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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, 2021

 

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: 000-55079

 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(Exact name of registrant as specified in its charter)

 

Nevada   27-2343603
(State or other jurisdiction of Incorporation or organization)   (I.R.S. Employer Identification Number)
     
10800 Galaxie Avenue
Ferndale, MI
  48220
(Address of principal executive offices)   (Zip code)

 

(877) 787-6268

(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 [X]   No [_]

 

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: 4,088,504,043 shares of common stock were issued and outstanding as of October 15, 2021.

 


 

  PAGE
PART I FINANCIAL INFORMATION  
     
ITEM 1. Financial Statements 3
     
  Condensed Consolidated Balance Sheets as of August 31, 2021 and February 28, 2021 (Unaudited) 3
     
  Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended August 31, 2021 and 2020 (Unaudited) 4
     
  Condensed Consolidated Statements of Stockholders’ Deficit for the Six Months Ended August 31, 2021 and 2020 (Unaudited) 5
     
  Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 31, 2021 and 2020 (Unaudited) 7
     
  Notes to the Consolidated Financial Statements (Unaudited) 8
     
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 31
     
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 37
     
ITEM 4. Controls and Procedures 37
     
PART II OTHER INFORMATION  
     
ITEM 1. Legal Proceedings 38
     
ITEM 1A. Risk Factors 38
     
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds 38
     
ITEM 3. Defaults Upon Senior Securities 38
     
ITEM 4. Mine Safety Disclosures 38
     
ITEM 5. Other Information 38
     
ITEM 6. Exhibits 39
     
SIGNATURES 40

 

- 2 -


 

PART 1 – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

      August 31, 2021
(Unaudited)
    February 28, 2021*  
ASSETS              
Current assets:              
Cash   $ 2,395,389   $ 1,044,418  
Accounts receivable, net of allowance     186,435     98,544  
Prepaid expenses     269,614      
Deposits on inventory     278,427      
Device parts inventory     488,296     64,071  
Total current assets     3,618,161     1,207,033  
Operating lease asset     1,280,039     47,753  
Revenue earning devices, net of accumulated depreciation of $303,143 and $226,459, respectively     475,957     273,714  
Fixed assets, net of accumulated depreciation of $33,032 and $67,113, respectively     57,785     34,994  
Security deposit     19,739     3,859  
Total assets   $ 5,451,681   $ 1,567,353  
               
LIABILITIES AND STOCKHOLDERS’ DEFICIT              
Current liabilities:              
Accounts payable and accrued expenses   $ 841,443   $ 1,373,838  
Advances payable     1,594     1,594  
Balance owed WeSecure         122,000  
Customer deposits     10,000     10,500  
Current operating lease liability     94,610     43,894  
Current portion of deferred variable payment obligation     246,035     91,587  
Current portion of convertible notes payable, net of discount of $0 and $697,276 respectively     3,500     196,224  
Incentive compensation plan payable     1,022,000      
Loan payable - related party     910,095     904,806  
Current portion of loans payable, net of discount of $8,735,256 and $0, respectively     2,558,698     944,614  
Vehicle loan - current portion     38,522     38,522  
Current portion of accrued interest payable     516,364     238,665  
Derivative liability     7,299     444,466  
Total current liabilities     6,250,160     4,410,710  
Non-current operating lease liability     1,185,429     3,859  
Loans payable, net of discount of $951,226 and $2,510,994 respectively     12,577,919     8,867,998  
Deferred variable payment obligation     2,525,000     2,525,000  
Accrued interest payable     1,172,970     303,473  
Total liabilities     23,711,478     16,111,040  
               
Commitments and Contingencies              
               
Stockholders’ deficit:              
Preferred Stock, undesignated; 15,545,650 shares authorized; no shares issued and outstanding at August 31, 2021 and February 28, 2021, respectively          
Series E Preferred Stock, $0.001 par value; 4,350,000 shares authorized; 3,350,000 and 4,350,000 shares issued and outstanding, respectively     3,350     4,350  
Series F Convertible Preferred Stock, $1.00 par value; 4,350 shares authorized; 2,532 and 2,799 shares issued and outstanding, respectively     2,532     2,799  
Series G Preferred Stock, $0.001 par value; 100,000 shares authorized, no shares issued and outstanding at August 31, 2021 and February 28, 2021, respectively          
Common Stock, $0.00001 par value; 5,000,000,000 shares authorized 3,995,271,111 and 3,229,426,884 shares issued and outstanding, respectively     39,953     32,294  
Additional paid-in capital     53,779,343     16,764,554  
Preferred stock to be issued     174,070     174,070  
Accumulated deficit     (72,259,045 )   (31,521,754 )
Total stockholders’ deficit     (18,259,797 )   (14,543,687 )
Total liabilities and stockholders’ deficit   $ 5,451,681   $ 1,567,353  

 

* Derived from audited information

 

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

 

- 3 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

                           
    Three Months
Ended
  Three Months
Ended
  Six Months
Ended
  Six Months
Ended
 
    August 31, 2021   August 31, 2020   August 31, 2021   August 31, 2020  
                           
Revenues   $ 141,572   $ 76,082   $ 701,906   $ 139,403  
                           
Cost of Goods Sold     41,954     36,011     152,880     45,301  
                           
Gross Profit     99,618     40,071     549,026     94,102  
                           
Operating expenses:                          
Research and development     699,292     108,678     1,333,937     190,401  
General and administrative     2,590,920     564,078     4,490,712     844,001  
Depreciation and amortization     47,691     30,360     85,334     58,476  
Operating lease cost and rent     75,212     4,300     104,086     7,300  
(Gain) loss on disposal of fixed assets     (29,125 )   553     (29,125 )   553  
Total operating expenses     3,383,990     707,969     5,984,944     1,100,731  
                           
Loss from operations     (3,284,372 )   (667,898 )   (5,435,918 )   (1,006,629 )
                           
Other income (expense), net:                          
Change in fair value of derivative liabilities     193,063     (7,170,785 )   372,502     (4,327,294 )
Interest expense     (1,813,773 )   (1,179,558 )   (2,762,223 )   (1,709,042 )
Gain (loss) on settlement of debt     72,709         (32,911,652 )    
Total other expense net     (1,548,001 )   (8,350,343 )   (35,301,373 )   (6,036,336 )
                           
Net loss   $ (4,832,373 ) $ (9,018,241 ) $ (40,737,291 ) $ (7,042,965 )
                           
Net loss per share - basic   $ (0.00 ) $ (0.04 ) $ (0.01 ) $ (0.07 )
Net loss per share - diluted   $ (0.00 ) $ (0.04 ) $ (0.01 ) $ (0.07 )
                           
Weighted average common share outstanding - basic     3,890,453,905     200,780,577     3,689,985,691     101,158,965  
                           
Weighted average common share outstanding - diluted     3,890,453,905     200,780,577     3,689,985,691     101,158,965  

 

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

 

- 4 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDER’S DEFICIT

(Unaudited)

 

                                                   
    Series E   Series F       Additional       Total  
    Preferred Stock   Preferred Stock   Common Stock   Paid-In   Accumulated   Stockholders’  
    Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit  
Balance at February 29, 2020   4,350,000   $ 4,350   3,450   $ 177,520   418,415   $ 4   $ 4,334,564   $ (25,622,843 ) $ (21,106,405 )
Adjustment to derivative liability                       167,497         167,497  
Common stock issued for debt conversion               6,068,336     61     159,597         159,658  
Rounding shares               9                  
Net income                           1,975,276     1,975,276  
Balance at May 31, 2020   4,350,000   $ 4,350   3,450   $ 177,520   6,486,760   $ 65   $ 4,661,658   $ (23,647,567 ) $ (18,803,974 )
Contributed Capital                       (11,508 )       (11,508 )
Adjustment to derivative liability                       1,560,733         1,560,733  
Common stock issued for debt conversion               523,543,455     5,235     1,916,719         1,921,954  
Cancellation of Series F Preferred Shares         (816 )   (816 )         816          
Net income                           (9,018,241 )   (9,018,241 )
Balance at August 31, 2020   4,350,000   $ 4,350   2,634   $ 176,704   530,030,215   $ 5,300   $ 8,128,418   $ (32,665,808 ) $ (24,351,036 )

 

- 5 -


 

                                                   
    Series E   Series F       Additional       Total  
    Preferred Stock   Preferred Stock   Common Stock   Paid-In   Accumulated   Stockholders’  
    Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Deficit  
Balance at February 28, 2021   4,350,000   $ 4,350   2,799   $ 176,869   3,229,426,884   $ 32,294   $ 16,764,554   $ (31,521,754 ) $ (14,543,687 )
Series F preferred shares and warrants issued with deferred variable payment obligation amendment agreement         40     40           33,015,174         33,015,214  
Series F preferred shares cancelled in exchange for promissory notes         (83 )   (83 )         (6,732,752 )       (6,732,835 )
Series F preferred shares issued on exercise of warrants         38     38           (38 )        
Series F preferred shares converted to common shares         (78 )   (78 ) 316,345,998     3,164     (3,086 )        
Warrants issued as part of a debt issuance                       4,749,006         4,749,006  
Stock based compensation                       69,350         69,350  
Net income                           (35,904,918 )   (35,904,918 )
Balance at May 31 2021   4,350,000   $ 4,350   2,716   $ 176,786   3,545,772,882   $ 35,458   $ 47,862,208   $ (67,426,672 ) $ (19,347,870 )
Adjustment to derivative liability                       422,272         422,272  
Common stock issued for debt conversion               31,042,436     310     898,395         898,705  
Stock based compensation on issuable shares               2,100,000     21     109,179         109,200  
Exercise of warrants               300,251,561     3,003     (3,003 )        
Exchange of debt for common shares               116,104,232     1,161     6,454,235         6,455,396  
Relative fair value of warrants issued with debt                       2,035,033         2,035,033  
Cancellation of Series E preferred shares   (1,000,000 )   (1,000 )               1,000          
Exchange of Series F preferred shares for debt         (184 )   (184 )         (3,999,976 )       (4,000,160 )
Net income                           (4,832,373 )   (4,832,373 )
Balance at August 31 2021   3,350,000   $ 3,350   2,532   $ 176,602   3,995,271,111   $ 39,953   $ 53,779,343   $ (72,259,045 ) $ (18,259,797 )

 

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

 

- 6 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

    Six Months Ended
August 31, 2021
  Six Months Ended
August 31, 2020
 
CASH FLOWS USED IN OPERATING ACTIVITIES:              
Net loss   $ (40,737,291 ) $ (7,042,965 )
Adjustments to reconcile net income to net cash used in operating activities:              
Depreciation and amortization     85,334     58,476  
Revenue earning device sold and expensed in cost of sales     3,255      
Bad debts expense     2,022      
Reduction of right of use asset     42,684      
Accretion of lease liability     49,656      
(Gain) loss on disposal of fixed assets     (29,125 )   553  
Stock based compensation     1,200,550      
Change in fair value of derivative liabilities     (372,502 )   4,327,294  
Interest expense related to penalties from debt defaults         445,277  
Amortization of debt discounts     1,395,799     156,525  
(Gain) loss on settlement of debt     32,911,652      
Increase in related party accrued payroll and interest     162,438     143,368  
Changes in operating assets and liabilities:              
Accounts receivable     (89,913 )   (1,507 )
Prepaid expenses     (269,614 )    
Deposits on inventory     (278,427 )    
Device parts inventory     (706,562 )    
Accounts payable and accrued expenses     (586,886 )   (53,100 )
Accrued expense -related party     (38,807 )   (2,955 )
Customer deposits     (500 )    
Operating lease liabilities     (92,340 )    
Current portion of deferred variable payment obligation for payments     154,448     19,815  
Balance owed WeSecure     (122,000 )   (13,000 )
Accrued interest payable     1,219,151     1,058,845  
Net cash used in operating activities     (6,096,978 )   (903,374 )
               
CASH FLOWS USED IN INVESTING ACTIVITIES:              
Purchase of fixed assets     (32,162 )   (51,731 )
Proceeds on disposal of fixed assets     30,000     1,000  
Cash paid for security deposit     (15,880 )    
Net cash used in investing activities     (18,042 )   (50,731 )
               
CASH FLOWS FROM FINANCING ACTIVITIES:              
Proceeds from deferred variable payment obligation         966,000  
Proceeds from loans payable     7,926,146     349,015  
Repayment of loans payable     (276,813 )   (113,752 )
Cash acquired on consolidation of RAD G         (284 )
Repayment of convertible debt     (65,000 )    
Net borrowings (repayments) on loan payable - related party     (118,342 )   (75,328 )
Net cash provided by financing activities     7,465,991     1,125,651  
               
Net change in cash     1,350,971     171,546  
               
Cash, beginning of period     1,044,418     13,307  
               
Cash, end of period   $ 2,395,389   $ 184,853  
               
Supplemental disclosure of cash and non-cash transactions:              
Cash paid for interest   $ 109,864   $ 1,589  
Cash paid for income taxes   $   $  
               
Noncash investing and financing activities:              
Right of use asset for operating lease liability   $ 1,275,970   $  
Transfer from device parts inventory to revenue earning devices   $ 282,337   $  
Net assets on consolidation of RAD G   $   $ 11,508  
Conversion of convertible notes and interest to shares of common stock   $ 898,705   $ 2,081,612  
Release of derivative liability on conversion of convertible notes payable   $ 422,272   $ 1,728,231  
Derivative debt discount on re-valuation on loan amendment   $ 438,835   $  
Exchange of notes payable for Series F preferred shares   $ 6,732,835   $  
Discount applied to face value of loans   $ 6,162,945   $  
Warrants issued as part of debt   $ 6,784,039   $  
Exercise of warrants   $ 3,003   $  
Series F preferred shares issued for debt   $ 4,000,160   $  
Cancellation of Series E preferred shares   $ 1,000   $  
Series F preferred shares converted to common shares   $ 3,086   $  
Series F preferred shares issued on exercise of warrants   $ 38   $  

 

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

 

- 7 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED 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 an 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. 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, 2021, the Company had negative cash flow from operating activities of $(6,096,978). As of August 31, 2021, the Company has an accumulated deficit of $(72,259,045), and negative working capital of $2,631,999. 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 raise an additional $ 15 million to $ 50 million before the end of the fiscal year. Management is committed to raise either non-dilutive funds or minimally dilutive funds. There is no assurance that these funds will be able to be raised nor can we provide assurance that these possible raises may not have dilutive effects.

 

The Company currently projects that 2022 fiscal year’s revenues will be between 5 and 15 times greater than the 2021 fiscal year’s revenues. This projection is based on the following factors: 1. an anticipated significant increase in the orders; 2. an expected significant improvement in the Company’s ability to make timely deliveries; and 3. an anticipated significant improvement in the Company’s ability to support many more devices than this it could support during the 2021’s fiscal year. However, there can be no assurance that the revenues will increase to the extent projected or that the anticipated improvements will actually occur.

 

This expansion plan will require the Company to expend significant resources, including the hiring of additional staffing, which the Company expects to finish the next fiscal year with between 75 – 125 employees.

 

- 8 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED 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 filed on June 1, 2021. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Robotic Assistance Devices, Inc., Robotic Assistance Devices Group, Inc., and Robotic Assistance Devices Mobile, Inc. 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, 2021 are not necessarily indicative of the results that may be expected for the entire year.

 

Use of Estimates

 

In order to prepare financial statements in conformity with accounting principles generally accepted in the United States, management must make estimates, judgements and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from resolution currently anticipated by management and on which the financial statements are based. The most significant estimates included in these consolidated financial statements are those associated with the assumptions used to value preferred stock and derivative liabilities.

 

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 was an allowance of $26,890 and $24,868 provided as of August 31, 2021 and February 28, 2021, respectively.

 

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. As of both August 31, 2021 and February 28, 2021 there was no valuation reserve.

 

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.

 

- 9 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED 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.

 

Computer equipment   3 years
Office equipment   4 years
Demo Devices   4 years
Vehicles   3 years
Leasehold improvements   5 years, the life of the lease

 

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

 

Research and Development

 

Research and development costs are expensed in the period they are incurred in accordance with ASC 730, Research and Development unless they meet specific criteria related to technical, market and financial feasibility, as determined by Management, including but not limited to the establishment of a clearly defined future market for the product, and the availability of adequate resources to complete the project. If all criteria are met, the costs are deferred and amortized over the expected useful life or written off if a product is abandoned. At August 31, 2021 and February 28, 2021, 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 8, 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 Companys revenue for a reporting period underlying the agreement have only a minimal impact on the investors 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.

 

- 10 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED 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 4 – Revenue from Contracts with Customers for additional information.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized when items of income and expense are recognized in the financial statements in different periods than when recognized in the tax return. Deferred tax assets arise when expenses are recognized in the financial statements before the tax returns or when income items are recognized in the tax return prior to the financial statements. Deferred tax assets also arise when operating losses or tax credits are available to offset tax payments due in future years. Deferred tax liabilities arise when income items are recognized in the financial statements before the tax returns or when expenses are recognized in the tax return prior to the financial statements. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Leases

 

Lease agreements are evaluated to determine if they are sales/finance leases meeting any of the following criteria at inception: (a) transfer of ownership of the underlying asset; (b) purchase option that is reasonably certain of being exercised; (c) the lease term is greater than a major part of the remaining estimated economic life of the underlying asset; or (d) if the present value of the sum of lease payments and any residual value guaranteed by the lessee that has not already been included in lease payments in accordance with ASC 842-10-30-5(f) equals or exceeds substantially all of the fair value of the underlying asset.

 

If at its inception, a lease meets any of the four lease criteria above, the lease is classified by the Company as a sales/finance; 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.

 

- 11 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Distinguishing Liabilities from Equity

 

The Company relies on the guidance provided by ASC Topic 480, Distinguishing Liabilities from Equity, to classify certain redeemable and/or convertible instruments. The Company first determines whether a financial instrument should be classified as a liability. The Company will determine the liability classification if the financial instrument is mandatorily redeemable, or if the financial instrument, other than outstanding shares, embodies a conditional obligation that the Company must or may settle by issuing a variable number of its equity shares.

 

Once the Company determines that a financial instrument should not be classified as a liability, the Company determines whether the financial instrument should be presented between the liability section and the equity section of the balance sheet (“temporary equity”). The Company will determine temporary equity classification if the redemption of the financial instrument is outside the control of the Company (i.e. at the option of the holder). Otherwise, the Company accounts for the financial instrument as permanent equity.

 

Our CEO and Chairman holds sufficient shares of the Company’s voting preferred stock that give sufficient voting rights under the articles of incorporation and bylaws of the Company such that the CEO and Chairman can at any time unilaterally vote to increase the number of authorized shares of common stock of the Company, without the need to call a general meeting of common shareholders of the Company.

 

Initial Measurement

 

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

 

Subsequent Measurement – Financial Instruments Classified as Liabilities

 

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

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

  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.

 

- 12 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Measured on a Recurring Basis

 

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

 

    Amount at   Fair Value Measurement Using  
    Fair Value   Level 1   Level 2   Level 3  
August 31, 2021                          
Liabilities                          
Derivative liability – conversion features pursuant to convertible notes payable   $ 7,299   $   $   $ 7,299  
                           
February 28, 2021                          
Liabilities                          
Derivative liability – conversion features pursuant to convertible notes payable   $ 444,466   $   $   $ 444,466  

 

See Note 12 for specific inputs used in the multinomial lattice 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.

 

Recently Issued Accounting Pronouncements

 

Accounting for Income Taxes

 

In December 2019, the FASB issued a new standard to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes and enacted changes in tax laws or rates, and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard will be effective for us beginning July 1, 2021, with early adoption permitted. The Company does not expect any material impact of this standard in our consolidated financial statements, including accounting policies, processes, and systems.

 

- 13 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Recently Adopted 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 adopted this on March 1, 2020.

 

4. REVENUE FROM CONTRACTS WITH CUSTOMERS

 

Revenue is earned primarily from two sources: 1) direct sales of goods or services and 2) short-term rentals. Direct sales of goods or services are accounted for under Topic 606, and short-term rentals are accounted for under Topic 842 (which addresses lease accounting and was adopted on March 1, 2019).

 

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, 2021
  Six Months Ended
August 31, 2021
 
Device rental activities   $ 123,375   $ 218,081  
Direct sales of goods and services     18,197     483,825  
    $ 141,572   $ 701,906  

 

    Three Months Ended
August 31, 2020
  Six Months Ended
August 31, 2020
 
Device rental activities   $ 73,082   $ 130,203  
Direct sales of goods and services     3,000     9,200  
    $ 76,082   $ 139,403  

 

 

5. REVENUE EARNING DEVICES

 

Revenue earning devices consisted of the following:

 

    August 31, 2021   February 28, 2021  
Revenue earning devices   $ 779,100   $ 500,173  
Less: Accumulated depreciation     (303,143 )   (226,459 )
    $ 475,957   $ 273,714  

 

- 14 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

During the six months ended August 31, 2021, the Company made total additions through inventory transfers to revenue earning devices of $282,337. During the six months ended August 31, 2020, the Company made total additions to revenue earning devices of $47,094.

 

During the six months ended August 31, 2021 the Company sold a revenue earning device having a net book value of $3,255 for revenues of $30,600 and included the $3,255 in cost of goods sold.

 

Depreciation expense was $43,834 and $76,839 for the three and six months ended August 31, 2021, respectively, and $24,820 and $47,461 for the three and six months ended August 31, 2020, respectively.

 

6. FIXED ASSETS

 

Fixed assets consisted of the following:

 

    August 31, 2021   February 28, 2021  
Vehicles   $ 44,243   $ 70,896  
Demo devices     3,670     3,670  
Computer equipment     36,742     23,399  
Office equipment     6,162     4,142  
      90,817     102,107  
Less: Accumulated depreciation     (33,032 )   (67,113 )
    $ 57,785   $ 34,994  

 

During the three months and six months ended August 31, 2021 the Company made additions of $16,800 and $32,162, respectively. During both the three months and six months ended August 31, 2020 the Company made additions of $4,638.

 

During the six months ended August 31, 2021 the Company sold a vehicle having a net book value of $875 for fair value proceeds of $30,000 and recorded a gain on disposal of fixed assets of $29,125.

 

During the six months ended August 31, 2020, the Company disposed of office equipment having an original cost of $3,550 and a net book value of $1,553 for $1,000 in proceeds and recorded a $553 loss on disposal of fixed assets.

 

Depreciation expense was $3,857 and $8,495 for the three and six months ended August 31, 2021, respectively, and $5,540 and $11,015 for the three and six months ended August 31, 2020, respectively.

 

7. LEASES

 

We lease certain warehouses and office space. Leases with an initial term of 12 months or less are not recorded on the balance sheet; we recognize lease expense for these leases on a straight-line basis over the lease term. For lease agreements entered into or reassessed after the adoption of Topic 842, we did not combine lease and non-lease components.

 

Most leases include one or more options to renew, with renewal terms that can extend the lease term by 10 years or more. The exercise of lease renewal options is at our sole discretion. The depreciable life of assets and leasehold improvements are limited by the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.

 

- 15 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Below is a summary of our lease assets and liabilities at August 31, 2021 and February 28, 2021.

 

Leases   Classification   August 31, 2021   February 28, 2021  
Assets                  
Operating   Operating Lease Assets   $ 1,280,039   $ 47,753  
Liabilities                  
Current                  
Operating   Current Operating Lease Liability   $ 94,610   $ 43,894  
Noncurrent                  
Operating   Noncurrent Operating Lease Liabilities     1,185,429     3,859  
Total lease liabilities       $ 1,280,039   $ 47,753  

 

Note: As most of our leases do not provide an implicit rate, we use our incremental borrowing rate of 10% based on the information available at commencement date in determining the present value of lease payments.

 

The weighted average remaining lease term is 9.5 years.

 

CAM charges were not included in operating lease expense and were expensed in general and administrative expenses as incurred.

 

The Company’s leases are accounted for as operating leases. Rent expense and operating lease cost are recorded over the lease terms on a straight-line basis. Rent expense and operating lease cost was $75,212 and $104,086 for the three and six months ended August 31, 2021, respectively, and $4,300 and $7,300 for the three and six months ended August 31, 2020, respectively.

 

8. 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 February 29, 2020 the investor has advanced the full $900,000.

 

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

 

  (1) The investor would pay up to $400,000 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 February 29, 2020, $400,000 has been paid to the Company.
     
  (2) The investor would pay up to $50,000 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 February 29, 2020, $50,000 has been paid to the Company.

 

These variable payments (Payments) are to be made 30 days after the end of each 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.

 

- 16 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On November 18, 2019 the Company entered into another similar arrangement with the (February 1, 2019) investor above whereby the investor would advance up to $225,000 in exchange for a perpetual 2.25% rate Payment on the Company’s quarterly Revenues (commencing on quarter ending May 31, 2020). At February 29, 2020 the investor has advanced $109,000 and the investor advanced the $116,000 remainder as of May 2020.

 

On December 30, 2019 the Company entered into another similar arrangement with a new investor whereby the investor would advance up to $100,000 in exchange for a perpetual 1.00% rate Payment on the Company’s quarterly Revenues (commencing quarter ended November 30, 2020). At February 29, 2020 the investor has advanced $50,000 with the remainder to be advanced no later than June 30, 2020. If the total investor advances turns out to be less than $100,000, this would not constitute a breach of the agreement, rather the 1.00% rate would be adjusted on a pro-rata basis.

 

On April 22, 2020 the Company entered into another similar arrangement with the (first May 9, 2019) investor above whereby the investor would advance up to $100,000 in exchange for a perpetual 1.00% rate Payment on the Company’s quarterly Revenues. At May 31, 2020 the investor has fully funded this commitment.

 

On July 1, 2020 the Company entered into a similar agreement with the first investor whereby the investor would pay up to $800,000 in exchange for a perpetual 2.75% rate payment (Payment) on the Company’s reported quarterly revenue. These Payments are to be made 90 days after the fiscal quarter with the first payment being due no later than May 31, 2021. If the Payments would deplete RAD’s available cash by more than 20%, the payment may be deferred. The investor had agreed to pay $100,000 per month over an 8-month period with the first payment due July 2020 and the final payment no later than February 28, 2021. As at August 31, 2020 the investor had fully funded the $800,000 commitment.

 

On August 27, 2020 the Company and the first investor referred to above consolidated the three separate agreements of February 1, 2019 for $900,000, November 18, 2019 for $225,000 and July 1, 2020 for $800,000 into a new agreement for a total of $1,925,000. This new agreement is for similar terms as the above agreements save for the following: the rate payment is revised to 14.25% payable on revenues commencing the quarter ended August 31, 2020 and the Payments are secured by the assets of the Company. This interest may be secured by UCC filing but is subordinated to equipment financing on the products the Company leases to its customers.

 

In summary of all agreements mentioned above if 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 43.77% 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 43.77% 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. As of March 1, 2021 as a result of the amendment with the first investor noted below, this aggregate asset disposition % was reduced from 43.77 % to 33.77%.

 

On March 1, 2021 the first investor referred to above whose aggregate investment is $1,925,000 revised his agreements as follows:

 

  1) The rate payment was reduced from 14.25 % to 9.65 %
     
  2) The asset disposition % (see below) was reduced from 31 % to 21%

 

In consideration for the above changes, the investor received 40 Series F Convertible Preferred Stock and a warrant to purchase 367 shares of its Series F Convertible Preferred Stock with a five-year term and an exercise price of $1.00. During the three months ended May31, 2021 the warrant holder exercised warrants to acquire 38 shares of Series F Convertible Preferred Stock. The company attributed a fair value based on recent transactions for the Series F Preferred stock and warrants of $33,015,214 and recorded a loss on settlement of debt with a corresponding adjustment to paid in capital.

 

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, 2021, 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 year end February 28, 2023 filing. As of August 31, 2021, and February 28, 2021, the balances under these agreements were $2,525,000 and $2,525,000, respectively.

 

- 17 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

For the three months ended August 31, 2021, the Company has received $0 related to the deferred payment obligation as the balance remains $2,525,000 at August 31, 2021. For the year ended February 28, 2021, $966,000 has been paid to the Company bringing the balance to $2,525,000 at February 28, 2021.

 

The Payments first become payable on June 30, 2019 (unless otherwise indicated) based on the quarterly Revenues for the quarter ended May 31, 2019 and accrue every quarter thereafter. As of August 31, 2021, the Company has accrued $246,035 in Payments (February 28, 2021 -$91,857). No amounts have been recorded to date as interest on Payments, as the amounts are immaterial.

 

9. CONVERTIBLE NOTES PAYABLE

 

Convertible notes payable consisted of the following:

 

                  Balance   Balance  
          Interest   Conversion   August 31,   February 28,  
Issued   Maturity     Rate   Rate per Share   2021   2021  
July 18, 2016   July 18, 2017*     10%   $0.003 (2)   3,500     3,500  
December 31, 2016   December 31, 2020     8%   35% discount (1)       65,000  
January 19, 2021   January 19, 2022     12%   $0.04         275,000  
January 27,2021   January 27, 2022     10%   $0.10 (3)       550,000  
                    3,500     893,500  
                             
Less: current portion of convertible notes payable     (3,500 )   (893,500 )
Less: discount on noncurrent convertible notes payable          
Noncurrent convertible notes payable, net of discount   $   $  
               
Current portion of convertible notes payable   $ 3,500   $ 893,500  
Less: discount on current portion of convertible notes payable         (697,276 )
Current portion of convertible notes payable, net of discount   $ 3,500   $ 196,224  

__________

* The indicated note was in default as of August 31, 2021. Default interest rate 22%
   
(1) 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.
   
(2) The conversion price is not subject to adjustment from forward or reverse stock splits.
   
(3) The per share conversion price into which Principal Amount and interest (including any Default Interest) under this Note shall be convertible into shares of Common Stock hereunder (the “Conversion Price”) shall be equal to $0.10 per share (the “Fixed Conversion Price”); provided, however, that if, the lowest traded price on the date six (6) months from the issue date hereof is below the Fixed Conversion Price, and no default exists, the conversion shall be $0.05 (the “Alternative Fixed Conversion Price”) provided, further, that upon any Event of Default (as defined herein) after the Issue Date, the Conversion Price shall equal the lower of (i) $0.03 (the “Default Fixed Conversion Price”); or (ii) seventy percent (70%) multiplied by the lowest closing price of the Common Stock during the fifteen (15) consecutive Trading Day period immediately preceding the date of the respective event of default (the “Default Conversion Price”);

 

During both the three months ended August 31, 2021 and 2020, the Company incurred original issue discounts of $0, and debt discounts from derivative liabilities of $438,835 and $0, respectively related to new or re-valued convertible notes payable. During the three months ended August 31, 2021 and 2020, the Company recognized interest expense related to the amortization of debt discount of $694,855 and $35,551, respectively. The Company recorded penalty interest of $0 and $445,277 during the three months ended August 31, 2021 and August 31, 2020, respectively.

 

- 18 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

During both the six months ended August 31, 2021 and 2020, the Company incurred original issue discounts of $0 and debt discounts from derivative liabilities of $438,835 and $0, respectively related to new or re-valued convertible notes payable. During the six months ended August 31, 2021and 2020, the Company recognized interest expense related to the amortization of debt discount of $775,986 and $94,675, respectively. The Company recorded penalty interest of $0 and $445,277 during the six months ended August 31, 2021 and August 31, 2020, respectively.

 

All the notes above are unsecured. As of August 31, 2021 and February 28, 2021, the Company had total accrued interest payable of $27,302 and $49,764, respectively, all of which is classified as current.

 

During the six months ended August 31, 2021, the Company also had the following convertible note activity:

 

the Company amended the January 27, 2021 agreement with the lender whereby the conversion rate was changed from $0.10 to $0.03 as a result of a dilutive issuance. This resulted a derivative discount of $438,835 and a loss on extinguishment of $360,125.
   

holders of certain convertible notes payable elected to convert a total of $825,000 of principal and $71,955 accrued interest, and $1,750 of fees into 31,042,436 shares of common stock. No gain or loss was recognized on conversions as these conversions occurred within the terms of the agreement that provided for conversion.

 

the conversion rate of the January 19, 2021 note included above was reduced to $0.027 due to the dilutive issuance provision in the January 19, 2021 agreement.  

 

10. RELATED PARTY TRANSACTIONS

 

For the six months ended August 31, 2021, the Company repaid net advances of $118,342 from its loan payable-related party. For the six months ended August 31, 2020 the Company repaid net advances of $75,328. At August 31, 2021, the loan payable-related party was $910,095 and $904,806 at February 28, 2021. Included in the balance due to the related party at August 31, 2021 is $925,001 of deferred salary and interest, $762,000 of which bears interest at 12%. At February 28, 2021, included in the balance due to the related party is $883,710 of deferred salary and interest, $642,000 of which bears interest at 12%. The accrued interest included in loan at August 31, 2021 and August 31, 2020 was $160,536 and $80,410, respectively.

 

Pursuant to the amended Employment Agreement with its Chief Executive Officer in Note 14, the Company accrued $1,022,000 of stock-based compensation with a corresponding adjustment to incentive compensation plan payable due to the vesting cost of the equity awards. These awards are payable through the issuance of Series G Preferred Shares which are redeemable at the Company’s option at $1,000 per share. The Company will classify these awards granted as Series G Preferred Shares as a liability accordingly because of those terms.

 

During the three and six months ended August 31, 2021 the Company was charged $1,041,788 and $562,837, respectively in consulting fees for research and development to a company partially owned by a principal shareholder During the three and six months ended August 31, 2020, the Company was charged $61,121 and $111,816, respectively for consulting fees for research and development to a company owned by a principal shareholder.

 

11. 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 made were $0 for both the year ended February 28, 2021 and February 29, 2020. 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 both February 28, 2021 and February 29, 2020. For the first vehicle loan, the vehicle was retired in 2020, the proceeds of the disposal of $18,766 was applied against the balance of the loan with a $5,515 gain on the remaining asset value of $13,251. A balance of $16,944 remains on this vehicle loan at both February 28, 2021 and February 29, 2020. The remaining total balances of the amounts owed on the vehicle loans were $38,522 and $38,522 as of August 31, 2021 and February 28, 2021, respectively, of which all were classified as current.

 

- 19 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

12. LOANS PAYABLE

 

Loans payable at August 31, 2021 consisted of the following:

                Annual  
Date   Maturity   Description   Principal   Interest Rate  
June 11, 2018   June 11, 2019   Promissory note (3) $ 48,000   25% *
August 10, 2018   September 1, 2018   Promissory note (4)     25%  
August 16, 2018   August 16, 2019   Promissory note (1)     25%  
August 16, 2018   October 1, 2018   Promissory note (4)      25%  
October 11, 2018   October 11, 2019   Promissory note (7)   17,000   20% *
January 31, 2019   June 30, 2019   Promissory note (2)   78,432   15% *
January 24, 2019   January 24, 2021   Loan (8)   194,803   11%  *
May 9, 2019   June 30, 2019   Promissory note (5)   7,850   15% *
May 31, 2019   June 30, 2019   Promissory note (6)   86,567   15% *
June 26, 2019   June 26, 2020   Promissory note (9)   79,104   15% *
September 24, 2019   June 24, 2020   Promissory note (13)   12,000   15% *
January 30, 2020   January 30, 2021   Promissory note (15)   11,000   15%  *
February 27, 2020   February 27, 2021   Promissory note (16)   5,000   15%  *
April 16, 2020   April 16, 2021   Promissory note (17)   13,000   15%  *
May 12, 2020   May 12, 2021   Promissory note (18)   43,500   15%  *
May 22, 2020   May 22, 2021   Promissory note (19)   85,000   15%  *
June 2, 2020   June 2, 2021   Promissory note (23)   62,000   15%  *
June 9, 2020   June 9, 2021   Promissory note (24)   31,000   15%  *
June 12, 2020   June 12, 2021   Promissory note (25)   50,000   15%  *
June 16, 2020   June 16, 2021   Promissory note (26)   42,000   15%  *
April 3, 2020   April 3, 2021   Promissory note (20)   27,697   20%
August 13, 2020   August 13, 2021   Promissory note (22)     20%  
September 8, 2020   September 8, 2021   Promissory note (27)     20%  
September 15, 2020   September 15, 2022   Promissory note (28)   300,000   10%  
October 6, 2020   March 6, 2023   Promissory note (29)   150,000   12%  
November 12, 2020   November 12, 2023   Promissory note (30)   110,000   12%  
November 23, 2020   October 23, 2022   Promissory note (31)   65,000   15.5%  
November 23, 2020   November 23, 2023   Promissory note (32)   300,000   15%  
December 10, 2020   December 10, 2023   Promissory note (33)   82,500   12%  
December 10, 2020   December 10, 2023   Promissory note (34)   3,921,168   12%  
December 10, 2020   December 10, 2023   Promissory note (35)   3,054,338   12%  
December 10, 2020   December 10, 2023   Promissory note (36)   165,605   12%  
December 14, 2020   December 14, 2023   Promissory note (37)   310,375   12%  
December 14, 2020   December 14, 2023   Promissory note (38)     12%  
December 30, 2020   December 30, 2023   Promissory note (39)   350,000   12%  
December 31, 2021   December 31, 2024   Promissory note (40)   25,000   12%  
December 31, 2021   December 31, 2024   Promissory note (41)   145,000   12%  
January 14, 2021   January 14, 2024   Promissory note (42)   550,000   12%  
February 22, 2021   February 22, 2022   Promissory note (43)   1,650,000   12%  
March 1, 2021   March 1, 2022   Promissory note (10)   6,000,000   12%  
March 23, 2021   March 23, 2022   Promissory note (11)     0%  
March 23, 2021   March 23, 2022   Promissory note (12)     0%  
June 8, 2021   June 8, 2022   Promissory note (44)   2,750,000   12%  
July 12, 2021   July 26, 2026   Promissory note (45)   4,000,160   7%  
        $ 24,823,099      
Less current portion of loans payable         (11,293,954 )    
Less discount on loans payable         (951,226 )    
Loans payable       $ 12,577,919      
                 
Current portion of loans payable       $ 11,293,954      
Less discount on loans payable         (8,735,256 )    
Current portion of loans payable, net of discount       $ 2,558,698      

 

- 20 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

* 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. The loan has been fully repaid.
   
(2) The note may be pre-payable at any time. The note balance includes 33% original issue discount of $25,882.
   
(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) $20,000 loan repaid during the quarter ended May 31, 2021.
   
(5) The note may be pre-payable at any time. The note balance includes 33% original issue discount of $2,590.
   
(6) The note may be pre-payable at any time. The note balance includes 33% original issue discount of $28,567.
   
(7) $6,000 repaid during the year ended February 29, 2020.
   
(8) $257,000 Canadian loan. Interest payable every calendar quarter commencing June 30, 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 favor of the lender on a first priority basis subject to the following: the lender’s security in this respect shall be postponeable to security in favor of institutional financing obtained by RAD. Additional funding of $26,146 during the quarter ended May 31, 2021.
   
(9) The note may be pre-payable at any time. The note balance includes 33% original issue discount of $26,104.
   
(10) The unsecured note may be pre-payable at any time. Cash proceeds of $5,400,000 were received. The note balance of $6,000,000 includes an original issue discount of $600,0000 and was issued with a warrant to purchase 300,000,000 shares at an exercise price of $0.135 per share with a 3-year term and having a relative fair value of $4,749,005 using Black-Scholes with assumptions described in note 14. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $4,749.005 with a corresponding adjustment to paid in capital for the relative value of the warrant. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $190,438 and $228,363, respectively with an unamortized discount of $5,120,643 at August 31, 2021.
   
(11) In exchange for 28 Series F preferred shares, the Company issued a noninterest bearing unsecured loan for $2,545,900. A fair value of the loan of $2,267,768 was determined with a debt discount off $278,132. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $1,524 and $54,102, respectively with an unamortized discount of $0 at August 31, 2021. On June 2, 2021 the Company exchanged the $2,545,900 debt having a net book value of $2,321,870 for 39,167,693 common shares having a fair value of $2,177,724. The Company recorded a gain on settlement of debt of $144,146.
   
(12) In exchange for 55 Series F preferred shares, the Company issued a noninterest bearing unsecured loan for $5,000,875. A fair value of the loan of $4,465,067 was determined with a debt discount off $535,808. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $2,936 and $107,162, respectively with an unamortized discount of $0 at August 31, 2021. On June 2, 2021 the Company exchanged the $5,000,875 debt having a net book value $4,572,229 for 76,936,539 common shares having a fair value of 4,277,672. The Company recorded a gain on settlement of debt of $294,557.
   
(13) The note may be pre-payable at any time. The note balance includes an original issue discount of $3,000.

 

- 21 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(15) The note may be pre-payable at any time. The note balance includes an original issue discount of $2,450.
   
(16) The note may be pre-payable at any time. The note balance includes an original issue discount of $1,200.
   
(17) The note may be pre-payable at any time. The note balance includes an original issue discount of $3,850.
   
(18) The note may be pre-payable at any time. The note balance includes an original issue discount of $8,000.
   
(19) The note may be pre-payable at any time. The note balance includes an original issue discount of $15,000.
   
(20) $ 40,000 CDN loan, both principal and interest are due at maturity, if unpaid there is a 10% penalty on unpaid balance. By consent of all parties, lender may convert balance into Class F shares at $6,739 USD per share.
   
(21) Principal repayable in one year. Interest repayable in 10 monthly instalments of $460 commencing January 11, 2019 and secured by revenue earning devices having a net book value of at least $186,000. $25,000 repaid during the year. Repaid in full.
   
(22) $ 60,000 CDN loan, principal is due at maturity, interest is payable commencing the third month after the loan over the remaining 10 months. If principal or interest unpaid there is a 10% penalty on unpaid balance. By consent of all parties, lender may convert balance into Class F shares at $6,739 USD per share. Total loan of $44,183 (in $USD) and related accrued interest paid during the quarter ended May 31, 2021.
   
(23) The note may be pre-payable at any time. The note balance includes an original issue discount of $12,000.
   
(24) The note may be pre-payable at any time. The note balance includes an original issue discount of $6,000.
   
(25) The note may be pre-payable at any time. The note balance includes an original issue discount of $10,000.
   
(26) The note may be pre-payable at any time. The note balance includes an original issue discount of $7,000.
   
(27) $10,000 CDN loan, principal is due at maturity, interest is payable monthly commencing the third month after the loan over the remaining 10 months. If principal or interest unpaid there is a 10% penalty on unpaid balance. By consent of all parties, lender may convert balance into Class F shares at $6,739 USD per share. Total loan of $7,381 (in $USD) and related accrued interest paid during the quarter ended May 31, 2021.
   
(28) The note may be pre-payable at any time. The note balance includes an original issue discount of $50,000. Interest payable monthly, principal due at maturity. Secured by a general security charging all of RAD’s present and after-acquired property.
   
(29) Principal and interest repayable in 28 monthly instalments commencing December 6, 2020, the first 6 months at $2,000 per month, the remaining 22 payments at $ 8,500 per month. Secured by revenue earning devices.
   
(30) The note may be pre-payable at any time. The note balance includes an original issue discount of $10,000 and was issued with a warrant to purchase 70,000,000 shares at an exercise price of $0.00165 per share, with a 3-year term and having a relative fair value of $41,176. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $41,176 with a corresponding adjustment to paid in capital. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $2,860 and $$5,470, respectively with an unamortized discount of $42,859 at August 31, 2021.
   
(31) Principal and interest repayable in 21 monthly instalments commencing December 6, 2020 of $4,060 commencing February 21, 2021. Secured by revenue earning devices.

 

- 22 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(32) The note may be pre-payable at any time. The note balance includes an original issue discount of $25,000 and was issued with a warrant to purchase 230,000,000 shares at an exercise price of $0.00165 per share with a 3-year term and having a relative fair value of $125,814. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $125,814 with a corresponding adjustment to paid in capital for the relative value of the warrant. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $7,999 and $15,244, respectively with an unamortized discount of $128,556 at August 31, 2021.
   
(33) The note may be pre-payable at any time. The note balance includes an original issue discount of 7,500 and was issued with a warrant to purchase 100,000,000 shares at an exercise price of $0.002 per share with a 3-year term and having a relative fair value of $54,545. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $54,545 with a corresponding adjustment to paid in capital for the relative value of the warrant. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $2,207 and $4,051, respectively with an unamortized discount of $56,519 at August 31, 2021.
   
(34) This promissory note was issued as part of a debt settlement as disclosed in Note 8 whereby $2,683,357 in convertible notes and associated accrued interest of $1,237,811 totaling $3,921,168 was exchanged for this promissory note of $3,921,168, and a warrant to purchase 450,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a relative fair value of $990,000. This note is secured by a general security charging all of the Company’s present and after-acquired property.
   
(35) This promissory note was issued as part of a debt settlement as disclosed in Note 9 whereby $1,460,794 in convertible notes and associated accrued interest of $1,593,544 totaling $3,054,338 was exchanged for this promissory note of $3,054,338, and a warrant to purchase 250,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a relative fair value of $550,000. This note is secured by a general security charging all of the Company’s present and after-acquired property.
   
(36) This promissory note was issued as part of a debt settlement as disclosed in Note 9 whereby $103,180 in convertible notes and associated accrued interest of $62,425 totaling $165,605 was exchanged for this promissory note of $165,605, and a warrant to purchase 80,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a fair value of $176,000.
   
(37) This promissory note was issued as part of a debt settlement as disclosed in Note 8 whereby $235,000 in convertible notes and associated accrued interest of $75,375 totaling $310,375 was exchanged for this promissory note of $310,375, and a warrant to purchase 25,000,000 shares at an exercise price of $.002 per share and a three-year maturity having a fair value of $182,500.
   
(38) This promissory note was issued as part of a debt settlement as disclosed in Note 9 whereby $100,000 in convertible notes and associated accrued interest of $37,589 totaling $137,589 was exchanged for this promissory note of $192,625. Loan fully repaid at May 31,2021.
   
(39) The note may be pre-payable at any time. The note balance includes an original issue discount of $35,000 and was issued with a warrant to purchase 50,000,000 shares at an exercise price of $0.025 per share with a 3-year term and having a relative fair value of $271,250. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $271,250 with a corresponding adjustment to paid in capital for the relative fair value of the warrant. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $5,652 and $9,927, respectively with an unamortized discount of $294,203 at August 31, 2021.
   
(40) This promissory note was issued as part of a debt settlement as disclosed in Note 9 whereby $9,200 in convertible notes and associated accrued interest of $6,944 totaling $16,144 was exchanged for this promissory note of $25,000. This note is secured by a general security charging all of the Company’s present and after-acquired property.

 

- 23 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

(41) This promissory note was issued as part of a debt settlement as disclosed in Note 9 whereby $79,500 in convertible notes and associated accrued interest of $28,925 totaling $108,425 was exchanged for this promissory note of $145,000. This note is secured by a general security charging all of the Company’s present and after-acquired property.
   
(42) The note may be pre-payable at any time. The note balance includes an original issue discount of $250,000 and was issued with a warrant to purchase 50,000,000 shares at an exercise price of $0.025 per share with a 3-year term and having a relative fair value of $380,174. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $380,174 with a corresponding adjustment to paid in capital. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $12,879 and $23,458, respectively with an unamortized discount of $401,998 at August 31, 2021.
   
(43) The note may be pre-payable at any time. The note balance includes an original issue discount of $150,000 and was issued with a warrant to purchase 100,000,000 shares at an exercise price of $0.135 per share with a 3-year term and having a relative fair value of $1,342,857. The discount and warrant are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $1,342,857 with a corresponding adjustment to paid in capital for the relative fair value of the warrant. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $16,039 and $27,595 with an unamortized discount of $1,464,983 at August 31, 2021.
   
(44) The note may be pre-payable at any time. The note balance includes an original issue discount of $50,000 and was issued with a warrant to purchase 170,000,000 shares at an exercise price of $0.064 per share with a 3-year term and having a relative fair value of $2,035,033 using Black-Scholes with assumptions described in note 14. The discounts are being amortized over the term of the loan. After allocating these charges to debt and equity according to their respective values, a debt discount of $2,035,033 with a corresponding adjustment to paid in capital. For the three months and six months ended August 31, 2021, the Company recorded amortization expense of $135,404 with an unamortized discount of $2,149,630 at August 31, 2021.
   
(45) This loan was in exchange for 184 Series F preferred shares from a former director. The interest and principal are payable at maturity. The loan is unsecured.

 

 

13. DERIVATIVE LIABILITIES

 

As of August 31, 2021, 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 $7,299.

 

The Company estimated the fair value of the derivative liabilities using the multinomial lattice model using the following key assumptions during the three months ended August 31, 2021:

 

Strike price $0.04 - $0.026
Fair value of Company common stock $0.6320 - $0.4285
Dividend yield 0.00%
Expected volatility 125.3% - 107.7%
Risk free interest rate 0.15% - 0.13%
Expected term (years) 0.5 - 0.32

 

During the three months ended August 31, 2021, and 2020, the Company released $503,500 and $1,560,733, and respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes and other debt settlements.

 

During the six months ended August 31, 2021, and 2020, the Company released $503,500 and $1,728,231, and respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes and other debt settlements.

 

- 24 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The changes in the derivative liabilities (Level 3 financial instruments) measured at fair value on a recurring basis for the three months ended August 31, 2021 were as follows:

 

Balance as of February 28, 2021 $ 444,466  
Reduction of derivative liability due to debt settlement   (503,500 )
Derivative discount on loan amendment   438,835  
Change in fair value of derivative liabilities   (372,502 )
Balance as of August 31, 2021 $ 7,299  

 

 

14. STOCKHOLDERS’ EQUITY (DEFICIT)

 

Summary of Preferred Stock Activity

 

Series E Preferred Stock

 

During the six months ended August 31, 2021 Series F shareholders had the following activity:

 

  - A shareholder cancelled 100 Class E shares. The company recorded an adjustment to paid in capital.

 

Series F Preferred Stock

 

During the six months ended August 31, 2021 Series F shareholders had the following activity:

 

  - 40 Series F Preferred Shares and a warrant to purchase 367 Series F Preferred Shares with a five-year term and an exercise price of $1.00 were issued to an investor in exchange for amending their deferred variable payment obligation agreement as disclosed in Note 8.  The company attributed a fair value based on recent transactions for the Series F Preferred stock and warrants of $33,015,214 and recorded a loss on settlement of debt with a corresponding adjustment to paid in capital.
     
  - The warrant holder exercised warrant to acquire 38 Series F Preferred Shares.
     
  - The shareholder above converted 78 Series F Preferred Shares into 316,345,908 common shares.
     
  - Two Series F Preferred shareholders exchanged 83 Series F Preferred Shares for two promissory notes as disclosed in point (11) and (12) in Note 12 on March 23, 2021. The notes are non-interest bearing, have a one-year maturity and total $7,546,775. These notes were subsequently exchanged on June 2, 2021 for a total of 116,104.232 common shares.
     
  - On July 12, 2021, the former director agreed to surrender his remaining 184 Series F preferred shares in exchange for a note payable from the Company of $4,000,160 bearing interest at 7% per annum with a 5 year term, maturing July 12, 2026.
     
  - On August 24, 2021the Series F preferred warrant holder agreed to not exercise his warrant privileges on his remaining 329 warrant shares before September 1, 2023.

 

 Summary of Preferred Stock Warrant Activity

 

    Number of Series F Preferred Warrants   Weighted Average Exercise Price   Weighted Average Remaining Years
             
Outstanding at March 1, 2021      
Issued   367   $1.00   5.00
Exercised   (38 ) $1.00   5.00
Forfeited and cancelled      
Outstanding at August 31, 2021   329   $1.00   4.75

 

- 25 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

On August 23, 2021, the Company filed amended Series F preferred shares such that Series F preferred shares are not convertible into common stock by a holder until (A) August 23, 2023 or (B) the date on which such a conversion may be required for the purpose of (i) uplisting the Company to a new stock exchange, or (ii) selling more than 50% of the Company’s assets.

 

Summary of Common Stock Activity

 

During the six months ended August 31, 2021 common shareholders had the following activity:

 

  - A Series F Preferred shareholder converted 78 Series F Preferred Shares for 316,345,998 common shares.
     
  - holders of certain convertible notes payable elected to convert a total of $825,000 of principal and $71,955 accrued interest, and $1,750 of fees into 31,042,436 shares of common stock.
     
  - in June 2021, lenders (see note 12) exchanged debt having a face value of $7,546,775 and a net book value of $6,894,099 for 116,104,232 common shares having a fair value of $6,455,396. A gain on settlement of debt of $438,703 was recorded.
     
  - the company entered into an investor relations contract whereby 2,100,000 shares are issuable as of August 31, 2021. Stock based compensation of $109,200 was recorded in the period ended August 31, 2021.

 

 Summary of Common Stock Warrant Activity

 

    Number of Warrants   Weighted Average Exercise Price   Weighted Average Remaining Years
             
Outstanding at March 1, 2021   619,523,492   $0.0295   2.81
Issued   470,000,000   $0.109   2.77
Exercised   (311,000,000 ) $0.0003   2.23
Forfeited and cancelled      
Outstanding at August 31, 2021   778,523,492   $0.0875   2.51

 

For both the three and six months ended August 31, 2021 and August 31, 2020, the Company recorded a total of $1,200,550 and $0, respectively, to stock-based compensation for options and warrants with a corresponding adjustment to additional paid-in capital.

 

During the six months ended August 31, 2021 warrant holders had the following activity:

 

  - warrant holders exercised warrants to acquire 311,000,000 shares on a cashless basis for 300,251,671 common shares with a corresponding adjustment to paid in capital.
     
  - in conjunction with debt disclosed in Note 12 (44), the Company issued warrants to a lender to purchase 170,000,000 shares at an exercise price of $0.064 per share with a 3-year term and having a relative fair value of $2,035,033 and in in conjunction with debt disclosed in Note 12 (10), the Company issued warrants to a lender to purchase 300,000,000 shares at an exercise price of $0.135 per share with a 3-year term and having a relative fair value of $4,749,005 both using the Black-Scholes model with assumptions described below:

 

Strike price $0.135 - $0.0064
Fair value of Company’s common stock $0.146 - $0.0071
Dividend yield 0.00%
Expected volatility 411.0% - 409.5%
Risk free interest rate 0.32% - 0.27%
Expected term (years) 3.00

 

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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Summary of Common Stock Option Activity

 

On April 9, 2021 the Company entered into an Employment Agreement with Chief Executive Officer, Steven Reinharz with three year term under the following terms whereby stock option awards will be granted if certain conditions are met :

 

  - A stock option award (option 1) will be granted to the employee to purchase 10,000,000 shares at an exercise price of $ $0.15 per share if the trading share price of the Company reaches an average of $0.30 per share for ten days over a 30 day trading period.
     
  - A stock option award (option 2) will be granted to the employee to purchase 30,000,000 shares at an exercise price of $ $0.25 per share if the trading share price of the Company reaches an average of $0.50 per share for ten days over a 30 day trading period.
     
  - On July 12, 2021 the Company and CEO amended the April 9, 2021 Employment Agreement effective July 1, 2021 whereby the following objectives and awards were added to the two existing ones:

 

  Objective #3: Sales in any fiscal quarter exceed the total sales in fiscal year 2021 for the first time.
     
  Award #3: Five hundred (500) shares of Series G preferred stock.
     
  Objective #4: One hundred fifty (150) devices are deployed in the marketplace.
     
  Award #4: Two hundred fifty (250) shares of Series G preferred stock.
     
  Objective #5: Year-to-date sales at any point in fiscal year 2022 exceed One Million Dollars ($1,000,000).
     
  Award #5: Two hundred fifty (250) shares of Series G preferred stock.
     
  Objective #6: The price per share of common stock has increased to and maintains a price of Ten Cents ($0.10) or more for ten (10) days in a thirty (30) day period.
     
  Award #6: Two hundred fifty (250) shares of Series G preferred stock.
     
  Objective #7: The price per share of common stock has increased to and maintains a price of Twenty Cents ($0.20) or more for ten (10) days in a thirty (30) day period.
     
  Award #7: Five hundred (500) shares of Series G preferred stock.
     
  Objective #8: The RAD 3.0 products are launched into the marketplace by November 30, 2022.
     
  Award #8: Five hundred (500) shares of Series G preferred stock.
     
  Objective #9: RAD receives an order for fifty (50) units from a single customer.
     
  Award #9: Five hundred (500) shares of Series G preferred stock.

 

The fair value the first two awards was obtained through the use of the Monte Carlo method was $69,350 with a charge to stock- based compensation and a corresponding charge to paid in capital. The fair value of the remaining rewards was determined by calculating the vesting amounts of each reward and totaled $1,022,000 with a charge to stock-based compensation and a corresponding charge to incentive compensation plan payable.

 

On April 14, 2021, the Shareholders of Series E Preferred Stock and the Board of Directors of our Company (“Board”) approved and adopted the 2021 Incentive Stock Plan (the “2021 Plan”).

 

- 27 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The purpose of the 2021 Plan is to promote the success of the Company by authorizing incentive awards to retain Directors, executives, selected Employees and Consultants, and reward participants for making major contributions to the success of the Company. The 2021 Plan authorizes the granting of stock options, restricted stock, restricted stock units, stock appreciation rights and stock awards. A total of five million (5,000,000) shares of common stock may be issued under the 2021 Plan. All awards under the 2021 Plan, whether vested or unvested, are subject to the terms of any recoupment, clawback or similar policy of the Company in effect from time to time, as well as any similar provisions of applicable law, which could in certain circumstances require repayment or forfeiture of awards or any shares of stock or other cash or property received with respect to the awards, including any value received from a disposition of the shares acquired upon payment of the awards. The 2021 Plan will be administered by the Board or any Committee authorized by the Board, if applicable, which will have the sole authority to, among other things: construe and interpret the 2021 Plan; make rules and regulations relating to the administration of the 2021 Plan; select participants; and establish the terms and conditions of awards, all in accordance with the terms of the 2021 Plan. The 2021 Plan will remain in effect until April 14, 2031, unless sooner terminated by the Board. Termination will not affect awards then outstanding.

 

15. 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 March 2021, the Company settled with former landlords for $30,000. The Company had accrued $62,552 at February 28, 2021. A gain on settlement of debt of $32,552 was recorded.

 

In April 2019 the principals of WeSecure filed a lawsuit against the Company in California Superior Court seeking a total of $199,358 plus attorney’s fees and damages. The total included claims for the non-payment of a balance from the sale of WeSecure assets to the Company, unpaid consulting fees payable to the two principals of WeSecure, and labor code violations. In June 2019, the parties settled all claims for $180,000, payable in 14 monthly installments, and a full release. The $122,000 balance owing at February 28, 2021 was paid in full on March 17, 2021.

 

The related legal costs are expensed as incurred.

 

Purchase Commitment

 

On August 15 ,2021 the Company entered into a memorandum of understanding with Ghost Robotics whereby the Company will modify and resell a Ghost Robotics (“Ghost”) product (“V50”) in development in exchange for the following:

 

  - the Company will pay Ghost a non refundable marketing fee of $500,000 with $100,000 payable September 1, 2021 with the remaining $400,000 to be paid in instalments of $40,000 per month over the following 10 months commencing October 1, 2021.
     
  - the Company will purchase $85,000 of other Ghost products for research and development purposes. This amount will be credited against future purchases of 6 V50’s that the Company will modify and resell.  
     
  - Ghost agrees not to sell it’s V50 to three specific customers for a three-year period commencing after the first commercial sales of the V50.
     
  - the Company will be re-brand their modified version of the V50 and be responsible for its testing and support.

 

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ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Operating Lease

 

On December 18, 2020, the Company entered into a 15-month lease agreement for office space at 18009 Sky Park Circle Suite E, Irvine CA, 92614, commencing on December 18, 2020 through to March 31, 2022 with a minimum base rent of $3,859 per month. The Company paid a security deposit of $3,859.

 

On March 10, 2021, the Company entered into a 10-year lease agreement for a manufacturing facility at 10800 Galaxie Avenue, Ferndale, Michigan, 48220, commencing on May 1, 2021 through to April 30, 2031 with a minimum base rent of $15,880 per month. The base rent increase by 3% per annum commencing May 1, 2024. The Company paid a security deposit of $15,880.

 

Maturity of Lease Liabilities Operating
Leases
 
August 31, 2022 $ 234,571  
August 31, 2023   207,558  
August 31, 2024   207,558  
August 31, 2025   207,558  
August 31, 2026   207,558  
August 31, 2027 and after   968,604  
Total lease payments   2,033,407  
Less: Interest   (753,368 )
Present value of lease liabilities $ 1,280,039  

 

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. Penalties earned through August 31, 2021 have been recorded in these financial statements.

 

15. EARNINGS (LOSS) PER SHARE

 

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

                           
    For the Three Months Ended   For the Six Months Ended  
    August 31,   August 31,  
    2021   2020   2021   2020  
Numerator:                          
Net income (loss) available to common shareholders   $ (4,832,373 ) $ (9,018,241 ) $ (40,737,291 ) $ (7,042,965)  
                           
Effect of common stock equivalents:                          
Add: interest expense on convertible debt     38,345     588,817     63,299     999,966  
Add Penalty interest on convertible debt         445,277         445,277  
Add (less) loss (gain) on change of derivative liabilities     193,063     7,170,785     372,502     4,327,294  
Net income (loss) adjusted for common stock equivalents     (4,600,965 )   (813,362 )   (40,301,490 )   (1,270,428 )
                           
Denominator:                          
Weighted average shares – basic     3,890,453,905     200,780,577     3,689,985,691     101,158,965  
                           
Net income (loss) per share – basic   $ (0.00 ) $ (0.04 ) $ (0.01 ) $ (0.07 )
                           
Denominator:                          
Weighted average shares – diluted     3,890,453,905     200,780,577     3,689,985,691     101,158,965  
                           
Net income (loss) per share – diluted   $ (0.00 ) $ (0.04 ) $ (0.01 ) $ (0.07 )

 

- 29 -


 

ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

The anti-dilutive shares of common stock equivalents for the three and six months ended August 31, 2021 and August 31, 2020 were as follows:

 

    For the Three Months Ended   For the Six Months Ended
    August 31,   August 31,
    2021   2020   2021   2020
Convertible notes and accrued interest   2,782,614   3,610,181,585   2,782,614   3,610,181,585
Convertible Class F Preferred shares   13,783,685,333   1,828,604,242   13,783,685,333   1,828,604,242
Stock options and warrants   818,523,492     818,523,492  
Total   14,604,991,439   5,438,785,827   14,604,991,439   5,438,785,827

 

 

16. SUBSEQUENT EVENTS

 

Subsequent to August 31, 2021 through to October 15, 2021: 

 

  - On September 2, 2021 the Company filed a Form S-3 statement indicating its intention to issue a public offering of shares of its securities in a prospectus for an aggregate value of $30,000,000. The prospectus describes the general terms of these securities and the general manner in which these securities will be offered. The Company will provide the specific terms of these securities in supplements to this prospectus. The prospectus supplements will also describe the specific manner in which these securities will be offered and may also supplement, update or amend information contained or incorporated by reference in this prospectus. The Company may offer these securities in amounts, at prices and on terms determined at the time of offering.
     
  - On September 15, 2021 the Company and GHS Investments, LLC (“the investor”) entered into a share purchase agreement whereby the investor would purchase up to $10,000,000 of the Company’s common stock over the next year. The investor would receive 112.5% of the purchased shares at a price of 90% of the lowest volume weighted average price   over the five days prior to purchase date.  Pursuant to this agreement the investor has so far acquired 44,193,332 common shares for net proceeds of $1,257,175.
     
  - On September 14, 2021 the Company entered into a promissory note for $1,650,000 with cash proceeds of $1,500,000 and an original issue discount of $150,000. The loan bears interest at 12% per annum and matures on September 14, 2024. Along with the note the lender received a warrant to purchase 250,000,000 shares of common stock at an exercise price of $0.037 per share and a three year term.
     
  - On September 15, 2021 the Company and White Lion Capital , LLC (“White Lion”) entered into a share purchase agreement whereby the investor would purchase up to $10,000,000 of the Company’s common stock over the next year. The purchase price of the common stock is 92% of the lowest volume weighted average price over the three days prior to purchase date.  The Company will pay $3,000 for each purchase transaction to cover clearing costs. Pursuant to this agreement on October 7, 2021 the investor acquired 49,000,000 common shares for expected net proceeds of $1,182,640.
     
  - In September 2021 the Company repaid to its Chief Executive Officer approximately $800,000 in deferred salary and associated interest.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

 

The following discussion of our financial condition and results of operations for the three months and six months ended August 31, 2021 and August 31, 2020 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, 2021, as filed on June 1, 2021 with the SEC. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

 

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

 

Overview

 

AITX was incorporated in Florida on March 25, 2010. AITX reincorporated into Nevada on February 17, 2015. AITX’s fiscal year end is February 28 (February 29 during leap year). AITX is located at 10800 Galaxie Ave., Ferndale Michigan, 48220, and our telephone number is 877-767-6268.

 

AITX’s mission is to apply Artificial Intelligence (AI) technology to solve enterprise problems categorized as expensive, repetitive, difficult to staff, and outside of the core competencies of the client organization.

 

A short list of basic examples include:

 

  1. Typical security guard-related functions such as monitoring a parking lot during and after hours and responding appropriately. This scenario applies to perimeters, interior yard areas, and related similar environments.
     
  2. Integrated hardware/software with AI-driven responses, simulating and expanding on what legacy or manned solutions could perform.
     
  3. Automation of common access control functions through technology utilizing facial recognition and machine vision, leapfrogging most legacy solutions in use today.

 

RAD solutions are unique because they:

 

  1. Start with an AI-driven autonomous response utilizing cellular-optimized communications, while easily connecting to a human operator for a manned response, as needed.
     
  2. Use unique hardware purpose-built by RAD for delivery of these solutions. Various form factors have been customized to deliver this new functionality.
     
  3. Deliver services through RAD-developed software and cloud services, allowing enterprise IT groups to focus on core competencies instead of maintenance of complex video and security platforms.

 

- 31 -


 

Management Discussion and Analysis

 

Results of Operations for the Three Months Ended August 31, 2021 and 2020

 

The following table shows our results of operations for the three months ended August 31, 2021 and 2020. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

Revenue

 

    Period   Change  
    Three Months
Ended
August 31, 2021
  Three Months
Ended
August 31, 2020
  Dollars   Percentage  
Revenues   $ 141,572   $ 76,082   $ 65,490   86%  
Gross profit     99,618     40,071     59,547   149%  
Operating expenses     3,383,990     707,969     2,676,021   378%  
Loss from operations     (3,284,372 )   (667,898 )   (2,616,474 ) 392%  
Other income (expense), net     (1,548,001 )   (8,350,343 )   6,802,342   (81% )
Net loss   $ (4,832,373 ) $ (9,018,241 ) $ 4,185,868   (46% )

 

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

 

    Three Months
Ended
  Three Months
Ended
  Change  
    August 31, 2021   August 31, 2020   Dollars   Percentage  
Device rental activities   $ 123,375   $ 73,082   $ 50,293   69%  
Direct sales of goods and services     18,197     3,000     15,197   507%  
    $ 141,572   $ 76,082   $ 65,490   86%  

 

Total revenue for the three-month period ended August 31, 2021 was $141,572 which represented an increase of $65,490 compared to total revenue of $76,082 for the three months ended August 31, 2020. This large increase is a result of increases in rental activities and training revenue as the Company continues to grow its business.

 

Gross profit

 

Total gross profit for the three-month period ended August 31, 2021 was $99,618 which represented an increase of $59,547, compared to gross profit of $40,071 for the three months ended August 31, 2020. The increase resulted primarily from the increased revenues noted above. The gross profit % of 70% for the three-month period ended August 31, 2021 was slightly higher than the margin of 53% for the prior year’s corresponding period due to the shift in sales mix, specifically higher training revenue in 2021.

 

Operating Expenses

 

    Period   Change  
    Three Months
Ended
August 31, 2021
  Three Months
Ended
August 31, 2020
  Dollars   Percentage  
Research and development   $ 699,292   $ 108,678   $ 590,614   543%  
General and administrative     2,590,920     564,078     2,026,842   359%  
Depreciation and amortization     47,691     30,360     17,331   57%  
Operating lease cost and rent     75,212     4,300     70,912   1649%  
(Gain) loss on disposal of fixed assets     (29,125 )   553     (29,678 ) 5367%  
Operating expenses   $ 3,383,990   $ 707,969   $ 2,676,021   378%  

 

- 32 -


 

Our operating expenses were comprised of general and administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the three-month period ended August 31, 2021 and August 31, 2020, were $3,383,990 and $707,969, respectively. The overall increase of $2,676,021 was primarily attributable to the following changes in operating expenses of:

 

General and administrative expenses increased by $2,026,842. In comparing the three months ended August 31, 2021 and August 31, 2020 this significant increase was primarily due to increases in production supplies by $182,579, professional fees by $29,967, wages and salaries $590,820, stock-based compensation $1,131,260, and travel $116,203 and with the remaining increase distributed amongst other G&A accounts. These large increases may be explained due to the large ramp up in costs this fiscal year to operate the new manufacturing facility and the hiring of 18 additional full-time employees. In addition, the expenses of the prior year’s corresponding quarter were also much lower due to the Covid 19 pandemic and the limited cash available at that time.
   
Research and development increased by $590,614 due to funding development of new products as well as upgrades of existing products.
   

Depreciation and amortization increased by $17,331 due to increases in fixed assets and revenue earning devices.

   
Operating lease cost and rent increased by $70,912 due to the two new leases including three months of the new manufacturing facility for the three months ended August 31, 2021 as compared to a month-to-month lease of only office space for the three months ended August 31, 2020.
   
(Gain) loss on disposal of fixed assets increase by $29,678 due to a vehicle sold this current quarter.  

 

Other Income (Expense)

 

Other income (expense) during the three months ended August 31, 2021 and August 31, 2020, was ($1,548,001) and ($8,350,343), respectively. The $6,802,342 decrease in other expense was primarily attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt.

 

In comparing the three months ended August 31, 2021 and the three months ended August 31, 2020, the change in fair value of derivative liabilities increased by $7,363,848 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 as well as reductions in derivative liability as a result of settlements on the underlying 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 as well as the significant reduction in convertible debt and accrued interest that occurred at the end of fiscal 2021.
   
Interest expense increased by $634,215 due to a significant increase loans payable, most significantly new loans totaling over $18 million , including loans from the Series F preferred share exchanges, and other debt exchanges.
   

Gain on settlement of debt was $72,709 for the quarter ended August 31, 2021 and nil in the prior year’s quarter. The

Debt exchange for common shares was partially offset by a loss on the convertible debt amendment which resulted in an overall gain this quarter.

 

Net loss

 

We had a net loss of $4,832,373 for the three months ended August 31, 2021, compared to a net loss of $9,018,241 for the three months ended August 31, 2020. The change is primarily the result of the change in fair value of derivative liabilities and other items discussed above.

 

- 33 -


 

Results of Operations for the Six Months Ended August 31, 2021 and 2020

 

The following table shows our results of operations for the six months ended August 31, 2021 and 2020. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.

 

Revenue

 

    Period   Change  
    Six Months
Ended
August 31, 2021
  Six Months
Ended
August 31, 2020
  Dollars   Percentage  
Revenues   $ 701,906   $ 139,403   $ 562,503   404%  
Gross profit     549,026     94,102     454,924   483%  
Operating expenses     5,984,944     1,100,731     4,884,213   444%  
Loss from operations     (5,435,918 )   (1,006,629 )   (4,429,289 ) 440%  
Other income (expense), net     (35,301,373 )   (6,036,336 )   (29,265,037 ) 485%  
Net loss   $ (40,737,291 ) $ (7,042,965 ) $ (33,694,326 ) 478%  

 

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

 

    Six Months
Ended
  Six Months
Ended
  Change  
    August 31, 2021   August 31, 2020   Dollars   Percentage  
Device rental activities   $ 218,081   $ 130,203   $ 87,878   67%  
Direct sales of goods and services     483,825     9,200     474,625   5,159%  
    $ 701,906   $ 139,403   $ 562,503   404%  

 

Total revenue for the six-month period ended August 31, 2021 was $701,996 which represented an increase of $562,503 compared to total revenue of 139,403 for the six months ended August 31, 2020. This large increase is a result of unit sales which includes sales of new units totaling $434,342 with the remaining increases in training revenue. Rental activities increased by 67% as well as the Company continues to grow its business.

 

Gross profit

 

Total gross profit for the six-month period ended August 31, 2021 was $549,026 which represented an increase of $454,924, compared to gross profit of $94,102 for the six months ended August 31, 2020. The increase resulted primarily from the increased revenues noted above. The gross profit % of 78% for the six-month period ended August 31, 2021 was higher than the margin of 68% for the prior year’s corresponding period due to the shift in sales mix.

 

Operating Expenses

 

    Period   Change  
    Six Months
Ended
August 31, 2021
  Six Months
Ended
August 31, 2020
  Dollars   Percentage  
Research and development   $ 1,333,937   $ 190,401   $ 1,143,536   601%  
General and administrative     4,490,712     844,001     3,646,711   432%  
Depreciation and amortization     85,334     58,476     26,858   46%  
Operating lease cost and rent     104,086     7,300     96,786   1,326%  
(Gain) loss on disposal of fixed assets     (29,125 )   553     (29,678 ) 5,367%  
Operating expenses   $ 5,984,944   $ 1,100,731   $ 4,884,213   444%  

 

- 34 -


 

Our operating expenses were comprised of general and administrative expenses, research and development, and depreciation. General and administrative expenses consisted primarily of professional services, automobile expenses, advertising, salaries and wages, travel expenses and consultants. Our operating expenses during the six-month period ended August 31, 2021 and August 31, 2020, were $5,984,944 and $1,100,731, respectively. The overall increase of $4,884,213 was primarily attributable to the following changes in operating expenses of:

 

General and administrative expenses increased by $3,646,711. In comparing the six months ended August 31, 2021 and August 31, 2020 this significant increase was primarily due to increases in production supplies by $120,974, professional fees by $534,688, wages and salaries $882,904, subcontractor fees $58,812, stock-based compensation $1,200,550,investor relations $76,000, payments under deferred variable payment obligation $134,634, duty and freight $118,921, office expenses $79,523, advertising and promotion $37,660 , and travel $217,476 with the remaining increase distributed amongst other G&A accounts. These large increases may be explained due to the large ramp up in costs this quarter to operate the new manufacturing facility, the hiring of 18 additional full-time employees and the termination costs of the former director. In addition, the expenses of the prior year’s corresponding quarter were also much lower due to the Covid 19 pandemic and the limited cash available at that time.
   
Research and development increased by $1,143,536 due to funding development of new products as well as upgrades of existing products.
   
Depreciation and amortization increased by $26,858 due to increases in fixed assets and revenue earning devices.
   
Operating lease cost and rent increased by $96,786 due to the two new leases including four months of the new manufacturing facility for the six months ended August 31, 2021 as compared to a month-to-month lease of office space for the six months ended August 31, 2020.
   
(Gain) loss on disposal of fixed assets increase by $29,678 due to a vehicle sold this current quarter.  

 

Other Income (Expense)

 

Other income (expense) during the six months ended August 31, 2021 and August 31, 2020, was ($35,301,373) and ($6,036,336), respectively. The $29,265,037 decrease in other income was primarily attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt.

 

In comparing the six months ended August 31, 2021 and the six months ended August 31, 2020, the change in fair value of derivative liabilities increased by $4,699,796 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 as well as reductions in derivative liability as a result of settlements on the underlying 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 as well as the significant reduction in convertible debt and accrued interest that occurred at the end of fiscal 2021 and first six months of fiscal 2022.
   
Interest expense increased by $1,053,181 due to a significant increase loan payable, most significantly new loans totaling over $18 million , including loans from the Series F preferred share exchanges, and other debt exchanges.
   
Loss on settlement of debt was $32,911,652 the quarter ended August 31, 2021 and nil in the prior year’s quarter. The amendment of the deferred variable payment obligation referred to in Note 8 led to a $33,015,215 loss which was partially offset by gains from accrued liabilities settlements and the debt exchange for common shares which was partially offset by a loss on the convertible debt amendment that resulted in an overall gain this quarter. This loss on settlement of debt is non-cash and has no effect on the cash flows of the Company.

 

Net loss

 

We had a net loss of $40,737,291 for the six months ended August 31, 2021, compared to a net loss of $7,042,065 for the six months ended August 31, 2020. The change is primarily the result of the loss on settlement in the six months ended August 31, 2021 as well as the change in the fair value of the derivative liabilities and other items discussed above.

 

- 35 -


 

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, 2021, we have generated revenue and are trying to achieve positive cash flows from operations

 

As of August 31, 2021, we had a cash balance of $2,395,389, accounts receivable of $186,435, device parts inventory of $278,427 and $6,250,160 in current liabilities. At the current cash consumption rate, we will need to consider additional funding sources going forward. We are taking proactive measures to reduce operating expenses and drive growth in revenue.

 

The successful outcome of future activities cannot be determined at this time and there is no assurance that, if achieved, we will have sufficient funds to execute our intended business plan or generate positive operating results.

 

Capital Resources

 

The following table summarizes total current assets, liabilities and working capital (deficit) for the periods indicated:

 

    August 31, 2021   February 28, 2021  
Current assets   $ 3,618,161   $ 1,207,033  
Current liabilities(1)     6,250,160     4,410,710  
Working capital   $ (2,631,999 ) $ (3,203,677 )

__________

(1) As of August 31, 2021 and February 28, 2021, current liabilities included approximately $7,299 and $444,466, 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, 2021 and February 28, 2021, we had a cash balance of $2,395,389 and $1,044,418, respectively.

 

Summary of Cash Flows   Six Months
Ended
August 31, 2021
  Six Months
Ended
August 31, 2020
 
Net cash used in operating activities   $ (6,096,978 ) $ (903,374 )
Net cash used in investing activities   $ (18,042 ) $ (50,731 )
Net cash provided by financing activities   $ 7,465,991   $ 1,125,651  

 

Net cash used in operating activities.

 

Net cash used in operating activities for the six months ended August 31, 2021 was ($6,096,978), which included a net loss of ($40,737,291), non-cash activity such as the loss on settlement of debt of $32,911,652, revenue earning device sold and expensed in cost of sales $3,255,bad debts expense $2,022, reduction of right of use asset of $ 42,684, accretion of lease liability $49,656, stock based compensation of $1,200,550, change in fair value of derivative liabilities of ($372,502), change in operating assets of ($811,451), amortization of debt discount of $1,395,799, increase in related party accrued payroll and interest of $162,438 and depreciation and amortization of $85,334 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, 2021 was ($18,042), which was the purchase of fixed assets of ($32,162), proceeds on disposal of fixed assets of $30,000 and ($15,880) paid for a security deposit.

 

Net cash provided by financing activities.

 

Net cash provided by financing activities was $7,465,991 for the six months ended August 31, 2021. This consisted of proceeds from loans payable of $7,926,146, reduced by net repayments from loan payable – related party of $118,342, settlement of convertible debt $65,000, and repayments on loans payable of $276,813.

 

- 36 -


 

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 for the year ended February 28, 2021 filed with the SEC on June 1, 2021.

 

Related Party Transactions

 

For the six months ended August 31, 2021, the Company repaid net advances of $118,342 from its loan payable-related party. For the six months ended August 31, 2020 the Company repaid net advances of $75,328. At August 31, 2021, the loan payable-related party was $910,095 and $904,806 at February 28, 2021. Included in the balance due to the related party at August 31, 2021 is $925,001 of deferred salary and interest, $762,000 of which bears interest at 12%. At February 28, 2021, included in the balance due to the related party is $883,710 of deferred salary and interest, $642,000 of which bears interest at 12%. The accrued interest included in loan at August 31, 2021 and August 31, 2020 was $160,536 and $80,410, respectively.

 

Pursuant to the amended Employment Agreement with its Chief Executive Officer in Note 14, the Company accrued $1,022,000 of stock-based compensation with a corresponding adjustment to incentive compensation plan payable due to the vesting cost of the equity awards.

 

During the three and six months ended August 31, 2021 the Company was charged $1,041,788 and $562,837, respectively in consulting fees for research and development to a company partially owned by a principal shareholder During the three and six months ended August 31, 2020, the Company was charged $61,121 and $111,816, respectively for 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, 2021. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of August 31, 2021, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed by us under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

  1. As of August 31, 2021, 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, 2021, 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, do 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.

 

- 37 -


 

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 filed a lawsuit against the Company in California Superior Court seeking a total of $199,358 plus attorney’s fees and damages. The total included claims for the non-payment of a balance from the sale of WeSecure assets to the Company, unpaid consulting fees payable to the two principals of WeSecure, and labor code violations. In June 2019, the parties settled all claims for $180,000, payable in 14 monthly installments, and a full release. The $122,000 balance owing at February 28, 2021 was paid in full on March 17, 2021.

 

The related legal costs are expensed as incurred.

 

ITEM 1A. RISK FACTORS

 

This item is not applicable to smaller reporting companies.

 

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

 

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

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

The Company has not defaulted upon senior securities.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable to the Company.

 

ITEM 5. OTHER INFORMATION

 

None.

 

- 38 -


 

ITEM 6. EXHIBITS

 

3.1

Articles of Incorporation (1)

 

 

3.2

Bylaws (2)

 

 

14

Code of Ethics (2)

 

 

21

Subsidiaries of the Registrant (3)

 

 

31.1

Rule 13(a)-14(a)/15(d)-14(a) Certification of principal executive officer. (3)

 

 

31.2

Rule 13(a)-14(a)/15(d)-14(a) Certification of principal financial and accounting officer. (3)

 

 

32.1

Section 1350 Certification of principal executive officer. (3)

 

 

32.2

Section 1350 Certification of principal financial accounting officer. (3)

 

 

101.INS

Inline XBRL Instance Document – the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. (3)

101.SCH

Inline XBRL Taxonomy Extension Schema Document (3)

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase Document (3)

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase Document (3)

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase Document (3)

101.PRE

Inline XBRL Taxonomy Extension Presentation Linkbase Document (3)

104

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) (3)

__________

(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.

 

- 39 -


 

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: October 15 2021 BY: /s/ Steven Reinharz
  Steven Reinharz
  President, Chief Executive Officer (principal executive officer)
   
   
Date: October 15, 2021 BY: /s/ Anthony Brenz
  Anthony Brenz
  Chief Financial Officer (principal financial officer)

 

- 40 -


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