Company has determined that all such agreements are debt.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Revenue Recognition

ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, supersedes the revenue recognition requirements and industry specific guidance under Revenue Recognition (Topic 605). Topic 606 requires an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration the entity expects to be entitled to in exchange for those goods or services. Topic 606 defines a five-step process that must be evaluated and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under existing accounting principles generally accepted in the United States of America (“U.S. GAAP”) including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. The Company adopted Topic 606 on March 1, 2018, using the modified retrospective method. Under the modified retrospective method, prior period financial positions and results will not be adjusted. There was no cumulative effect adjustment recognized as a result of this adoption. Refer to Note 5 – 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 are 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.

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.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Initial Measurement

The Company records its financial instruments classified as liability, temporary equity or permanent equity at issuance at the fair value, or cash received.

Subsequent Measurement – Financial Instruments Classified as Liabilities

The Company records the fair value of its financial instruments classified as liabilities at each subsequent measurement date. The changes in fair value of its financial instruments classified as liabilities are recorded as other income (expenses).

Fair Value of Financial Instruments

ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”) provides a framework for measuring fair value in accordance with generally accepted accounting principles.

ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). The three levels of the fair value hierarchy under ASC Topic 820 are described as follows:

●Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.●Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.●Level 3 – Inputs that are unobservable for the asset or liability.
Measured on a Recurring Basis

The following table presents information about our liabilities measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fell:

Amount atFair Value Measurement UsingFair ValueLevel 1Level 2Level 3August 31, 2019LiabilitiesDerivative liability – conversion features pursuant to convertible notes payable$3,310,254$—$—$3,310,254February 28, 2019LiabilitiesDerivative liability – conversion features pursuant to convertible notes payable$6,170,139$—$—$6,170,139

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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

See Note 15 for specific inputs used and a description of the model 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.

See additional disclosure in Note 18.

Recently Adopted Accounting Pronouncements

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

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.

On March 1, 2019 the Company adopted 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 adopted ASU 2016-02 but does not expect any material impact on the financial statements because the leases commencing March 1, 2019 are month to month.

Recently Issued Accounting Pronouncements

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. The Company will adopt this March 1, 2020.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

4. CORRECTION OF AN ERROR IN PREVIOUSLY ISSUED FINANCIAL STATEMENTS

At February 28, 2019 the company corrected an error on how it was recording the issuance of warrants that were issued along with share conversions throughout the fiscal year. The Company had been recording it as a separate transaction recording the fair value of the warrants at conversion when the Company should have been including the warrants as part of the fair value of the share conversion. Accordingly $57,538 and $530,498 in stock based compensation was reduced for the three months and six ending August 31, 2018, respectively from the results originally reported, with a corresponding decease in paid in capital. The comparative figures have been adjusted throughout this document to reflect this change.

The impact on the financial statements for the three and six months ended August 31, 2018 are as follows:

ARTIFICIAL INTELLIGENCE TECHNOLOGY SYSTEMS INC.
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

Originally statedRestatedThree MonthsEnded
August 31, 2018AdjustmentThree MonthsEnded
August 31, 2018Revenues$10,175$—$10,175Cost of Goods Sold31,250—31,250Gross Profit(21,075)—(21,075)Operating expenses:Research and development64,501—64,501General and administrative898,290(57,538)840,752Depreciation and amortization29,560—29,560Loss on impairment of fixed assets4,739—4,739Total operating expenses997,090(57,538)939,552Loss from operations(1,018,165)57,538(960,627)Total other income (expense), net(3,713,682)—(3,713,682)Net income (loss)$(4,731,847)$57,538$(4,674,309)Net income ( loss) per share - basic$(2.52)—$(2.49)Net income (loss) per share - diluted$(2.52)—$(2.49)

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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

Originally statedRestatedSix Months Ended
August 31, 2018AdjustmentSix Months Ended
August 31, 2018Revenues$26,841$—$26,841Cost of Goods Sold35,509—35,509Gross Profit(8,668)—(8,668)Operating expenses:Research and development233,131—233,131General and administrative2,282,217(530,498)1,751,719Depreciation and amortization51,41351,413Loss on impairment of fixed assets4,739—4,739Total operating expenses2,571,500(530,498)2,041,002Loss from operations(2,580,168)530,498(2,049,670)Total other income (expense), net12,253,272—12,253,272Net income (loss)$9,673,104$530,498$10,203,602Net income ( loss) per share - basic$6.07—$6.40Net income (loss) per share - diluted$(0.01)—$(0.01)CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSCASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)$9,673,104$530,498$10,203,602Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization51,413—51,413Provision for note receivable40,000—40,000Loss on impairment of fixed assets4,739—4,739Stock based compensation540,069(530,498)9,571Change in fair value of derivative liabilities(15,992,640)—(15,992,640)Interest expense related to penalties from debt defaults221,055—221,055Interest expense related to derivative liability in excess of face value of debt684,781—684,781Amortization of debt discounts2,352,222—2,352,222Loss on settlement of debt54,610—54,610Changes in operating assets and liabilities:—Accounts receivable9,627—9,627Prepaid expenses12,826—12,826Device parts inventory50,529—50,529Accounts payable and accrued expenses784,172—784,172Accrued interest payable403,799—403,799Net cash used in operating activities(1,109,694)—(1,109,694)Net cash used in investing activities(188,765)—(188,765)Net cash provided by financing activities1,290,142—1,290,142Net change in cash(8,317)—(8,317)Cash, beginning of period24,773—24,773Cash, end of period$16,456$—$16,456

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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

5. REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue is earned primarily from two sources: 1) direct sales of goods or services and 2) short-term rentals. Direct sales of goods or services are accounted for under Topic 606, and short-term rentals are accounted for under Topic 840 (which addresses lease accounting and will be updated after the adoption of Topic 842 on March 1, 2019) as operating leases.

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. Revenue is recognized on direct sales of goods or services 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.

After adopting Topic 842, also referred to above in Note 3, the Company is accounting 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. 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.

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

Three Months Ended
August 31, 2019Six Months Ended
August 31, 2019Device rental activities$75,024$115,329Direct sales of goods and services——$75,024$115,329

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
6. PREPAID EXPENSES AND DEPOSITS

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

August 31, 2019February 28, 2019Prepaid insurance$—$18,778$—$18,778

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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

7. REVENUE EARNING DEVICES

Revenue earning devices consisted of the following:

August 31, 2019February 28, 2019Revenue earning devices$351,318$229,958Less: Accumulated depreciation(78,340)(42,784)$272,978$187,174
During the six months ended August 31, 2019, the Company made total additions to revenue earning devices of $121,360 including $97,788 in inventory transfers. During the six months ended August 31, 2018, the Company made total additions to revenue earning devices of $188,690.

Depreciation expense was $19,789 and $35,556 for the three and six months ended August 31, 2019, respectively, and $11,579 and $14,788 for the three and six months ended August 31, 2018, respectively.

8. FIXED ASSETS

Fixed assets consisted of the following:

August 31, 2019February 28, 2019Automobile$40,953$40,953Computer equipment20,26220,262Office equipment5,6805,680Leasehold improvements——66,89566,895Less: Accumulated depreciation(40,614)(29,701)$26,281$37,194
During the six months ended August, 2019 and August 31, 2018, the Company made no additions to fixed assets.

Depreciation expense was $5,461 and $10,912 for the three and six months ended August 31, 2018, respectively, and $14,886 and $29,898 for the three and six months ended August 31, 2018, respectively.

9. CUSTOMER DEPOSITS

As of February 28, 2017, the Company received a $10,000 deposit from a customer towards the rental of equipment with no expected delivery, and accordingly the deposit is expected to be returned to the customer sometime in fiscal 2020.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

10. DEFERRED VARIABLE PAYMENT OBLIGATION

On February 1, 2019 the Company entered into an agreement with an investor whereby the investor would pay up to $900,000 (including $192,500 paid in January and February 2019) in exchange for a perpetual 9% rate payment (Payments) on the Company’s reported quarterly revenue from operations excluding any gains or losses from financial instruments (Revenues). If the total investor advances turns out to be less than $900,000, this would not constitute a breach of the agreement, rather the 9% rate would be adjusted on a pro-rata basis. The investor has agreed to pay the remaining balance in minimum $60,000 monthly installments, concluding November 30, 2019. At August 31, 2019, $706,500 has been paid to the Company.

On May 9, 2019 the Company entered int two similar arrangements with two investors:

(1)The investor would pay up to $400,000 (including $143,556 paid in May 2019) in exchange for a perpetual 4% rate Payment on the Company’s reported quarterly Revenues. If the total investor advances turns out to be less than $400,000, this would not constitute a breach of the agreement, rather the 4% rate would be adjusted on a pro-rata basis. The investor has agreed to pay the remaining balance in four monthly installments of $64,111 starting July 1, 2019. At August 31, 2019, $271,778 has been paid to the Company.(2)The investor would pay up to $50,000 (including $17,444 paid in May 2019) in exchange for a perpetual 1.11% rate Payment on the Company’s reported quarterly Revenues. If the total investor advances turns out to be less than $50,000, this would not constitute a breach of the agreement, rather the 1.11% rate would be adjusted on a pro-rata basis. The investor has agreed to pay the remaining balance in four monthly installments of $8,014 starting July 1, 2019. At August 31, 2019, $33,972 has been paid to the Company.
These variable payments (Payments) are to be made 30 days after the fiscal quarter. If the Payments would deplete RAD’s available cash by more than 30%, the Payments may be deferred for up to 12 months after the quarterly report at an interest rate of 6% per annum on the unpaid amount.

In the event that at least 10% of the assets of the Company are sold by the Company, the investors would be entitled to the fair market value (FMV) of all future Payments associated with the assets sold as determined by an independent valuator to be chosen by the investors. The FMV cannot exceed 30% of the total asset disposition price defined as the total price paid for the assets plus all future Payments associated with the assets sold. In the event that the common or preferred shares are sold by the Company to a third party as to effect a change in control, then the investors must be paid the FMV of all future Payments in one lump payment. The FMV cannot exceed 30% of the share disposition price defined as the total price the third party paid for the shares plus the total value of all future Payments.

The Payments will first become payable on June 30, 2019 based on the quarterly Revenues for the quarter ended May 31, 2019 and will accrue every quarter thereafter.

The Company retains total involvement in the generation of cash flows from these revenue streams that form the basis of the payments to be made to the investors under this agreement. Because of this, the Company has determined that the agreements constitute debt agreements. As of August 31, 2019, the Company has not yet completed its assessment of the likely cash flows under these agreements, and thus, has not yet determined the effective interest rate under these agreements. The Company expects to have completed its analysis of the expected cash flows prior to the filing of the fiscal third quarter November 30, 2019 filing. As of August 31, 2019, the Company owes the investors approximately $10,000. No amounts have been recorded to date as interest, as the amounts are immaterial. As of August 31, 2019, and February 28, 2019, the balances under these agreements were $1,012,250 and $192,500, respectively.

As of the date of these financial statements the investors had fully funded their commitments under the agreements.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

11. CONVERTIBLE NOTES PAYABLE

Convertible notes payable consisted of the following:

BalanceBalanceInterestConversionAugust 31,February 28,IssuedMaturityRateRate per Share20192019February 28, 2011February 26, 2013 *7%$0.015$—$32,600January 31, 2013February 28, 2017 *10%$0.010(3)119,091119,091May 31, 2013November 30, 2016 *10%$0.010(3)261,595261,595August 31, 2014November 30, 2016 *10%$0.002(3)355,652355,652November 30, 2014November 30, 2016 *10%$0.002(3)103,950103,950February 28, 2015February 28, 2017 *10%$0.001(3)63,35763,357May 31, 2015August 31, 2017*10%$1.000(3)65,38365,383August 31, 2015August 31, 2017*10%$0.300(3)91,62991,629November 30, 2015November 30, 2018*10%$0.300(3)269,791269,791February 29, 2016February 28, 2019*10%60% discount(2)95,24595,245May 31, 2016May 31, 2019*10%$0.003(3)35,10035,100July 18, 2016July 18, 2017*10%$0.003(3)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)50,00050,000April 19, 2017April 19, 2018*15%50% discount(2)—96,250April 26, 2017April 26, 2018*0%$0.0016868May 1, 2017May 1, 20218%35% discount(2)50,00050,000May 4, 2017May 4, 2018*8%40% discount(2)35,585131,450May 15, 2017May 15, 2018*0%$0.0011,2801,280May 17, 2017May 17, 202010%40% discount(1)85,00085,000June 7, 2017June 7, 2018*8%40% discount(2)156,764180,964June 16, 2017June 16, 2018*0%$0.001750750July 6, 2017July 6, 2018*8%40% discount(2)200,000200,000August 8, 2017August 8, 2018*8%40% discount(2)125,000125,000August 29, 2017August 29, 2018*15%50% discount(2)147,500147,500October 4, 2017May 4, 2018*8%40% discount(2)150,000150,000October 16, 2017October 16, 2018*15%50% discount(2)175,093204,067November 22, 2017November 22, 2018*15%50% discount(2)500,250500,250December 28, 2017December 28, 2017*10%40% discount(2)28,15028,150December 29, 2017December 29, 2018*15%50% discount(2)330,000330,000January 9, 2018January 9, 2019*8%40% discount(2)(1)79,50879,508January 30, 2018January 30, 2019*15%50% discount(2)(1)300,000300,000February 21, 2018February 21, 2019*15%50% discount(2)(1)300,000300,000March 14, 2018March 14, 2019*10%40% discount(2)50,00050,000June 7, 2017June 9, 2019*8%40% discount(2)200,000200,000April 9, 2018April 9, 2019*15%50% discount(2)55,00055,000March 21, 2017March 21, 2018*8%40% discount(2)40,00040,000April 20, 2018April 20, 2019*8%40% discount(2)97,65965,106May 2, 2018December 2, 2018*10%40% discount(2)70,68270,682May 4, 2018May 4, 2019*12%50% discount(2)123,750123,750May 14, 2018December 14, 2018*10%50% discount(2)33,54233,542May 23, 2018May 23, 2019*10%50% discount(2)110,000110,000June 6, 2018June 6, 2019*15%50% discount(2)282,949282,949June 19, 2018March 19, 2019*15%50% discount(2)87,27487,274July 6, 2017June 9, 2019*8%40% discount(2)200,000200,000August 1, 2018August 1, 2019*15%50% discount(2)32,50032,500August 23, 2018August 23, 2019*8%45% discount(2)70,12377,435September 13, 2018June 30, 2019*12%45% discount(2)9,20079,500September 17, 2018March 17, 2019*10%50% discount(2)4,9454,945September 20, 2018September 20, 201915%50% discount(2)34,95039,350September 24, 2018June 24, 2019*8%40% discount(2)44,00044,000August 8, 2017June 9, 2019*8%40% discount(2)125,000125,000November 8, 2018August 15, 2019*12%45% discount(2)79,50079,500November 26, 2018May 26, 2019*10%50% discount(2)44,79944,7986,440,1146,767,461Less: current portion of convertible notes payable(5,875,114)(6,202,461)Less: discount on noncurrent convertible notes payable(213,510)(302,105)Noncurrent convertible notes payable, net of discount$351,490$262,895Current portion of convertible notes payable$5,875,114$6,202,461Less: discount on current portion of convertible notes payable(60,960)(718,015)Current portion of convertible notes payable, net of discount$5,814,154$5,484,446

- 18 -

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

__________
*The indicated notes were in default as of August 31, 2019. Default interest rate 24%(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, 2019 and 2019, the Company incurred original issue discounts of $0 and $13,960, respectively, and derivative discounts of $0 and $123,401, 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, 2019 and 2018, the Company recognized interest expense related to the amortization of debt discount of $161,870 and $1,218,459, respectively. The Company recorded penalty interest of $35,265 during the three months ended August 31, 2018.

During the six months ended August 31, 2019 and 2018, the Company incurred original issue discounts of $0 and $62,853, respectively, and derivative discounts of $0 and $924,009, 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, 2019 and 2018, the Company recognized interest expense related to the amortization of debt discount of $660,100 and $2,352,222, respectively. The Company recorded penalty interest of $32,553 and $221,055 during the six months ended August 31, 2019 and August 31, 2018, respectively.

All the notes above are unsecured. As of August 31, 2019, the Company had total accrued interest payable of $1,760,352, of which $1,651,214 is classified as current and $109,138 is classified as noncurrent.

The Company determined that the embedded conversion features in the convertibles notes described below should be accounted for as derivative liabilities as a result of their variable conversion rates.

During the six months ended August 31, 2019, the Company also had the following convertible note activity:

●The Company wrote off a note payable for $32,600 and related interest of $97,139. The note has matured in February 2013,  the company cannot contact the lender and the note is legally prescribed. A gain on settlement of debt of $129,739 was recorded..●The company recorded a $32,553 penalty as increase on the 4/20/2018 note, with a corresponding charge to interest.●During the six months ended August 31, 2019, holders of certain convertible notes payable elected to convert a total of $327,302 of principal and $66,895 accrued interest, and $500 of fees into 1,164,044,625 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.
12. RELATED PARTY TRANSACTIONS

For the six months ended August 31, 2019 and 2018, the Company received net advances of $159,526 and $135,908, respectively, from its loan payable-related party. At August 31, 2019, the loan payable-related party was $1,153,904 and $782,844 at February 28, 2019. At August 31, 2019, included in the balance due to the related party is $526,633 of deferred salary and interest, $331,602 of which bears interest at 12%. At February 28, 2019, included in the balance due to the related party is $352,392 of deferred salary and interest, $210,000 of which bears interest at 12%. The accrued interest included at August 31, 2019 and February 28, 2019 was $34,917 and $13,650, respectively.


- 19 -

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

During the three and six months ended August 31, 2019 the Company paid $54,222 and $(42,852), respectively in consulting fees for research and development to a company owned by a principal shareholder. The credit received in the quarter ended May 31, 2019 were a result of billing corrections of ($106,444) and after adjusting for this, would bring total charges in the six months ended August 31, 2019 to $63,592. 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.

13. OTHER DEBT – VEHICLE LOAN

In December 2016, 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. In November 2017, RAD entered into another vehicle loan secured by the vehicle for $47,661. The loan is repayable over 5 years, maturing October 24, 2022 and repayable at $923 per month including interest and principal. The principal repayments were $0 and $8,984 for the six months ended August 31, 2019 and 2018, respectively. Regarding the second vehicle loan, the vehicle was returned at the end of fiscal 2019 and the car was subsequently sold by the lender for proceeds of $21,907 which went to reduce the outstanding balance of the loan. A loss of $3,257 was recorded as well. A balance of $21,578 remains on this vehicle loan at August 31, 2019. The remaining total balances of the amounts owed on the vehicle loans were $57,286 and $57,287 as of August 31, 2019 and February 28, 2019, respectively, of which all is current. The Company ceased making payments of principal and interest during the year and the company will return the remaining vehicle to the financing company for disposal in the upcoming months. The company has re-allocated the remaining vehicle from fixed assets to vehicles for disposal at the remaining net book value of $13,251 at August 31, 2019 and February 28, 2019.

14. LOANS PAYABLE

Loans payable consisted of the following at August 31, 2019:

AnnualInterestDateMaturityDescriptionPrincipalRateJune 11, 2018June 11, 2019Promissory note(3)48,00025%*August 10, 2018September 1, 2018Promissory note10,00025%*August 16, 2018August 16, 2019Promissory note(1)22,62425%*August 16, 2018October 1, 2018Promissory note10,00025%*August 23, 2018October 20, 2018Promissory note5,50620%*October 10, 2018December 10, 2018Promissory note(8)4,95620%*October 11, 2018October 11, 2019Promissory note(10)23,00020%August 5, 2019March 11, 2020Factoring Agreement(4)70,725(4)July 22, 2019November 15, 2019Factoring Agreement(9)27,813(9)July 9, 2019January 5, 2020Factoring Agreement(5)28,843(5)January 31, 2019June 30, 2019Promissory note(2)78,43215%*January 24, 2019January 24,2021Loan(11)140,53511%May 9, 2019June 30, 2019Promissory note(6)7,85015%*May 31, 2019June 30, 2019Promissory note(7)86,56715%*June 26, 2019June 26, 2020Promissory note(12)79,10415%643,955Less current portion of loans payable140,535Non-current portion of loans payable503,420__________
*Note is in default. No notice has been given by the note holder.(1)Repayable in 12 monthly instalments of $2,376 commencing September 16, 2018 and secured by revenue earning devices having a net book value of at least $25,000.Only one $2,376 repayment has been made by the Company and no notices have been received. Accrued interest of $795 has been recorded this quarter.(2)The note may be pre-payable at any time. The note balance includes 33% original issue discount of $25,882.

- 20 -

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

(3)Repayable in 12 monthly instalments of $4,562 commencing August 11, 2018 and secured by revenue earning devices having a net book value of at least $48,000. No repayments have been made by the Company and no notices have been received.(4)Total loan $79,750, repayable $475 per business day including fees and interest of $25,170. Original cash proceeds of $31,353 and $23,227 carried from previous loan less repayment of $9,025. Previous loan ending December 19, 2019 of $31,080 including additional interest and fees of $11,111 was repaid this quarter. The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guaranty bv the controlling shareholder of the Company.(5)Total loan of $41.700, repayable $348 per business day including fees and interest of $11,700. Original proceeds of $30,000 less repayment of $12,058.The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guarantee by the controlling shareholder of the Company.(6)The note may be pre-payable at any time. The note balance includes 33% original issue discount of $2,590.(7)The note may be pre-payable at any time. The note balance includes 33% original issue discount of $28,567.(8)Repayable in 10 monthly instalments of $848 commencing January 10, 2019 and secured by revenue earning devices having a net book value of at least $186,000. $2,544 repaid this quarter.(9)Total loan $52,150, repayable $869 per business day including fees and interest of $17,150. Original cash proceeds of $35,000  less repayment of 24,337. The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guaranty bv the controlling shareholder of the Company.(10)$20,000 repaid in quarter ended February 28, 2019.(11)$185,000 Canadian loan. Interest payable every calendar quarter commencing June30, 2019, if unpaid accrued interest to be paid at maturity. An additional interest amount calculated as 4% of RAD revenues from SCOT rentals for the fiscal years 2020 and 2021 shall be payable March 31, 2020 and March 31, 2021, respectively. Secured by a general security charging all of RAD’s present and after-acquired property in favour of the lender on a first priority basis subject to the following: the lender’s security in this respect shall be post-poneable to security in favour of institutional financing obtained by RAD.(12)The note may be pre-payable at any time. The note balance includes 33% original issue discount of $26,104.
During the six months ended August 31, 2019 the Company received proceeds of $263,429 and repaid $100,038 of loan payable.

During the three months ended August 31, 2019 the Company received proceeds of $159,573 and repaid $69,498 of loan payable.

15. DERIVATIVE LIABILITES

As of August 31, 2019, 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 a total derivative liability of $3,310,254.

The Company estimated the fair value of the derivative liabilities using the multinomial lattice model using the following key assumptions during the six months ended August 31, 2019:

Strike price$1.00 - $0.001Fair value of Company common stock$0.0003 - $0.0015Dividend yield0.00%Expected volatility293.32% - 183.6%Risk free interest rate1.20% - 2.58%Expected term (years)0.05 - 3.12

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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

During the three and six months ended August 31, 2019, the Company released $228,634 and $383,318, respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes. 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, 2019 were as follows:

Balance as of February 28, 2019$6,170,139Release of derivative liability on conversion of convertible notes payable(383,318)Change in fair value of derivative liabilities(2,476,567)Balance as of August 31, 2019$3,310,254
16. STOCKHOLDERS’ EQUITY (DEFICIT)

Summary of Common Stock Activity

On April 23, 2019 the Board of Directors approved an increase in authorized share capital to 5,000,000,000 shares of common stock and to change the par value of the common stock to $0.00001 per share. This became effective on June 20, 2019. The share capital has been retrospectively adjusted accordingly to reflect this change in par value.

On April 23, 2019 the Board of Directors were granted approval to effectuate at its sole discretion a Reverse Stock Split of the Company’s Common Stock, by a ratio of no less than 2:1 and not more than 2000:1, with such ratio to be determined at the sole discretion of the Board and with the process to effect such Reverse Split to be commenced at any time, if at all, within a period of 6 months after May 31, 2019. As of this filing no Reverse splits have been authorized by the Board of Directors.

During the six months ended August 31, 2019, the Company issued 1,164,044,625 shares of its common stock for the conversion of debt and related interest and fees totaling $394.697 including $327,302 of principal and $66,895 accrued interest, and $500 of fees in connection with debt converted during the period, as well as the release of the related derivative liability (see Note 15).

Summary of Stock Option Activity

Number of WarrantsWeighted Average Exercise PriceWeighted Average Remaining YearsOutstanding at March 1, 201920,436,309$    0.012.56Issued———Exercised———Forfeited and cancelled———Outstanding at August 31, 201920,436,309$    0.012.31
For the six months ended August 31, 2019 and August 31, 2018, the Company recorded a total of $0 and $9,571, respectively, to stock-based compensation for options and warrants with a corresponding adjustment to additional paid-in capital.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

17. 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 April 2019 the principals of WeSecure (see Note 8) filed lawsuit in California Superior Court seeking damages for non-payment balance of sale of WeSecure assets totaling $25,000, unpaid consulting fees payable to the two principals through to September 2019 totaling $125,924, and labor code violations of $48,434 all totaling $199,358 plus attorney’s fees and damages. The parties finally settled all claims with a full release for $180,000 in June 2019 payable in 14 monthly instalments as follows:

20192020Total6/30/19$5,0001/26/2020$15,0007/30/19$5,0002/25/2020$15,0008/29/19$7,5003/26/2020$15,0009/28/19$7,5004/25/2020$15,00010/28/19$10,0005/25/2020$20,00011/27/19$10,0006/25/2020$20,00012/27/19$15,0007/24/2020$20,000Total$60,000$120,000$180,000
The company has fully accrued the above $180,000.

As of October 14, 2019 the Company has paid $17,500. As of filing the September through November instalments are in arrears.

The related legal costs are expensed as incurred.

The Company currently maintains an office at 1218-1222 Magnolia Ave, Suite 106 Bldg. H, Corona, California 92881 pursuant to a month to month lease commencing March 1, 2019. The Company’s annual rent is $12,000 per year.

RAD maintains a mailing address for 31103 Ranch Viejo Road, Suite d2114 for a nominal fee of $264/yr. RAD previously had its offices at 23121 La Cadena Suite B/C Laguna Hills, California 92675, pursuant to a five-year term ending March 31, 2022. Its annual rental cost for this facility was approximately $65,000, plus a proportionate share of operating expenses of approximately $35,000 annually. The Company also leased premises in northern California. The lease was for three years, beginning in August 2017, and would expire in August 2020. The Company shared these premises with a former supplier who was the co-lessee. Through agreement with the supplier, the Company was to pay 75% of the lease costs and the supplier was to pay 25%. The Company’s share of rent costs was approximately $43,000 annually. On February 1, 2018 the Company entered into an additional lease for premises for a robotic control center. The lease ran from February 1, 2018 to January 31, 2021 for $6,600 annually. At the end of fiscal 2019 the Company terminated all three preceding leases through verbal arrangement with the landlord. Regarding the lease at La Cadena, the Company agreed to a settlement amount to cover unpaid rent, commissions and leasehold improvements paid by the landlord totaling $62,039 to be paid by the Company in 4 monthly instalments of $5,000 commencing August 1, 2019 with the remaining balance to be paid in $10,000 monthly instalments thereafter. The Company recorded the $62,039 as a loss on settlement. No further liability was recorded for both the northern California and robotic control center leases.


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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

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 $1,000 and $4,000 for the three and six months ended August 31, 2019, respectively and $30,157 and $59,762 for the three and six months ended August 31, 2018, respectively.

At August 31, 2019 there were no Company’s future minimum payments.

Convertible Notes Payable

Certain convertible notes payable carry conditions whereby in the event of ant default of any condition the Company would be subject to certain financial penalties.

18. EARNINGS (LOSS) PER SHARE

The net income (loss) per common share amounts were determined as follows:

For the Three Months EndedFor the Six Months EndedAugust 31,August 31,2019201820192018Numerator:Net loss available to common shareholders(375,234)(4,674,309)315,37210,203,602Effect of common stock equivalentsAdd: interest expense on convertible debt150,848—281,204410,184Add (less) loss (gain) on change of derivative liabilities(712,466)—(2,476,567)(15,992,640)Net income (loss) adjusted for common stock equivalents(936,852)(4,674,309)(1,879,991)(5,378,854)Denominator:Weighted average shares – basic543,026,4861,878,320305,487,1721,594,296Net income (loss) per share – basic$(0.00)$(2.49)$(0.01)$6.40Dilutive effect of common stock equivalents:Warrants—1,357,411—16,436Convertible Debt9,406,564,4621,781,310,3339,406,564,462553,933,579Preferred shares*4,706,857,132542,550,0954,706,857,1329,377,102Denominator:Weighted average shares – diluted14,782,274,8322,327,096,15914,418,908,766564,921,413Net income (loss) per share – diluted$(0.00)$(2.49)$(0.00)$(0.01)

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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.
NOTES TO CONDEDNSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

18. SUBSEQUENT EVENTS

Subsequent to August 31, 2019:

-convertible note holders converted $234,904 principal, and $110,965 interest into 2,300,380,444 shares of the Company’s common stock.-the Company entered into a factoring loan on September 17, 2019 with a 10 week maturity totaling $24,000 including cash proceeds of $20,000 and $4,000 in interest and fees. Repayable $2,480 per week with $9,920 repaid to date.-the Company entered into a factoring loan on September 27, 2019 with a 5 month maturity totaling $59,600 including cash proceeds of $40,000 and $19,600 in interest and fees Repayable $590 per business day with $5,905 repaid to date.-On September 5, 2019, the Company received $25,000 of proceeds from an investor for a promissory note with a principal amount of $26,250, maturing on August 29, 2020. 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 8% per annum interest rate.-the Company repaid $66,127 in various other loans.-the Company received $194,250 from investors in advances on the deferred variable payment obligation.

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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 six months ended August 31, 2019 and August 31, 2018 should be read in conjunction with our unaudited consolidated financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under Item 1A. Risk Factors appearing in our Annual Report on Form 10-K for the year ended February 28, 2019, as filed on August 26, 2019 with the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

Unless expressly indicated or the context requires otherwise, the terms “AITX”, the “Company”, “we”, “us”, and “our” refer to Artificial Intelligence Technology Solutions Inc.

Overview

Artificial Intelligence Technology Solutions 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.


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Results of Operations for the Three Months Ended August 31, 2019 and 2018

The following table shows our results of operations for the three months ended August 31, 2019 and 2018. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

PeriodChangeThree Months
Ended
August 31, 2019Three Months
Ended
August 31, 2018DollarsPercentageRevenues$75,024$10,175$64,849637%Gross profit (loss)75,024(21,075)96,099(456%)Operating expenses637,705939,552(301,847)(32%)Loss from operations(562,681)(960,627)397,946(41%)Other income (expense), net187,447(3,713,682)3,901,129105%Net loss$(375,234)$(4,674,309)$4,299,075(92%)
Revenue

Total revenue for the three-month period ended August 31, 2019 was $75,024 which represented an increase of $64,489, compared to total revenue of $10,175 for the three months ended August 31, 2018. As the Company only began its rental activities of its new products in the quarter ended May 31, 2018 this 637% increase is a result of both a natural increase in business over time and a larger product line.

Gross profit

Total gross profit for the three-month period ended August 31, 2019 was $75,024 which represented an increase of $96,099, compared to gross loss of $21,075 for the three months ended August 31, 2018. The increase resulted primarily from the increased revenues noted above.

Operating Expenses

Our operating expenses were comprised of general and administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and rent. Our operating expenses during the three-month period ended August 31, 2019 and August 31, 2018, were $637,705 and $939,552, respectively. The overall decrease of $301,847 was primarily attributable to the following changes in operating expenses of:

PeriodChangeThree Months
Ended
August 31, 2019Three Months
Ended
August 31, 2018DollarsPercentageResearch and development$108,097$64,501$43,59668%General and administrative504,358840,752(336,394)(40%)Depreciation and amortization25,25029,560(4,310)(15%)Loss on impairment of fixed assets—4,739(4,739)(100%)Operating expenses$637,705$939,552$(301,847)(32%)

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●General and administrative expenses decreased by decreased by $336,394. In comparing the three months ended August 31, 2019 and August 31, 2018 this decrease was primarily due to decreases in wages and salaries of $259,385 as the company had only one management employee in 2019 and used consultants for other duties whereas in 2018 there were 15 employees. This decrease in salary was partially offset by increases in fees paid to subcontractors which increased 88,114. The decrease in personnel also lead to a decrease in insurance costs by $68,603. Also, professional fees decreased by $29,543 mostly due to a reduction in auditor fees, trade show expenses and travel decreased by $13,737 as the Company had more trade shows in 2018 introducing new SCOT and other upcoming products, and rent decreased by $25,556 due the company going from renting 3 locations in 2018 to only one new location in 2019 as disclosed in Note 17.●Research and development increased by $43,596 for the 3 months ended August 31, 2019 due to more product development on new products being done this period as compared to the prior year’s comparative period.●Depreciation and amortization decreased by $4,310. There were no significant changes in fixed assets.
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, 2019 and August 31, 2018, was $187,447 and $(3,713,682), respectively. The $3,901,129 increase in other income 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 decrease in the market price of the Company’s common stock during the current period.

●Change in fair value of derivative liabilities increased by $2,571,719 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 $1,006,655 due to a decrease in interest expense related to the derivative liability in excess of debt and a decrease in debt discounts that was partially offset by an increase in interest expense on debt.●Loss on settlement of debt decreased by $322,755 due to a decrease in the number and amount of debt settlements this quarter over the prior year’s quarter.
Net incomes

We had net loss of $375,234 for the three months ended August 31, 2019, compared to net loss of $4,674,309 for the three months ended August 31, 2018. 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, 2019 and 2018

The following table shows our results of operations for the six months ended August 31, 2019 and 2018. 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, 2019Six Months
Ended
August 31, 2018DollarsPercentageRevenues$115,329$26,841$88,488330%Gross profit (loss)115,126(8,668)123,7941428%Operating expenses1,006,8612,041,002(1,034,141)(51%)Loss from operations(891,735)(2,049,670)1,157,935(56%)Other income (expense), net1,207,10712,253,272(11,046,165)90%Net income (loss)$315,372$10,203,602$(9,888,230)(97%)

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Revenue

Total revenue for the six-month period ended August 31, 2019 was $115,329 which represented an increase of $84,448, compared to total revenue of $26,841 for the six months ended August 31, 2018. As the Company only began its rental activities of its new products in the quarter ended May 31, 2018 this 330% increase is a result of both a natural increase in business over time and a larger product line.

Gross profit

Total gross profit for the six-month period ended August 31, 2019 was $115,126 which represented an increase of $123,794, compared to gross loss of $8,075 for the six months ended August 31, 2018. The increase resulted primarily from the increased revenues noted above.

Operating Expenses

Our operating expenses were comprised of general and administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and rent. Our operating expenses during the six-month period ended August 31, 2019 and August 31, 2018, were $1,006,861 and $2,041,002, respectively. The overall decrease of $1,034,141 was primarily attributable to the following changes in operating expenses of:

PeriodChangeSix Months
Ended
August 31, 2019Six Months
Ended
August 31, 2018DollarsPercentageResearch and development$55,944$233,131$(177,187)(76%)General and administrative904,4491,751,719(847,270)(48%)Depreciation and amortization46,46851,413(4,945)(10%)Loss on impairment of fixed assets—4,739(4,739)(100%)Operating expenses$1,006,861$2,041,002$(1,034,141)(51%)
●General and administrative expenses decreased by $847,270. In comparing the six months ended August 31, 2019 and August 31, 2018 this decrease was primarily due to decreases in wages and salaries of $540,025 as the company had only one management employee in 2019 and used consultants for other duties whereas in 2018 there were 15 employees. This decrease in salary was partially offset by increases in fees paid to subcontractors which increased 189,654. The decrease in personnel also lead to a decrease in insurance costs by $71,955. Also, professional fees decreased by $86,463 mostly due to a reduction in auditor fees, trade show expenses decreased by $129,895 as the Company had more trade shows in 2018 introducing new SCOT and other upcoming products, travel decreased by $43,480 and rent decreased by $55,762 due the company going from renting 3 locations in 2018 to only one new location in 2019 as disclosed in Note 17.●Research and development decreased by $177,187 due to credits received in the quarter ended May 31, 2019 that were a result of billing corrections of ($106,444) and the charges in the six months ended August 31, 2019 were $162,388 compared to $233,131 for the prior year’s six month period. This decrease was due to less product development being done overall this period as in 2018 the new product line was being developed.●Depreciation and amortization decreased by $4,945. There were no significant changes in fixed assets.●Loss on impairment of fixed assets decreased by $4,739. There were no fixed asset impairments in 2019.
Other Income (Expense)

Other income (expense) consisted of the change of fair value of derivative instruments and interest. Other income during the six months ended August 31, 2019 and August 31, 2018, was $1,207,107 and $12,253,272, respectively. The $11,046,165 increase in other income 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 decrease in the market price of the Company’s common stock during the current period.


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●Change in fair value of derivative liabilities increased by $13,516,073 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 $2,302,789 due to a decrease in interest expense related to the derivative liability in excess of debt and a decrease in debt discounts that was partially offset by an increase in interest expense on debt.●Gain on settlement of debt increased by $167,119 due to a decrease in the number and amount of debt settlements this quarter over the prior year’s quarter.
Net incomes

We had net income of $315,372 for the six months ended August 31, 2019, compared to net income of $10,203,602 for the six months ended August 31, 2019. The change is primarily the result of the change in the fair value of the derivative liabilities and other items discussed above.

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, 2019, we have generated revenue and are trying to achieve positive cash flows from operations.

As of August 31, 2019, we had a cash balance of $5,575, accounts receivable of $57,186 and $13,689,064 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, 2019February 28, 2019Current assets$254,874$366,681Current liabilities(1)13,689,06415,743,601Working capital$(13,434,190)$(15,376,920)__________
(1)As of August 31, 2019 and February 28, 2019, current liabilities included approximately $3.3 million and $6.2 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, 2019 and February 28, 2019, we had a cash balance of $5,575 and $21,192, respectively.

Summary of Cash Flows

Six Months
Ended
August 31, 2019Six Months
Ended
August 31, 2018Net cash used in operating activities$(1,134,712)$(1,109,694)Net cash used in investing activities$(23,572)$(188,765)Net cash provided by financing activities$1,142,667$1,290,142

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Net cash used in operating activities.

Net cash used in operating activities for the six months ended August 31, 2019 was $1,134,712, which included a net income of $315,372, non-cash activity such as the change in fair value of derivative liabilities of ($2,476,567), gain on settlement of debt of ($112,509), change in operating assets of $435,466, amortization of debt discount of $657,058, and depreciation and amortization of $46,468 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, 2019 was $23,572, which was the purchase of fixed assets.

Net cash provided by financing activities.

Net cash provided by financing activities was $1,142,667 for the six months ended August 31, 2019. This consisted of proceeds from deferred payment obligation of $819,750, proceeds from loans payable $263,429,and net borrowings from loan payable – related party of $159,526 offset by payments on loans payable of $100,038.

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, 2019 filed with the SEC on August 29, 2019 and should be read in conjunction with the Original filing on Form 10-K filed with the SEC on August 26, 2019.

Related Party Transactions

For the six months ended August 31, 2019 and 2018, the Company received net advances of $125,021 and $135,908, respectively, from its loan payable-related party. At August 31, 2019, the loan payable-related party was $1,153,904 and $782,844 at February 28, 2019. At August 31, 2019, included in the balance due to the related party is $526,633 of deferred salary and interest, $331,602 of which bears interest at 12%. At February 28, 2019, included in the balance due to the related party is $352,392 of deferred salary and interest, $210,000 of which bears interest at 12%. The accrued interest included at August 31, 2019 and February 28, 2019 was $34,917 and $13,650, respectively.

During the three and six months ended August 31, 2019 the Company paid $54,222 and $(42,852), respectively in consulting fees for research and development to a company owned by a principal shareholder. The credit received in the quarter ended May 31, 2019 were a result of billing corrections of ($106,444) from the prior period and after adjusting for this, would bring total charges in the six months ended August 31, 2019 to $63,592. 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.

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, 2019. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of August 31, 2019, 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.


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1.As of August 31, 2019, we did not maintain effective controls over our control environment. Specifically, we have not developed and effectively communicated to our employees our accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-K. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.2.As of August 31, 2019, 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.

PART II — OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In April 2019 the principals of WeSecure (see Note 8) filed lawsuit in California Superior Court seeking damages for non-payment balance of sale of WeSecure assets totaling $25,000, unpaid consulting fees payable to the two principals through to September 2019 totaling $125,924, and labor code violations of $48,434 all totaling $199,358 plus attorney’s fees and damages. The parties finally settled all claims with a full release for $180,000 in June 2019 payable in 14 monthly instalments as follows:

20192020Total6/30/19$5,0001/26/2020$15,0007/30/19$5,0002/25/2020$15,0008/29/19$7,5003/26/2020$15,0009/28/19$7,5004/25/2020$15,00010/28/19$10,0005/25/2020$20,00011/27/19$10,0006/25/2020$20,00012/27/19$15,0007/24/2020$20,000Total$60,000$120,000$180,000
The company has fully accrued the above $180,000 and has paid $17,500 to October 1, 2019. As of filing the September through November instalments are in arrears.

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.


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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 Technology Solutions Inc.Date: December 5, 2019BY: /s/ Garett ParsonsGarett ParsonsPresident, Chief Executive Officer, Chief Financial Officer, 
Principal Accounting Officer, Treasurer and Director

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