Hello everyone! I apologize for the lack of content the last two months, but I am slowly getting back in the saddle after a busy period in my life. And what better way to get back into it than a review of AITX’s 10k for FY 2022!
I’ll be splitting this article into two parts… first we’ll go through the 10k at a higher level, and it will be a bit less technical. My second part will go through my more detailed notes on some specific line items, etc. that I thought were important. Let’s get started!
Financial Highlights – Income Statement
I’m not going to regurgitate numbers here like some computer-generate article (we all know the type), so I urge you to open the 10k in conjunction with this 😊.
The income statement is everyone’s favorite section! But how did they do this year? Not surprisingly, this was a year of growth for AITX, with the company growing topline revenue by about 300%, or 4x FY 2021 revenue (in other words), with revenue increasing from 360k to 1.4m.
We also saw very high losses, about 13.3m at the operating level, which I think is the only level that matters in this case. This was due to high investment in the company in the form of R&D, salespeople, the REX, etc. This all drove some fairly large operating losses.
From there, the company, again not surprisingly, incurred some big book losses related to interest expense and loss on the settlement of debt below operating income.
Let’s unpack all of this…
Revenue growth ended up being around 4x FY 2021 revenue. While this sounds pretty amazing on the face of it (and I think it is a good thing) the company objectively fell short of their own expectations. I wrote about this previously, but the company earlier in FY 2022 was issuing guidance of anywhere between 5x and 15-20x FY 2021 revenue.
So at the end, we hit below that range of growth. Why was there not pandemonium in the streets then? Do we need to resharpen those pitchforks and draw and quarter Steve? I think topline revenue growth needs to be taken with a grain of salt for three reasons.
First, it is heavily influenced by direct sales versus monthly rentals. Direct sales tend to over-inflate revenue as it is not a monthly stream of income. They’re nice from a cash in the door perspective, but the strategy has always been long term customers via rentals.
Second, when it comes to rentals, the question of revenue recognition comes into play. It might take a month or two from a signed sale agreement to deployment for a device. We then start only getting a trickle of monthly revenue. So any late in the year sales for a rental unit would have minimal FY 2022 impact, but could be worth millions long-term. This is how revenue recognition works so we don’t get another Enron falsifying revenue, so we must work within these confines 😊.
Third, with the concept of exponential growth, 4x growth from 360k seems pretty underwhelming, it’s only another ~1.1m in revenue. But 4x revenue again would be another (4×1.4m = 5.8m) and then 4x that is over 20m, and so on. So remember, the goal is not linear growth, it’s exponential. You need to decide if they can keep up with the rate of growth, not the dollar value of growth.
Operating Expenses and Loss
Probably the most troubling thing for most investors is the heavy operating expense spend which drives heavy operating losses. This should not be a surprise to anyone (unless you’re the kind of person who analyzes stocks by the color of their logo), we’ve always known AITX is a growth stage company that is taking a big risk by investing in itself for future profits. It could be years before the company turns a profit…it could be never.
At the end of the day, we’ve clearly seen the company is reinvesting cash back into the company at a high rate, with about 14m in operating expenses this year. But what has this spend gone towards? This is where I think we have some room scrutiny… Here is a brief breakdown of opex spend, it’s a little tricky to parse through because it’s written in the form of year-over-year increases, but it gets the point across.
- R&D – 2.9m total in FY 2022
- G&A – 10.9m total in FY 2022, representing increases of:
- CEO compensation – 3.5m increase (216k in 2021 to 3.7m in 2022)
- Professional fees – increased by 750k
- G&A wages – increased by 2.5m, but includes a 1.5m bonus included above for the CEO
- Total OPEX – ~13.8m
If we break this down, of the 13.8m:
- R&D was 2.9m, or 21% of total
- CEO comp was 3.7m, or 27% of total
- Everything else then – wages for non-R&D employees, professional fees, etc. was 7.2m, or 52% of total
Now it’s an early opinion time before I wrap up below. I said it back then and I’ll say it again, I’m a little indifferent to how much Steve paid himself in FY 2022. The performance compensation component (Series G Preferred) was around 2m which shouldn’t have been a surprise to anyone. It was literally right there in the 10Q’s with the milestones. For the remaining 1.5m… the guy has a majority voting stake and can pay himself whatever he wants technically, so we don’t have any visibility into that.
So in the end, am I comfortable that he was paid more than the entire R&D budget for FY 2022? Not really. But this compensation could be a good investment in the company. The guy took a huge risk to make this company and works like 27 hours a day on RAD. He was in self-proclaimed debt and put his whole life on the line for this. This sounds like his way to get his head back above water so that he can focus on AITX. Conversely, if he forced himself to be totally based on equity comp through the F Series, which are extremely illiquid, I don’t totally know if he lasts a year or two financially.
In the end, I have to trust that he was prudent with how much he paid himself. This year it looks like he paid himself A LOT versus the size of the company right now. But that may be a build up of several years of basically making nothing from the company. So we may see that proportion of pay go down for FY 2023.
So I’m indifferent all in all… it was a lot of money, but I’ll see how it all pans out. A huge red flag would be if he checked out after the payday, but he clearly didn’t.
Other than that, the rest is much less controversial. 3m in R&D and all of the associated wage expense increases make complete sense. If you were expecting differently, I don’t know what to tell you.
After our operating losses, the company incurred significant other expense, the vast majority being non-cash items. These were high interest expenses incurred due to issuing notes at a discount and also the book losses on settling their toxic convertible debt right.
Again, these are non-operating in nature, but just know that only the interest expense is persisting. As the company’s financial health improves (or if it improves), debt cleanup will be a top priority and we’ll see interest expense decrease. But for now, it isn’t going anywhere.
Financial Highlights – Balance Sheet
I’ll keep this one short… key things to know here:
- Cash was sitting at 4.6m which is awesome. That represents (approximately) 3-6 months of cash burn, give or take, depending on the business.
- They have a current ratio of around 1.5 (current assets / current liabilities). In other words, if the business was cash flow neutral, it could pay off all of its liabilities due in the next 12 months using current assets (cash, AR, inventories, etc.)
- Long term debt/liabilities are still very high, around 25m. These are mostly due during FY 2024, so we have to ignore these for now. But more on these in the next article.
- Convertible debt is negligible from a toxicity perspective, just some really minor potential conversions there.
Financial Highlights – Cash Flow
It doesn’t take a brain surgeon to know that the company burned a ton of cash this year as it had significant losses. Again, as a startup, this is what we’re going to see.
Cash flow burn was 14.8m from operations last year. The company had positive cash gains for its interest expense from amortized debt issued at discounts, stock comp, and the big settlement on the convertible debt. However, it also burned additional cash which does not flow through to the income statement for prepaid expenses, increases in AR, and the biggest being large amounts of device parts inventory being built up.
This is all completely par for the course. They are building a businesses and this was basically year 1 of serious operations. This happens. Look for cash burn to settle down some, but it will go up almost certainly.
Other Business Highlights
I’ll save the boring line by line things for next article, but I wanted to give some of my personal highlights from the business overview section. Namely:
- We’re up to 5 salespeople which is awesome, look for that to grow even more.
- They have 311 sales opportunities, which are defined as companies which have a quote they can sign and they have the ability to pay for it.
- Deployment expectations are between 250 and 1250, and as of May 2022 they have already hit 250. This was sort of a lazy guidance in my opinion… but guidance is supposed to be conservative so there you go! Another article to come on FY 2023 expectations…
- They are expecting COGS relief which is most likely tied to the large ROSA shell order.
- They are actively seeking to acquire patents, but nothing new there.
All in all, some cool stuff there.
Now it’s my hot-take time, what did I think of this year’s performance? If I could sum it up in one sentence it would be: a little underwhelming, but not a surprise. Going into the year, I think I was expecting some more significant sales growth and some larger orders to come through. I think Steve did too, or else he wouldn’t have listed sales guidance as 5x-15x FY 2021 revenue when we only hit 4x.
It felt like that company had a lot of momentum after moving into the REX and we never got the rush of sales orders we expected. Now, don’t get me wrong, I still liked the level of sales growth, and this next year will be very telling. The company is clearly still growing and expanding. But I think everyone expected more sales, including myself.
Now, I said above that the revenue figure listed is deceiving, so that’s part of the reason why I’m still comfortable with their progress and am not jumping ship. FY 2023 will be a very important year for the company. We’ll now have a full year straight of the company operating out of the REX and being structurally sound (i.e. with a CFO, a sales organization, etc.) In FY 2021, we saw much more of the growing pains that should be less evident in FY 2023 (barring any additional major expansions).
On the reinvestment and spend side, I thought the company did just an okay job here as well, but I have a hard to judging their performance for sure. This goes into my discussion on CEO compensation… I liked the spend on R&D and the other operational expenses going up made sense to me, but I’m only partially convinced on the CEO compensation side. I would have rather they spend that money on more engineers, developers, etc.
But spending as much as they did on the CEO is a risk in my opinion. But remember ladies and gentlemen, a risk can go either way. This could be a blunder for the company or it could end up being exactly what the company needed. I’m still leaning towards a positive spin on the CEO compensation in general, but I remain skeptical as always 😊. Either way, only time will tell.
So all in all, I’ll give the company a 7/10 for the year mostly driven by lower-than-expected sales and their spend. However, the company made a ton of progress structurally and from the growth perspective. For that reason, I’m still firmly long, but will be closely watching the coming year’s performance.
Thanks for reading!
DISCLAIMER – I CURRENTLY HOLD A LONG POSITION IN $AITX. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. AT THE TIME OF WRITING THIS ARTICLE, PERSONS AFFILIATED WITH THE COMPANY ANALYZED ABOVE MAY BE PROVIDING MONETARY COMPENSATION AS MONTHLY PATRONS THROUGH MY PATREON. THIS COMPENSATION IS NOT PROVIDED IN RETURN FOR ANY SERVICE, WRITING ABOUT A PARTICULAR TOPIC, AND/OR FAVORABLE OR UNFAVORABLE OPINIONS. MY PATREON SUPPORTERS HAVE NO INFLUENCE ON THE CONTENT OF MY ARTICLES.