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, 2020


OR


[_]

TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934


FOR THE TRANSITION PERIOD FROM _______________ TO _______________


COMMISSION FILE NUMBER: 0-55079


ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

(Exact name of registrant as specified in its charter)


Nevada

 

27-2343603

(State or other jurisdiction of Incorporation or organization)

 

(I.R.S. Employer Identification Number)

 

 

 

1 East Liberty, 6th Floor
Reno, NV 89501

 

89501

(Address of principal executive offices)

 

(Zip code)


(702) 990-3271

(Registrant’s telephone number, including area code)


not applicable

(Former name, former address and former fiscal year, if changed since last report)


Securities registered pursuant to Section 12(b) of the Act:  None

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]   No [_]

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes [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: 1,117,828,097 shares of common stock were issued and outstanding as of October 13, 2020.




 

PAGE

PART I

FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements

3

 

 

 

 

Condensed Consolidated Balance Sheets as of August 31, 2020 and February 29, 2020 (Unaudited)

3

 

 

 

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended August 31, 2020 and 2019 (Unaudited)

4

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Deficit for the Six Months Ended August 31, 2020 and 2019 (Unaudited)

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 31, 2020 and 2019 (Unaudited)

6

 

 

 

 

Notes to the Consolidated Financial Statements (Unaudited)

7

 

 

 

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

26

 

 

 

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

31

 

 

 

ITEM 4.

Controls and Procedures

32

 

 

 

PART II

OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

33

 

 

 

ITEM 1A.

Risk Factors

33

 

 

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

33

 

 

 

ITEM 3.

Defaults Upon Senior Securities

33

 

 

 

ITEM 4.

Mine Safety Disclosures

33

 

 

 

ITEM 5.

Other Information

33

 

 

 

ITEM 6.

Exhibits

34

 

 

 

SIGNATURES

35


- 2 -



PART 1 – FINANCIAL INFORMATION


ITEM 1. FINANCIAL STATEMENTS


ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS


 

 

August 31, 2020
(Unaudited)

 

February 29,
2020 *

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash

 

$

184,853

 

$

13,307

 

Accounts receivable

 

 

52,074

 

 

50,117

 

Device parts inventory

 

 

24,789

 

 

24,789

 

Total current assets

 

 

261,716

 

 

88,213

 

Revenue earning devices, net of accumulated depreciation of $170,549 and $123,088 respectively

 

 

238,804

 

 

239,171

 

Fixed assets, net of accumulated depreciation of $60,654 and $51,637, respectively

 

 

8,325

 

 

16,258

 

Total assets

 

$

508,845

 

$

343,642

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ DEFICIT

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

1,074,560

 

$

1,144,660

 

Advances payable

 

 

1,594

 

 

1,597

 

Balance owed WeSecure

 

 

149,500

 

 

162,500

 

Customer deposits

 

 

10,500

 

 

10,000

 

Current portion of deferred variable payment obligation

 

 

50,349

 

 

30,534

 

Current portion of convertible notes payable, net of discount of $56,413 and $120,602 respectively

 

 

5,885,254

 

 

6,613,625

 

Loan payable - related party

 

 

1,386,617

 

 

1,310,358

 

Current portion of loans payable

 

 

993,267

 

 

696,154

 

Vehicle loan - current portion

 

 

38,522

 

 

38,522

 

Current portion of accrued interest payable

 

 

3,254,967

 

 

2,778,583

 

Derivative liability

 

 

9,489,751

 

 

6,890,688

 

Total current liabilities

 

 

22,334,881

 

 

19,677,221

 

Convertible notes payable, net of discount of $0 and $30,486 respectively

 

 

 

 

69,515

 

Deferred variable payment obligation

 

 

2,525,000

 

 

1,559,000

 

Accrued interest payable

 

 

 

 

144,311

 

Total liabilities

 

 

24,859,881

 

 

21,450,047

 

 

 

 

 

 

 

 

 

Commitments and Contingencies

 

 

 

 

 

 

 

Stockholders’ deficit:

 

 

 

 

 

 

 

Preferred Stock, undesignated; 15,645,650 shares authorized; no shares issued and outstanding at August 31, 2020 and February 29, 2020, respectively

 

 

 

 

 

Series E Preferred Stock, $0.001 par value; 4,350,000 shares authorized; 4,350,000 and 4,350,000 shares issued and outstanding, respectively

 

 

4,350

 

 

4,350

 

Series F Convertible Preferred Stock, $1.00 par value; 3,450 shares authorized; 2,634 and 3,450 shares issued and outstanding, respectively

 

 

2,634

 

 

3,450

 

Common Stock, $0.00001 par value; 5,000,000,000 shares authorized 530,030,215 and 418,415 shares issued and outstanding, respectively

 

 

5,300

 

 

4

 

Additional paid-in capital

 

 

8,128,418

 

 

4,334,564

 

Preferred stock to be issued

 

 

174,070

 

 

174,070

 

Accumulated deficit

 

 

(32,665,808

)

 

(25,622,843

)

Total stockholders’ deficit

 

 

(24,351,036

)

 

(21,106,405

)

Total liabilities and stockholders’ deficit

 

$

508,845

 

$

343,642

 

* 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, 2020

 

August 31, 2019

 

August 31, 2020

 

August 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues

 

$

76,082

 

$

75,024

 

$

139,403

 

$

115,329

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of Goods Sold

 

 

36,011

 

 

22,163

 

 

45,301

 

 

41,775

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Profit

 

 

40,071

 

 

52,861

 

 

94,102

 

 

73,554

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

 

108,678

 

 

145,982

 

 

190,401

 

 

120,308

 

General and administrative

 

 

568,378

 

 

444,310

 

 

851,301

 

 

798,513

 

Depreciation and amortization

 

 

30,360

 

 

25,250

 

 

58,476

 

 

46,468

 

Loss on disposal of fixed assets

 

 

553

 

 

 

 

553

 

 

 

Total operating expenses

 

 

707,969

 

 

615,542

 

 

1,100,731

 

 

965,289

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(667,898

)

 

(562,681

)

 

(1,006,629

)

 

(891,735

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net:

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of derivative liabilities

 

 

(7,170,785

)

 

712,466

 

 

(4,327,294

)

 

2,476,567

 

Interest expense

 

 

(1,179,558

)

 

(525,019

)

 

(1,709,042

)

 

(1,381,969

)

Gain (loss) on settlement of debt

 

 

 

 

 

 

 

 

112,509

 

Total other income (expense), net

 

 

(8,350,343

)

 

187,447

 

 

(6,036,336

)

 

1,207,107

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

(9,018,241

)

$

(375,234

)

$

(7,042,965

)

$

315,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income ( loss) per share - basic

 

$

(0.04

)

$

(6.91

)

$

(0.07

)

$

10.32

 

Net income (loss) per share - diluted

 

$

(0.04

)

$

(0.64

)

$

(0.07

)

$

(1.31

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common share outstanding - basic

 

 

200,780,577

 

 

54,303

 

 

101,158,965

 

 

30,549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common share outstanding - diluted

 

 

200,780,577

 

 

1,465,645

 

 

101,158,965

 

 

1,441,891

 


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 28, 2019

 

4,350,000

 

$

4,350

 

3,450

 

$

177,520

 

20,026

 

$

 

$

3,395,606

 

$

(19,409,194

)

$

(15,831,718

)

Adjustment to derivative liability

 

 

 

 

 

 

 

 

 

 

 

154,684

 

 

 

 

154,684

 

Common stock issued for debt conversion

 

 

 

 

 

 

 

17,104

 

 

 

 

142,998

 

 

 

 

142,998

 

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

690,606

 

 

690,606

 

Balance at May 31 2019

 

4,350,000

 

$

4,350

 

3,450

 

$

177,520

 

37,130

 

$

 

$

3,693,288

 

$

(18,718,588

)

$

(14,843,430

)

Adjustment to derivative liability

 

 

 

 

 

 

 

 

 

 

 

228,634

 

 

 

 

228,634

 

Common stock issued for debt conversion

 

 

 

 

 

 

 

99,300

 

 

 

 

251,699

 

 

 

 

251,699

 

Stock based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

(375,234

)

 

(375,234

)

Balance at August 31 2019

 

4,350,000

 

$

4,350

 

3,450

 

$

177,520

 

136,430

 

$

 

$

4,173,621

 

$

(19,093,822

)

$

(14,738,331

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

)


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


- 5 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)


 

 

Six Months Ended
August 31, 2020

 

Six Months Ended
August 31, 2019

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

(7,042,965

)

$

315,372

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

58,476

 

 

46,468

 

Loss on disposal of fixed assets

 

 

553

 

 

 

Change in fair value of derivative liabilities

 

 

4,327,294

 

 

(2,476,567

)

Interest expense related to penalties from debt defaults

 

 

445,277

 

 

 

Amortization of  debt discounts

 

 

156,525

 

 

657,058

 

(Gain) loss on settlement of debt

 

 

 

 

(112,509

)

Increase in related party accrued payroll and interest

 

 

143,368

 

 

134,755

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

 

(1,507

)

 

(17,222

)

Prepaid expenses

 

 

 

 

18,778

 

Device parts inventory

 

 

 

 

(3,153

)

Accounts payable and accrued expenses

 

 

(53,100

)

 

(46,510

)

Accrued expense -related party

 

 

(2,955

)

 

(10,967

)

Current portion of deferred variable payment obligation for Payments (see Note 7)

 

 

19,815

 

 

 

Balance owed WeSecure

 

 

(13,000

)

 

(10,000

)

Accrued interest payable

 

 

1,058,845

 

 

504,616

 

Advances payable

 

 

 

 

(11,043

)

Net cash used in operating activities

 

 

(903,374

)

 

(1,010,924

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Purchase of fixed assets

 

 

(51,731

)

 

(23,572

)

Proceeds on disposal of fixed assets

 

 

1,000

 

 

 

Net cash used in investing activities

 

 

(50,731

)

 

(23,572

)

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Proceeds from deferred variable payment obligation

 

 

966,000

 

 

819,750

 

Proceeds from loans payable

 

 

349,015

 

 

263,429

 

Repayment of loans payable

 

 

(113,752

)

 

(100,038

)

Cash acquired on consolidation of RAD G

 

 

(284

)

 

 

Net borrowings (repayments) on loan payable - related party

 

 

(75,328

)

 

35,738

 

Net cash provided by financing activities

 

 

1,125,651

 

 

1,018,879

 

 

 

 

 

 

 

 

 

Net change in cash

 

 

171,546

 

 

(15,617

)

 

 

 

 

 

 

 

 

Cash, beginning of period

 

 

13,307

 

 

21,192

 

 

 

 

 

 

 

 

 

Cash, end of period

 

$

184,853

 

$

5,575

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash and non-cash transactions:

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,589

 

$

8,654

 

Cash paid for income taxes

 

$

 

$

 

 

 

 

 

 

 

 

 

Noncash investing and financing activities:

 

 

 

 

 

 

 

Inventory converted to revenue earning devices

 

$

 

$

97,788

 

Net assets on consolidation of RAD G

 

$

11,508

 

 

 

Conversion of convertible notes and interest to shares of common stock

 

$

2,081,612

 

$

394,697

 

Release of derivative liability on conversion of convertible notes payable

 

$

1,728,231

 

$

383,318

 

Capitalization of accrued interest to convertible notes payable and loans payable

 

$

 

$

56,280

 


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


- 6 -



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 a LLC. On July 25, 2017, Robotic Assistance Devices LLC converted to a C Corporation, Robotic Assistance Devices, Inc., through the issuance of 10,000 common shares to its sole shareholder.


On August 28, 2017, AITX completed the acquisition of RAD (the “Acquisition”), whereby AITX acquired all the ownership and equity interest in RAD for 3,350,000 shares of AITX Series E Preferred Stock and 2,450 shares of Series F Convertible Preferred Stock. AITX’s prior business focus was transportation services, and AITX was exploring the on-demand logistics market by developing a network of logistics partnerships. As a result of the closing of the Acquisition, AITX has succeeded to the business of RAD. 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, 2020, the Company had negative cash flow from operating activities of $903,374. As of August 31, 2020, the Company has an accumulated deficit of $32,665,808, and negative working capital of $22,073,165. Management does not anticipate having positive cash flow from operations in the near future. These factors raise a substantial doubt about the Company’s ability to continue as a going concern for the twelve months following the issuance of these financial statements.


The Company does not have the resources at this time to repay its credit and debt obligations, make any payments in the form of dividends to its shareholders or fully implement its business plan. Without additional capital, the Company will not be able to remain in business.


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


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


- 7 -



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 July 28, 2020. 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. (see Note 16), Robotic Assistance Devices Mobile, Inc., On the Move Experience, LLC and OMV Transports, LLC. All significant intercompany accounts and transactions have been eliminated in consolidation. The unaudited consolidated financial statements reflect all adjustments, consisting of normal recurring accruals, which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations for the six months ended August 31, 2020 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 principals generally accepted in the United States, management must make estimates, judgements and assumptions that affect the amounts reported in the financial statements and determine whether contingent assets and liabilities, if any, are disclosed in the financial statements. The ultimate resolution of issues requiring these estimates and assumptions could differ significantly from resolution currently anticipated by management and on which the financial statements are based. The most significant estimates included in these consolidated financial statements are those associated with the assumptions used to value 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 were no allowances provided for the six months ended August 31, 2020 and the year ended February 29, 2020.


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 at both August 31, 2020 and February 29, 2020 we had a valuation reserve of $160,000.


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.


- 8 -



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.


Vehicles

 

3 years

Computer equipment

 

3 years

Office equipment

 

4 years


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


Research and Development


Research and development costs are expensed in the period they are incurred in accordance with ASC 730, Research and Development unless they meet specific criteria related to technical, market and financial feasibility, as determined by Management, including but not limited to the establishment of a clearly defined future market for the product, and the availability of adequate resources to complete the project. If all criteria are met, the costs are deferred and amortized over the expected useful life or written off if a product is abandoned. At August 31, 2020 and February 29, 2020, the Company had no deferred development costs.


Contingencies


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


Sales of Future Revenues


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


 

Does the agreement purport, in substance, to be a sale

 

 

 

 

Does the Company have continuing involvement in the generation of cash flows due the investor

 

 

 

 

Is the transaction cancellable by either party through payment of a lump sum or other transfer of assets

 

 

 

 

Is the investors rate of return is implicitly limited by the terms of the agreement

 

 

 

 

Does the Company’s revenue for a reporting period underlying the agreement have only a minimal impact on the investor’s rate of return

 

 

 

 

Does the investor have recourse relating to payments due


In the event a transaction is determined to be a sale of future revenues, it is recorded as deferred revenue and amortized using the sum-of-the-revenue method. In the event a transaction is determined to be debt, it is recorded as debt and amortized using the effective interest method. As of the date of these financial statements, the Company has determined that all such agreements are debt.


- 9 -



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.


On December 22, 2017, the Tax Cuts and Jobs Act (“Tax Act”) was signed into law. ASC 740, Accounting for Income Taxes requires companies to recognize the effects of changes in tax laws and rates on deferred tax assets and liabilities and the retroactive effects of changes in tax laws in the period in which the new legislation is enacted. The Company’s gross deferred tax assets were revalued based on the reduction in the federal statutory tax rate from 35% to 21%. A corresponding offset has been made to the valuation allowance, and any potential other taxes arising due to the Tax Act will result in reductions to the Company’s net operating loss carryforward and valuation allowance. The Company will continue to analyze the Tax Act to assess its full effects on the Company’s financial results, including disclosures, for the Company’s fiscal year ending February 29, 2021, but the Company does not expect the Tax Act to have a material impact on the Company’s consolidated financial statements.


Leases


We adopted ASU No. 2016—02—Leases (topic 842), as amended as of March 1, 2019 using the modified retrospective approach. The modified retrospective approach provided a method for recording the existing leases at adoption and in comparative periods. In addition, we elected the package of practical expedient permitted under the transition guidance within the new standard.


In addition, we elected the hindsight practical expedient to determine the lease term for existing leases. The standard did not materially impact our consolidated net loss, accumulated deficit, and had no impact on cash flows.


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.


- 10 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


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


Distinguishing Liabilities from Equity


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


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


Initial Measurement


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


Subsequent Measurement – Financial Instruments Classified as Liabilities


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


Fair Value of Financial Instruments


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


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


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.


- 11 -



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, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability – conversion features pursuant to convertible notes payable

 

$

9,489,751

 

$

 

$

 

$

9,489,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 29, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability – conversion features pursuant to convertible notes payable

 

$

6,890,688

 

$

 

$

 

$

6,890,688

 


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.


See additional disclosure in Note-18.


Recently Adopted Accounting Pronouncements


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


In June 2018, the FASB issued ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvement to Nonemployee Share-Based Payment Accounting, which is part of the FASB’s simplification initiative to maintain or improve the usefulness of the information provided to the users of financial statements while reducing cost and complexity in financial reporting. This update provides consistency in the accounting for share-based payments to nonemployees with that of employees. The updated guidance had no impact on the Company’s consolidated financial position, results of operations or cash flows.


- 12 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


On March 1, 2019 the Company adopted ASU No. 2016-02, Leases (Topic 842), which is effective for public entities for annual reporting periods beginning after December 15, 2018. Under ASU 2016-02, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: 1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and 2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The Company adopted ASU 2016-02 on March 1, 2019 but does not expect any material impact on the financial statements because the leases commencing March 1, 2019 are month to month.


Recently Issued Accounting Pronouncements


In September 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses. ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments and changes the loss impairment methodology. ASU 2016-13 is effective for reporting periods beginning after December 15, 2019 using a modified retrospective adoption method. A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The Company is currently assessing the impact this accounting standard will have on its financial statements and related disclosures. The Company adopted this March 1, 2020.


Reclassifications


Certain reclassifications have been made in the 2019 financial statements to conform to the 2020 presentation.  These reclassifications have no effect on net loss for 2019.


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, 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

 


- 13 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


 

 

Three Months Ended
August 31, 2019

 

Six Months Ended
August 31, 2019

 

Device rental activities

 

$

52,621

 

$

84,924

 

Direct sales of goods and services

 

 

22,403

 

 

30,405

 

 

 

$

75,024

 

$

115,329

 


5. REVENUE EARNING DEVICES


Revenue earning devices consisted of the following:


 

 

August 31, 2020

 

February 29, 2020

 

Revenue earning devices

 

$

409,353

 

$

362,259

 

Less: Accumulated depreciation

 

 

(170,549

)

 

(123,088

)

 

 

$

238,804

 

$

239,171

 


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, 2019, the Company made total additions to revenue earning devices of $121,360 including $97,788 in inventory transfers.


Depreciation expense was $24,820 and $47,461 for the three and six months ended August 31, 2020, respectively, and $19,789 and $35,556 for the three and six months ended August 31, 2019, respectively.


6. FIXED ASSETS


Fixed assets consisted of the following:


 

 

August 31, 2020

 

February 29, 2020

 

Automobile

 

$

43,453

 

$

41,953

 

Computer equipment

 

 

23,399

 

 

20,262

 

Office equipment

 

 

2,127

 

 

5,680

 

 

 

 

68,979

 

 

67,895

 

Less: Accumulated depreciation

 

 

(60,654

)

 

(51,637

)

 

 

$

8,325

 

$

16,258

 


During both  the three months and six months ended August 31, 2020 the Company made additions of $4,638. The Company made no additions for 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 $5,541 and $11,015 for the three and six months ended August 31, 2020, respectively, and $5,461 and $10,912 for the three and six months ended August 31, 2019, respectively.


7. 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.


- 14 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


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


 

(1)

The investor would pay up to $400,000 (including $143,556 paid in May 2019) in exchange for a perpetual 4% rate Payment on the Company’s reported quarterly Revenues. If the total investor advances turns out to be less than $400,000, this would not constitute a breach of the agreement, rather the 4% rate would be adjusted on a pro-rata basis. The investor has agreed to pay the remaining balance in four monthly installments of $64,111 starting July 1, 2019. At February 29, 2020, $400,000 has been paid to the Company.

 

 

 

 

(2)

The investor would pay up to $50,000 (including $17,444 paid in May 2019) in exchange for a perpetual 1.11% rate Payment on the Company’s reported quarterly Revenues. If the total investor advances turns out to be less than $50,000, this would not constitute a breach of the agreement, rather the 1.11% rate would be adjusted on a pro-rata basis. The investor has agreed to pay the remaining balance in four monthly installments of $8,014 starting July 1, 2019. At February 29, 2020, $50,000 has been paid to the Company.


These variable payments (Payments) are to be made either 30 days up to 90 days after the fiscal quarter depending on the agreement. If the Payments would deplete RAD’s available cash by a percentage between 1% and 31% depending on the rate Payment, 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.


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 May 31, 2020 the investor has fully funded this commitment.


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 May 31, 2020 the investor has advanced $50,000 with the remainder to be advanced no later than June 30, 2020. As the investor has only advanced the $50,000 the 1.00% rate Payment  has been adjusted on a pro-rata basis to 0.50%.


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.


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 30, 2020, 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, 2021 filing.


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 has 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 has 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 will be 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.


- 15 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


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.


For the six months ended August 31, 2020, the Company has received $966,000 related to the deferred payment obligation bringing the balance to $2,525,000 at August 31, 2020. (February 29, 2020 -$1,559,000).


The Payments will first become payable on June 30, 2019 (unless otherwise indicated) based on the quarterly Revenues for the quarter ended May 31, 2019 and will accrue every quarter thereafter. For the three months and six months ended August 31, 2020 the  Company accrued $8,821 and $19,814 in Payments. As of August 31, 2020, the Company has accrued a total of $50,349 in Payments (February 29, 2020 -$30,534). No amounts have been recorded to date for interest on Payments, as the amounts are immaterial.


- 16 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


8. CONVERTIBLE NOTES PAYABLE


Convertible notes payable consisted of the following:


 

 

 

 

 

 

 

 

 

Balance

 

Balance

 

 

 

 

 

 

Interest

 

Conversion

August 31,

 

February 29,

 

Issued

 

Maturity

 

 

Rate

 

Rate per Share

2020

 

2020

 

January 31, 2013

 

February 28, 2017 *

 

 

10%

 

$0.010

(3)

$

119,091

 

$

119,091

 

May 31, 2013

 

November 30, 2016 *

 

 

10%

 

$0.010

(3)

 

261,595

 

 

261,595

 

August 31, 2014

 

November 30, 2016 *

 

 

10%

 

$0.002

(3)

 

355,652

 

 

355,652

 

November 30, 2014

 

November 30, 2016 *

 

 

10%

 

$0.002

(3)

 

103,950

 

 

103,950

 

February 28, 2015

 

February 28, 2017 *

 

 

10%

 

$0.001

(3)

 

63,357

 

 

63,357

 

May 31, 2015

 

August 31, 2017*

 

 

10%

 

$1.000

(3)

 

65,383

 

 

65,383

 

August 31, 2015

 

August 31, 2017*

 

 

10%

 

$0.300

(3)

 

91,629

 

 

91,629

 

November 30, 2015

 

November 30, 2018*

 

 

10%

 

$0.300

(3)

 

269,791

 

 

269,791

 

February 29, 2016

 

February 28, 2019*

 

 

10%

 

60% discount

(2)

 

95,245

 

 

95,245

 

May 31, 2016

 

May 31, 2019*

 

 

10%

 

$0.003

(3)

 

35,100

 

 

35,100

 

July 18, 2016

 

July 18, 2017*

 

 

10%

 

$0.003

(3)

 

3,500

 

 

3,500

 

December 31, 2016

 

December 31, 2020

 

 

8%

 

35% discount

(2)

 

65,000

 

 

65,000

 

January 15, 2017

 

January 15, 2021

 

 

8%

 

35% discount

(2)

 

50,000

 

 

50,000

 

January 15, 2017

 

January 15, 2021

 

 

8%

 

35% discount

(2)

 

100,000

 

 

100,000

 

January 16, 2017

 

January 16, 2021

 

 

8%

 

35% discount

(2)

 

150,000

 

 

150,000

 

March 8, 2017

 

March 8, 2020*

 

 

10%

 

40% discount

(2)

 

100,000

 

 

100,000

 

March 9, 2017

 

March 9, 2021

 

 

8%

 

35% discount

(2)

 

50,000

 

 

50,000

 

April 26, 2017

 

April 26, 2018*

 

 

0%

 

$0.001

 

 

68

 

 

68

 

May 1, 2017

 

May 1, 2021

 

 

8%

 

35% discount

(2)

 

50,000

 

 

50,000

 

May 4, 2017

 

May 4, 2018*

 

 

8%

 

40% discount

(2)

 

 

 

22,610

 

May 15, 2017

 

May 15, 2018*

 

 

0%

 

$0.001

 

 

1,280

 

 

1,280

 

May 17, 2017

 

May 17, 2020*

 

 

10%

 

40% discount

(1)

 

85,000

 

 

85,000

 

June 7, 2017

 

June 7, 2018*

 

 

8%

 

40% discount

(2)

 

 

 

156,764

 

June 16, 2017

 

June 16, 2018*

 

 

0%

 

$0.001

 

 

750

 

 

750

 

July 6, 2017

 

July 6, 2018*

 

 

8%

 

40% discount

(2)

 

 

 

200,000

 

August 8, 2017

 

August 8, 2018*

 

 

8%

 

40% discount

(2)

 

44,990

 

 

125,000

 

July 28, 2017

 

July 28, 2018*

 

 

15%

 

40% discount

(2)

 

47,913

 

 

47,913

 

August 29, 2017

 

August 29, 2018*

 

 

15%

 

50% discount

(2)

 

47,156

 

 

162,250

 

October 4, 2017

 

May 4, 2018*

 

 

8%

 

40% discount

(2)

 

150,000

 

 

150,000

 

October 16, 2017

 

October 16, 2018*

 

 

15%

 

50% discount

(2)

 

328,537

 

 

328,537

 

November 22, 2017

 

November 22, 2018*

 

 

15%

 

50% discount

(2)

 

546,920

 

 

550,275

 

December 28, 2017

 

December 28, 2017*

 

 

10%

 

40% discount

(2)

 

 

 

57,008

 

December 29, 2017

 

December 29, 2018*

 

 

15%

 

50% discount

(2)

 

363,000

 

 

363,000

 

January 9, 2018

 

January 9, 2019*

 

 

8%

 

40% discount

(2)(1)

 

79,508

 

 

79,508

 

January 30, 2018

 

January 30, 2019*

 

 

15%

 

50% discount

(2)(1)

 

330,000

 

 

330,000

 

February 21, 2018

 

February 21, 2019*

 

 

15%

 

50% discount

(2)(1)

 

252,965

 

 

330,000

 

March 14, 2018

 

March 14, 2019*

 

 

10%

 

40% discount

(2)

 

37,875

 

 

50,000

 

June 7, 2017

 

June 9, 2019*

 

 

8%

 

40% discount

(2)

 

200,000

 

 

200,000

 

April 9, 2018

 

April 9, 2019*

 

 

15%

 

50% discount

(2)

 

60,500

 

 

60,500

 

March 21, 2017

 

March 21, 2018*

 

 

8%

 

40% discount

(2)

 

40,000

 

 

40,000

 

April 20, 2018

 

April 20, 2019*

 

 

8%

 

40% discount

(2)

 

97,659

 

 

97,659

 

May 2, 2018

 

December 2, 2018*

 

 

10%

 

40% discount

(2)

 

 

 

70,682

 

May 4, 2018

 

May 4, 2019*

 

 

12%

 

50% discount

(2)

 

123,750

 

 

123,750

 

May 14, 2018

 

December 14, 2018*

 

 

10%

 

50% discount

(2)

 

 

 

33,542

 

May 23, 2018

 

May 23, 2019*

 

 

10%

 

50% discount

(2)

 

113,500

 

 

110,000

 

June 6, 2018

 

June 6, 2019*

 

 

15%

 

50% discount

(2)

 

282,949

 

 

282,949

 

June 19, 2018

 

March 19, 2019*

 

 

15%

 

50% discount

(2)

 

110,781

 

 

43,125

 

July 6, 2017

 

June 9, 2019*

 

 

8%

 

40% discount

(2)

 

200,000

 

 

200,000

 

August 1, 2018

 

August 1, 2019*

 

 

15%

 

50% discount

(2)

 

35,750

 

 

35,750

 

August 23, 2018

 

August 23, 2019*

 

 

8%

 

45% discount

(2)

 

 

 

70,123

 

September 13, 2018

 

June 30, 2019*

 

 

12%

 

45% discount

(2)

 

9,200

 

 

9,200

 

September 17, 2018

 

March 17, 2019*

 

 

10%

 

50% discount

(2)

 

 

 

4,945

 

September 20, 2018

 

September 20, 2019*

 

 

15%

 

50% discount

(2)

 

43,285

 

 

43,285

 

September 24, 2018

 

June 24, 2019*

 

 

8%

 

40% discount

(2)

 

45,663

 

 

63,913

 

August 8, 2017

 

June 9, 2019*

 

 

8%

 

40% discount

(2)

 

125,000

 

 

125,000

 

November 8, 2018

 

August 15, 2019*

 

 

12%

 

45% discount

(2)

 

79,500

 

 

79,500

 

November 26, 2018

 

May 26, 2019*

 

 

10%

 

50% discount

(2)

 

 

 

44,799

 

August 29, 2019 

 

August 29, 2020*

 

 

8%

 

40% discount

(2)

 

28,875

 

 

26,250

 

 

 

 

 

 

 

 

 

 

 

5,941,667

 

 

6,834,228

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Less: current portion of convertible notes payable

 

 

(5,941,667

)

 

(6,734,227

)

Less: discount on noncurrent convertible notes payable

 

 

 

 

(30,486

)

Noncurrent convertible notes payable, net of discount

 

$

 

$

69,515

 

 

 

 

 

 

 

 

 

Current portion of convertible notes payable

 

$

5,941,667

 

$

6,734,227

 

Less: discount on current portion of convertible notes payable

 

 

(56,413

)

 

(120,602

)

Current portion of convertible notes payable, net of discount

 

$

5,885,254

 

$

6,613,625

 


- 17 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


*

The indicated notes were in default as of August 31, 2020. Default interest rate 24%

 

 

(1)

The note is convertible beginning six months after the date of issuance.

 

 

(2)

The notes are convertible at a discount (as indicated) to the average market price and are accounted for and evaluated under ASC 480 as discussed in Note 3.

 

 

(3)

The conversion price is not subject to adjustment from forward or reverse stock splits.


During both the three months ended August 31, 2020 and 2019, the Company incurred original issue discounts of $0, and debt discounts from derivative liabilities of $0 related to new convertible notes payable. During the three months ended August 31, 2020 and 2019, the Company recognized interest expense related to the amortization of debt discount of $35,551 and $161,870, respectively. The Company recorded penalty interest of $445,277 and $0 during the three months ended August 31, 2020 and August 31, 2019, respectively.


During both the six months ended August 31, 2020 and 2019, the Company incurred original issue discounts of $0 and derivative discounts of $0, respectively, related to new convertible notes payable. During the six months ended August 31, 2020 and 2019, the Company recognized interest expense related to the amortization of debt discount of $94,675 and $660,100, respectively. The Company recorded penalty interest of $445,277 and $32,553 during the six months ended August 31, 2020 and August 31, 2019, respectively.


All the notes above are unsecured. As of August 31, 2020, the Company had total accrued interest payable of $3,254,967 all of which is classified as current.


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


During the six months ended August 31, 2020, the Company also had the following convertible note activity:


The company recorded  $445,277 in penalties as increases on various notes, with a corresponding charge to interest.

 

 

holders of certain convertible notes payable elected to convert a total of $1,337,838 of principal and $726,774 accrued interest, and $17,000 of fees into 529,611,800 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.


9. RELATED PARTY TRANSACTIONS


For the six months ended August 31, 2019, the Company borrowed net advances of $35,738 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, 2020, the loan payable-related party was $1,386,617 and $1,310,358 at February 29, 2020. Included in the balance due to the related party at August 31, 2020 is $799,702 of deferred salary and interest, $540,000 of which bears interest at 12%. At February 29, 2020, included in the balance due to the related party is $656,334 of deferred salary and interest, $426,000 of which bears interest at 12%. The accrued interest included in loan at August 31, 2020 and August 31, 2019 was $67,090 and $34,917, respectively.


During the three and six months ended August 31, 2020 and 2019, the Company was charged $61,121 and credited $111,816, respectively for consulting fees for research and development to a company owned by a principal shareholder. During the three and six months ended August 31, 2019 the Company paid $54,222 and $(42,852), respectively in consulting fees for research and development to a company owned by a principal shareholder. The credit received in the quarter ended May 31, 2019 were a result of billing corrections of ($106,444) and after adjusting for this, would bring total charges in the six months ended August 31, 2019 to $63,592.


- 18 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


10. 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 and $5,746 for the years ended February 29, 2020 and February 28, 2019, respectively. Regarding the second vehicle loan, the vehicle was returned at the end of fiscal 2019 and the car was subsequently sold by the lender for proceeds of $21,907 which went to reduce the outstanding balance of the loan. A loss of $3,257 was recorded as well. A balance of $21,578 remains on this vehicle loan at both August 31, 2020 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 August 31, 2020 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, 2020 and February 28, 2020, respectively, of which all were classified as current. The Company ceased making payments of principal and interest in fiscal 2019 and the company has returned the remaining vehicles to the financing company for disposal.


11. LOANS PAYABLE


Loans payable 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

 

 

10,000

 

25%

*

August 16, 2018

 

August 16, 2019

 

Promissory note

(1)

 

12,624

 

25%

*

August 16, 2018

 

October 1, 2018

 

Promissory note

 

 

10,000

 

25%

*

August 23, 2018

 

October 20, 2018

 

Promissory note

(21)

 

25,000

 

20%

*

October 11, 2018

 

October 11, 2019

 

Promissory note

(7)

 

17,000

 

20%

*

August 5, 2019

 

March 11, 2020

 

Factoring Agreement

(4)

 

21,250

 (4)

 

*

November 12, 2019

 

August 11, 2020

 

Factoring Agreement

(10)

 

3,292

 (10)

 

*

December 20, 2019

 

March 5, 2020

 

Factoring Agreement

(14)

 

7,480

 

 

*

October 17, 2019

 

April 29, 2020

 

Factoring Agreement

(11)

 

 (11)

 

 

September 27, 2019

 

April 4, 2020

 

Factoring Agreement

(12)

 

8,857

 (12)

 

*

January 31, 2019

 

June 30, 2019

 

Promissory note

(2)

 

78,432

 

15%

*

January 24, 2019

 

January 24, 2021

 

Loan

(8)

 

151,431

 

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 31, 2020

 

August 31, 2021

 

Promissory note

(22)

 

44,183

 

20%

 

 

 

 

 

 

 

$

993,267

 

 

 

Less current portion of loans payable

 

 

 

 

993,267

 

 

 

Non-current portion of loans payable

 

 

 

$

 

 

 


- 19 -



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. Only $12,376 has been repaid by the Company and no notices have been received. Accrued interest of $1,511 has been recorded.

 

 

(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)

Total loan $79,750, repayable $475 per business day including fees and interest of $25,170. Original cash proceeds of $31,353 and $23,227 carried from previous loan less repayment of $58,500, including payments of $5,775 made during the six months ended August 31, 2020. The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guaranty by the controlling shareholder of the Company.

 

 

(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)

$200,000 Canadian loan. Interest payable every calendar quarter commencing June30, 2019, if unpaid accrued interest to be paid at maturity. An additional interest amount calculated as 4% of RAD revenues from SCOT rentals for the fiscal years 2020 and 2021 shall be payable March 31, 2020 and March 31, 2021, respectively. Secured by a general security charging all of RAD’s present and after-acquired property in 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. Bonus interest of 10,304 has been accrued payable March 31, 2020.

 

 

(9)

The note may be pre-payable at any time. The note balance includes 33% original issue discount of $26,104.

 

 

(10)

Total loan of $243,639, repayable $1,509 per week including fees and interest of $60,042. Original cash proceeds of $7,877, repayment of loans (5) and (13) totaling $15,732, partial repayment of fees of $5,566 all totaling $29,175, additional advances of $88,772 with remaining $65,551 to be advanced to the company over the remaining 18 weeks. The Company has repaid a total of $148,789, including payments of $71,100 made during the six months ended August 31, 2020. The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guaranty by the controlling shareholder of the Company.

 

 

(11)

Total loan of $71,000, repayable $710 per business day including fees and interest of $21,000. Original proceeds of $50,000. Loan fully repaid at August 31, 2020.

 

 

(12)

Total loan of $59,960, repayable $590 per business day including fees and interest of $19,960. Original proceeds of $40,000 less repayment of $51,103, including payments of $6,036 made during the quarter ended August 31, 2020. The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guaranty by the controlling shareholder of the Company.

 

 

(13)

The note may be pre-payable at any time. The note balance includes 33% original issue discount of $3,000.

 

 

(14)

Total loan of $12,400, repayable $1,240 per week including fees and interest of $2,400. Original cash proceeds of $10,000, repayments of $4,920. The Company has pledged a security interest on all accounts receivable and bank accounts of the Company. Obligation under personal guaranty by the controlling shareholder of the Company.

 

 

(15)

The note may be pre-payable at any time. The note balance includes 22% original issue discount of $2,450.


- 20 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


(16)

The note may be pre-payable at any time. The note balance includes 24% 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.

 

 

(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.

 

 

(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.


12. DERIVATIVE LIABILITIES


As of August 31, 2020, 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 $9,489,751.


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, 2020:


Strike price

$0.035 - $0.005

Fair value of Company common stock

$0.059 - $0.0065

Dividend yield

0.00%

Expected volatility

556.4% - 359.2%

Risk free interest rate

0.16% - 0.08%

Expected term (years)

0.67 - 0.25


During the three months ended August 31, 2020, and 2019, the Company released $1,560,733 and $228,634, respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes. During the six months ended August 31, 2020, and 2019, the Company released $1,728,231 and $383,318, respectively, of the Company’s derivative liability to equity due to the conversions of principal and interest on the associated notes.


The changes in the derivative liabilities (Level 3 financial instruments) measured at fair value on a recurring basis for the six months ended August 31, 2020 were as follows:


Balance as of February 28, 2020

$

6,890,688

 

Release of derivative liability on conversion of convertible notes payable

 

(1,728,231

)

Change in fair value of derivative liabilities

 

4,327,294

 

Balance as of August 31, 2020

$

9,489,751

 


- 21 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


13. STOCKHOLDERS’ EQUITY (DEFICIT)


Summary of Common Stock Activity


On March 27, 2020, the Company undertook a 10,000:1 reverse stock split and on August 24, 2018, the Company undertook a 100:1 reverse stock split. The share capital has been retrospectively adjusted accordingly to reflect this reverse stock split, except for the conversion price of certain convertible notes as the conversion price is not subject to adjustment from forward and reverse stock splits (see Note 8).


During the six months ended August 31, 2020, the Company issued 529,611,800 shares of its common stock for the conversion of debt and related interest and fees totaling $2,081,613 including $1,337,838 of principal, $726,7745 interest, $17,000 in fees in connection with debt converted during the period, as well as the release of the related derivative liability (see Note 12).


Summary of Preferred Stock Activity


On July 22, 2020 the board of directors passed a resolution whereby the sole director agreed to return for cancellation, 816 of his 1000 Series F preferred shares to the Company.


Summary of Stock Option Activity


 

 

Number of Warrants

 

Weighted Average Exercise Price

 

Weighted Average Remaining Years

 

 

 

 

 

 

 

Outstanding at March 1, 2020

 

2,043

 

$ 156

 

1.81

Issued

 

 

 

Exercised

 

 

 

Forfeited and cancelled

 

 

 

Outstanding at August 31, 2020

 

2,043

 

$ 156

 

1.79


For the six months ended August 31, 2020 and August 31, 2019, the Company recorded a total of $0 and $0, respectively, to stock-based compensation for options and warrants with a corresponding adjustment to additional paid-in capital.


- 22 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


14. COMMITMENTS AND CONTINGENCIES


Litigation


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


In April 2019 the principals of WeSecure (see Note 9) filed lawsuit in California Superior Court seeking damages for this non-payment of this balance of WeSecure assets sold totaling $25,000, unpaid consulting fees payable to the two principals through September 2019 totaling $125,924, and labor code violations of $48,434, all totaling $199,358 plus attorney’s fees and damages. The parties finally settled all claims with a full release for $180,000 in June 2019 payable in 14 monthly instalments as follows:


2019

 

2020

 

Total

 

6/30/19

$

5,000

 

1/26/2020

$

15,000

 

 

 

 

7/30/19

$

5,000

 

2/25/2020

$

15,000

 

 

 

 

8/29/19

$

7,500

 

3/26/2020

$

15,000

 

 

 

 

9/28/19

$

7,500

 

4/25/2020

$

15,000

 

 

 

 

10/28/19

$

10,000

 

5/25/2020

$

20,000

 

 

 

 

11/27/19

$

10,000

 

6/25/2020

$

20,000

 

 

 

 

12/27/19

$

15,000

 

7/24/2020

$

20,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

$

60,000

 

 

$

120,000

 

$

180,000

 


The company has fully accrued the above $180,000 at February 28, 2019.


As of August 31, 2020 the Company paid $30,500. As of this filing the October 2019 through July 2020 instalments are in arrears. The Company repaid $13,000 towards these arrears in the three months ended August 31, 2020 included in the total payments above.


The related legal costs are expensed as incurred.


Operating Lease


The Company currently maintains an office at 1218-1222 Magnolia Ave, Suite 106 Bldg. H, Corona, California 92881 pursuant to a month to month lease which commenced March 1, 2019. The Company’s annual rent is $12,000 per year. RAD maintains a mailing address for 31103 Ranch Viejo Road, Suite d2114, San Juan Capistrano, California, for a nominal fee of $264/yr.


The Company’s leases are accounted for as operating leases. Rent expense is recorded over the lease terms on a straight-line basis. The Company has not paid but has accrued rent this quarter due to Covid-19. Rent expense was $4,300 and $7,300 for the three and six months ended August 31, 2020, respectively and $1,000 and $4,000 for the three and six months ended August 31, 2019, respectively.


At August 31, 2020 the Company had no future minimum payments.


Convertible Notes Payable


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


- 23 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


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,

 

 

 

2020

 

2019

 

2020

 

2019

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) available to common shareholders

 

$

(9,018,241

)

$

(375,234

)

$

(7,042,965

)

$

315,372

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Effect of common stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Add: interest expense on convertible debt

 

 

588,817

 

 

150,848

 

 

999,966

 

 

281,204

 

Add Penalty interest on convertible debt

 

 

445,277

 

 

 

 

445,277

 

 

 

Add (less) loss (gain) on change of derivative liabilities

 

 

7,170,785

 

 

(712,466

)

 

4,327,294

 

 

(2,476,567

)

Net income (loss) adjusted for common stock equivalents

 

 

(813,362

)

 

(936,852

)

 

(1,270,428

)

 

(1,879,991

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares - basic

 

 

200,780,577

 

 

54,303

 

 

101,158,965

 

 

30,549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – basic

 

$

(0.04

)

$

(6.91

)

$

(0.07

)

$

10.32

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dilutive effect of common stock equivalents:

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible Debt

 

 

 

 

940,656

 

 

 

 

940,656

 

Preferred shares

 

 

 

 

470,686

 

 

 

 

470,686

 

 

 

 

 

 

1,411,342

 

 

 

 

1,411,342

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares – diluted

 

 

200,780,577

 

 

1,465,645

 

 

101,158,965

 

 

1,441,891

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per share – diluted

 

$

(0.04

)

$

(0.64

)

$

(0.07

)

$

(1.31

)


The anti-dilutive shares of common stock equivalents for the three and six months ended August 31, 2020 and August 31, 2019 were as follows:


 

 

For the Three Months Ended

 

For the Six Months Ended

 

 

August 31,

 

August 31,

 

 

2020

 

2019

 

2020

 

2019

Convertible notes and accrued interest

 

3,610,181,585

 

 

3,610,181,585

 

Convertible Class C Preferred shares

 

1,828,604,242

 

 

1,828,604,242

 

Total

 

5,438,785,827

 

 

5,438,785,827

 


- 24 -



ARTIFICIAL INTELLIGENCE TECHNOLOGY SOLUTIONS INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)


16. ROBOTIC ASSISTANCE DEVICES GROUP, INC. CONSOLIDATION


In the quarter ended August 31, 2020, one of Robotics Assistance Devices, Inc.’s (“RAD”) lenders entered receivership under the US Bankruptcy Courts supervision. The trustee assigned to the bankruptcy estate used powers granted under the loan agreement with RAD to take over and control RAD’s bank accounts which allowed the trustee to transfer all funds available to the bankruptcy estate in partial repayment of the loan, which amounted to approximately


$50,200. Because the trustee of the bankruptcy estate maintained effective control of RAD’s bank accounts, one member of Management transferred control of an entity under his control to the Company in order to transfer the conduct of RAD business to the new entity, Robotics Assistance Devices Group, Inc. (“RAD G”) Because of this, the Company has consolidated RAD G beginning on June 1, 2020. The table below shows the assets and liabilities consolidated on June 1, 2020 that were contributed:


Cash

$

(283

)

Accounts receivable

 

450

 

Other liabilities

 

(11,675

)

Net liabilities contributed

$

(11,508

)


17. SUBSEQUENT EVENTS


Subsequent to August 31, 2020 through to October 13, 2020:


Convertible note holders converted $537,659 of principal, $234,805 of interest and $3,000 of fees into 587,797,882 shares of the Company’s common stock.


On October 6, 2020 and investor entered into a secured loan agreement whereby the investor advanced $150,000, with an effective interest rate of approximately 19% and a March 6, 2023 maturity. Principal and interest are to be repaid commencing on December 6, 2020 in 6 instalments of $2,000 per month followed by 22 instalments of $8,500 per month. The loan is secured by revenue producing devices having an estimated net book value of approximately $200,000.


- 25 -



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


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


Overview


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


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


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


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


- 26 -



Results of Operations for the Three Months Ended August 31, 2020 and 2019


The following table shows our results of operations for the three months ended August 31, 2020 and 2019. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.


 

 

Period

 

Change

 

 

 

Three Months Ended
August 31, 2020

 

Three Months Ended
August 31, 2019

 

Dollars

 

Percentage

 

Revenues

 

$

76,082

 

$

75,024

 

$

1,058

 

1%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

40,071

 

 

52,861

 

 

(12,790

)

(24%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

707,969

 

 

615,542

 

 

92,427

 

15%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(667,898

)

 

(562,681

)

 

(105,217

)

19%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

(8,350,343

)

 

187,447

 

 

(8,537,790

)

(4555%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(9,018,241

)

$

(375,234

)

$

(8,643,007

)

(2303%

)


Revenue


Total revenue for the three month period ended August 31, 2020 was $76,082 which represented an increase of $1,058, compared to total revenue of $75,024 for the three months ended August 31, 2019. This 1% increase is explained by a 23% increase in rental revenues partially offset by a $16,000 reduction in discontinued monitoring revenues from 2019.


Gross profit


Total gross profit for the three month period ended August 31, 2020 was $40,071 which represented a decrease of $12,790, compared to gross profit of $52,861 for the three months ended August 31, 2019. The decrease resulted primarily from higher costs of revenues which are based on allocations of personnel and charges in 2020.


Operating Expenses


 

 

Period

 

Change

 

 

 

Three Months Ended
August 31, 2020

 

Three Months Ended
August 31, 2019

 

Dollars

 

Percentage

 

Research and development

 

$

108,678

 

$

145,982

 

$

(37,304

)

(26%

)

General and administrative

 

 

568,378

 

 

444,310

 

 

124,068

 

28%

 

Depreciation and amortization

 

 

30,360

 

 

25,250

 

 

5,110

 

20%

 

Loss on disposal of fixed assets

 

 

553

 

 

 

 

553

 

 

Operating expenses

 

$

707,969

 

$

615,542

 

$

92,427

 

15%

 


Our operating expenses were comprised of general and administrative expenses, research and development, loss on disposal of fixed assets 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, 2020 and August 31, 2019, were $707,969 and $615,542, respectively. The overall increase of $92,427 was primarily attributable to the following changes in operating expenses of:


General and administrative expenses increased by $124,068. In comparing the three months ended August 31, 2020 and August 31, 2019 this increase was primarily due to increases in subcontractor and professional fees.

 

 

Research and development decreased by $37,304 due to greater development efforts in 2019 in creating new products.

 

 

Depreciation and amortization increased by $5,110 due to increases in revenue earning devices.

 

 

Loss on disposal was $553 for the three months ended August 31, 2020. There were no disposals in the corresponding prior year period.


- 27 -



Other Income (Expense)


Other income (expense) consisted of the change of fair value of derivative instruments and interest. Other income (expense) during the three months ended August 31, 2020 and August 31, 2019, was ($8,350,343) and $187,447, respectively. The 8,537,7904 decrease in other income was primarily attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt. Fair value of derivatives was largely affected by the decrease in the market price of the Company’s common stock during the current period.


In comparing the three months ended August 31, 2020 and the three months ended August 31, 2019, the change in fair value of derivative liabilities decreased by $7,883,251 due to the re-valuation of derivative liability on convertible notes and accrued interest based on the change in the market price of the Company’s common stock. The valuation of the derivatives associated with our convertible notes and accrued interest of the notes is dependent upon a number of estimates developed by management. Included in those estimates are the timing and availability of common stock underlying the conversion of the notes and accrued interest. Our notes generally contain provisions such that the holders are barred from conversion of any amount of principal or interest should that conversion cause their ownership of common stock to exceed 4.99% of the then outstanding common stock of the Company. Because of this, the amount of the derivative can at times be limited due to this factor. In the quarter ended August 31, 2020, the availability of shares underlying the conversion was significantly higher than in previous periods. The result of this was a significant increase in the liability reported as of August 31, 2020.

 

 

Interest expense increased by $654,569 due to an increase in interest expense on debt and $445,277 in penalty interest.


Net incomes


We had net loss of $9,018,241 for the three months ended August 31, 2020, compared to net loss of $375,234 for the three months ended August 31, 2019. The change is primarily the result of the change in the fair value of the derivative liabilities and other items discussed above.


Results of Operations for the Six Months Ended August 31, 2020 and 2019


The following table shows our results of operations for the six months ended August 31, 2020 and 2019. The historical results presented below are not necessarily indicative of the results that may be expected for any future period.


 

 

Period

 

Change

 

 

 

Six Months Ended
August 31, 2020

 

Six Months Ended
August 31, 2019

 

Dollars

 

Percentage

 

Revenues

 

$

139,403

 

$

115,329

 

$

24,074

 

21%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

94,102

 

 

73,554

 

 

20,548

 

28%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

1,100,731

 

 

965,289

 

 

135,442

 

14%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(1,006,629

)

 

(891,735

)

 

(114,894

)

13%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense), net

 

 

(6,036,336

)

 

1,207,107

 

 

(7,243,443

)

(600%

)

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(7,042,965

)

$

315,372

 

$

(7,358,337

)

(2333%

)


Revenue


Total revenue for the six month period ended August 31, 2020 was $139,403 which represented an increase of $24,074, compared to total revenue of $115,29 for the three months ended August 31, 2019. This 12% increase is a result of a natural growth over time as the customer grows its customer base.


- 28 -



Gross profit


Total gross profit for the six month period ended August 31, 2020 was $94,102 which represented and increase of $20,548, compared to gross profit of $73,554 for the three months ended August 31, 2019. The increase resulted primarily from the increased revenues noted above.


Operating Expenses


 

 

Period

 

Change

 

 

 

Six Months Ended
August 31, 2020

 

Six Months Ended
August 31, 2019

 

Dollars

 

Percentage

 

Research and development

 

$

190,401

 

$

120,308

 

$

70,093

 

58%

 

General and administrative

 

 

851,301

 

 

798,513

 

 

52,788

 

7%

 

Depreciation and amortization

 

 

58,476

 

 

46,468

 

 

12,008

 

26%

 

Loss on impairment of fixed assets

 

 

553

 

 

 

 

553

 

 

Operating expenses

 

$

1,100,731

 

$

965,289

 

$

135,442

 

14%

 


Our operating expenses were comprised of general and administrative expenses, research and development, loss on disposal of fixed assets 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, 2020 and August 31, 2019, were $1,100,731 and $965,289, respectively. The overall decrease of $135,442 was primarily attributable to the following changes in operating expenses of:


General and administrative expenses increased by $52,788. In comparing the six months ended August 31, 2020 and August 31, 2019 this increase was primarily due to increases in subcontractors by $81,332, professional fees by $35,135, software and technology expenses by $20,798 offset by decreases in travel by $70,466.

 

 

Research and development increased by $70,093 mostly due to due to credits received in the quarter ended May 31, 2019 that were a result of billing corrections of ($106,444). When taking those 2019 credits into consideration research and development in 2019 was actually $36,351 higher due to greater development efforts in the six months ended August 31, 2019 in creating new products.

 

 

Depreciation and amortization increased by $12,008 due to increases in revenue earning devices.

 

 

Loss on disposal was $553 for the three months ended August 31, 2020. There were no disposals in the corresponding prior year period.


Other Income (Expense)


Other income (expense) consisted of the change of fair value of derivative instruments and interest. Other income (expense) during the six months ended August 31, 2020 and August 31, 2019, was ($6,036,336) and $1,207,107, respectively. The 7,243,443 decrease in other income was primarily attributable to the change in the fair value of derivatives, interest expense, and loss on settlement of debt. Fair value of derivatives was largely affected by the decrease in the market price of the Company’s common stock during the current period.


In comparing the six months ended August 31, 2020 and the six months ended August 31, 2019, the change in fair value of derivative liabilities decreased by $6,803,861 due to the re-valuation of derivative liability on convertible notes and accrued interest based on the change in the market price of the Company’s common stock. The valuation of the derivatives associated with our convertible notes and accrued interest of the notes is dependent upon a number of estimates developed by management. Included in those estimates are the timing and availability of common stock underlying the conversion of the notes and accrued interest. Our notes generally contain provisions such that the holders are barred from conversion of any amount of principal or interest should that conversion cause their ownership of common stock to exceed 4.99% of the then outstanding common stock of the Company. Because of this, the amount of the derivative can at times be limited due to this factor. In the quarter ended August 31, 2020, the availability of shares underlying the conversion was significantly higher than in previous periods. The result of this was a significant increase in the liability reported as of August 31, 2020.


- 29 -



Interest expense increased by $327,073 due to an increase in interest expense on debt and $445,277 in penalty interest which was partially offset by a reduction in amortization of debt discounts of $500,533.At August 31, 2020 most of the debt has reached maturity and has been fully amortized. Interest expense for the 6 months ended August 31, 2020 was higher than in the prior year’s period because most of the debt is in default and interest is being accrued at a higher default rate and most debt had penalties that were added to the principal amount when the debt and interest was unpaid at maturity.

 

 

Gain on settlement of debt was nil the six month’s ended August 31, 2020 and $112,509 in the prior year’s period.


Net incomes


We had net loss of $7,042,965 for the six months ended August 31, 2020, compared to net income of $315,372 for the six months ended August 31, 2019. The change is primarily the result of the change in the fair value of the derivative liabilities and other items discussed above.


Liquidity, Capital Resources and Cash Flows


Management believes that we will continue to incur losses for the immediate future. Therefore, we will need additional equity or debt financing until we can achieve profitability and positive cash flows from operating activities, if ever. These conditions raise substantial doubt about our ability to continue as a going concern. Our unaudited condensed consolidated financial statements do not include and adjustments relating to the recovery of assets or the classification of liabilities that may be necessary should we be unable to continue as a going concern. For the six months ended August 31, 2020, we have generated revenue and are trying to achieve positive cash flows from operations.


As of August 31, 2020, we had a cash balance of $184,853, accounts receivable of $52,074 and $22,334,881 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, 2020

 

February 29, 2020

 

Current assets

 

$

261,716

 

$

88,213

 

Current liabilities(1)

 

 

22,334,881

 

 

19,677,221

 

Working capital

 

$

(22,073,165

)

$

(19,589,008

)

__________

(1)

As of August 31, 2020 and February 28, 2020, current liabilities included approximately $9.5 million and $6.9 million, respectively, of derivative liabilities that are expected to be settled in shares of the Company in accordance with the various conversion terms.


As of August 31, 2020 and February 28, 2020, we had a cash balance of $184,853 and $13,307, respectively.


 

 

Six Months Ended
August 31, 2020

 

Six Months Ended
August 31, 2019

 

Net cash used in operating activities

 

$

(903,374

)

$

(1,010,924

)

Net cash used in investing activities

 

$

(50,731

)

$

(23,572

)

Net cash provided by financing activities

 

$

1,125,651

 

$

1,018,879

 


- 30 -



Net cash used in operating activities.


Net cash used in operating activities for the six months ended August 31, 2020 was $903,374, which included a net loss of $7,042,965, non-cash activity such as the change in fair value of derivative liabilities of $4,327,294, change in operating assets of $1,008,099, interest expense related to penalties from debt defaults $445,277, amortization of debt discount of $156,525, increase in related party accrued payroll and interest of $143,368, loss on disposal of fixed assets of $553, and depreciation and amortization of $58,476 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, 2020 was $50,731, which was the purchase of fixed assets $51,731 offset by the proceeds of disposal of fixed assets of $1,000.


Net cash provided by financing activities.


Net cash provided by financing activities was $1,125,6512 for the six months ended August 31, 2020. This consisted of proceeds from deferred payment obligation of $966,000, proceeds from loans payable $349,015,reduced by net repayments from loan payable – related party of $75,328, cash acquired on consolidation of RAD G of $283, and repayments on loans payable of $113,752.


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 29, 2020 filed with the SEC on July 28, 2010.


Related Party Transactions


For the six months ended August 31, 2019, the Company borrowed net advances of $35,738 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, 2020, the loan payable-related party was $1,386,617 and $1,310,358 at February 29, 2020. Included in the balance due to the related party at August 31, 2020 is $799,702 of deferred salary and interest, $540,000 of which bears interest at 12%. At February 29, 2020, included in the balance due to the related party is $656,334 of deferred salary and interest, $426,000 of which bears interest at 12%. The accrued interest included in loan at August 31, 2020 and August 31, 2019 was $67,090 and $34,917, respectively.


During the three and six months ended August 31, 2020 and 2019, the Company was charged $61,121 and credited $111,816, respectively for consulting fees for research and development to a company owned by a principal shareholder. During the three and six months ended August 31, 2019 the Company paid $54,222 and $(42,852), respectively in consulting fees for research and development to a company owned by a principal shareholder. The credit received in the quarter ended May 31, 2019 were a result of billing corrections of ($106,444) and after adjusting for this, would bring total charges in the six months ended August 31, 2019 to $63,592.


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Not applicable for a smaller reporting company.


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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, 2020. Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of August 31, 2020, 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, 2020, 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, 2020, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.


Our management, including our principal executive officer and principal financial officer, who is the same person, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.


Change in Internal Controls over Financial Reporting


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


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PART II — OTHER INFORMATION


ITEM 1. LEGAL PROCEEDINGS


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


2019

 

2020

 

Total

6/30/19

$5,000

 

1/26/2020

$15,000

 

 

7/30/19

$5,000

 

2/25/2020

$15,000

 

 

8/29/19

$7,500

 

3/26/2020

$15,000

 

 

9/28/19

$7,500

 

4/25/2020

$15,000

 

 

10/28/19

$10,000

 

5/25/2020

$20,000

 

 

11/27/19

$10,000

 

6/25/2020

$20,000

 

 

12/27/19

$15,000

 

7/24/2020

$20,000

 

 

 

 

 

 

 

 

 

Total

$60,000

 

 

$120,000

 

$180,000


The company has fully accrued the above $180,000.


As of August 31, 2020 the Company has paid $20,500. As of this filing the October 2019 through July 2020 instalments are in arrears.


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.


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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 and principal financial and accounting officer. (3)

 

 

32.1

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

 

 

101

XBRL data files of Financial Statement and Notes contained in this Quarterly Report on Form 10-Q. (4)

__________

(1)

Incorporated by reference to our Form 10-KT file with the Securities and Exchange Commission on March 12, 2018.

 

 

(2)

Incorporated by reference to our Form S-1 filed with the Securities and Exchange Commission on August 4, 2010.

 

 

(3)

Filed or furnished herewith.

 

 

(4)

In accordance with Regulation S-T, the Interactive Data Files in Exhibit 101 to the Quarterly Report on Form 10-Q shall be deemed “furnished” and not “filed.”


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SIGNATURES


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


 

Artificial Intelligence Technology Solutions Inc.

 

 

 

 

Date: October 15, 2020

BY: /s/ Garett Parsons

 

Garett Parsons

 

President, Chief Executive Officer, Chief Financial Officer,
Principal Accounting Officer, Treasurer and Director


- 35 -


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