Artificial Intelligence Technology Solutions Inc.: Form 10-Q for the period ended Aug 31, 2020

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.

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

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.

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

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:

(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.

- 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.

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.

- 32 -