Read Part 1 here:
This is part 2 of my review/analysis of AITX’s 10k for FY 2022. Part 1 contained my more high-level thoughts on financial performance and some key highlights. Part 2 will get down into the weeds a bit more on some key things I found in the 10k that were of interest. Let’s get to it!
Critical Audit Matters
This was a fairly interesting section within the critical audit matters going through AITX’s debt refinance last year. For you non-accountants/finance people out there, this is basically the auditors saying that it is incredibly difficult to value the losses incurred due to the refinance of convertible debt.
To recap, AITX basically paid off any convertible debt holders who hadn’t yet converted with a variety of different instruments. Some received straight non-convertible debt, some received shares and warrants, but some also received F Series convertible preferred shares. See my article here on the F Series.
Now, what the auditors are saying is that because these transactions were so difficult to value, it is extremely subjective how much their loss really was in those transactions. For me, the band-aid has already been ripped off from the convertible debt refinance, so I don’t really care about it anymore as I now know the go-forward capital structure. But if anyone was nervous about that section, that’s all they’re saying… they were hard to value, we had to use a lot of assumptions, use discretion.
I’ll keep this short. The going concern section should not be a surprise to anybody. AITX is going to make a loss this coming, likely the next year too. If it doesn’t raise cash at some point, it will go bankrupt. That’s how these things work. That’s all they’re saying, this is part of a growth stage company, high risk high reward.
Accounts Receivables (AR) Allowance
I was pleasantly surprised to see how low AITX’s AR allowance was at year-end, sitting at around 33k when compared to a collectible AR of 429k. I have gotten nervous in the past that AITX may have trouble collecting on some of its revenue given it’s smaller stature (companies tend to take advantage of this). Couple that with a monthly recurring revenue model where there are monthly invoices and (presumably) a lot of back-office admin.
So all in all, I’m pleasantly surprised there. It seems like a small win, but it signals two things. First, AITX is able to collect on its own bills (coming from consulting, you should see the problems they have), which is a nice “green flag” so to speak on company operational soundness.
Second, it shows that customers actually like the products enough to feel the need to pay every month. It sounds kind of dumb because they signed a contract. But you’d be surprised, again especially with a small company like AITX, many companies will just simply not pay if they’re not satisfied even though they may keep using the device (potentially). Any litigation is pretty unlikely given the dollar values involved and the fact that AITX is small. So again, good sign here IMO.
Related Party Loan Repayment
I had a rather lengthy section in Part 1 going through all of the CEO compensation received during 2022. One thing I didn’t hear many people talking about was that Steve has now been repaid basically all of his personal loan to the company, which totaled around 1m, of which 800k was repaid in 2022. So just an interesting tidbit there, Steve paid himself back for some personal loans, in case anybody cares 😊.
Debt Maturity Timeline
Now, I said this in Part 1, but AITX has renegotiated most of its debt to be maturing either at the end of calendar 2023 or early calendar 2024. Let’s break it down, if we we’re talking only about principal to repay, AITX has the following maturity schedule (with a little rounding 😊):
- Already matured: 650k
- Due by March 31, 2023: 515k
- Due by the end of March 31, 2024: 16.2m
- Due later than that: 8.4m
So as you can see, ignoring past interest expense already accrued and not paid, about 95% of AITX’s debt is not due into FY 2024, giving AITX some significant breathing room. Also, most of this debt is due near the end of FY 2023 (December 2023, mostly), which is even better.
This means that AITX can continue to grow the business without being crunched for cash for things other than regular operating expenses. From there, ideally AITX will have a much sounder business and cash flow in 12-18 months. While they likely won’t be profitable, they will likely be able to renegotiate that debt into more favorable terms.
However, as we all know, nothing is guaranteed. If AITX does not increase its cash flow potential and is not able to renegotiate/roll over this debt into more favorable terms, it will likely need to pay this debt off with more shares or some sort of more “toxic” arrangement. Again, not saying this will happen, but that’s the risk.
Either way, just know that Steve has setup the company pretty well for these next 12-18 months from a cash flow perspective. The breathing room should hopefully do the company wonders and let it focus on expansion.
F Series Preferred Shares
No changes to the F Series, they cannot be converted until August 2023. There have also been no new issuances of these instruments, and none have been bought back yet. This is still, in my opinion, elephant in the room number one for the company. The current potential converted shares from these are astronomical, currently 16.3 billion. That’s right, billion, not million. I urge you to read my F Series article again if you’re unaware.
Currently, common shares only truly account for around 25-30% ownership of the company. The rest is inherently tied into the F Series preferred shares, of which Steve owns like 95% of them.
I will make a separate article about this again looking forward. But just know that your common shares are basically just investing in a minority stake of the company. Also, whatever the market cap is that you see from current common shares is actually much less than the true value of the company. If the market cap is 80m, when you consider that only accounts from 25%-30% of the company, the true market “value” is around 3.5x that.
We still haven’t heard any news on what Steve plans to do with these. Other companies have lowered the convertible share ratio, for example moving it down from 3.45 to 2.0. Some have just paid out common shares at a reduced price and wiped them out. For now, it seems Steve is content to let these ride for now. Long term though, something will need to happen. More to come here.
Just know that if you are investing in AITX, your shares are only part of a pool of shares that are a minority stake. Again, everything has a price and they are obviously worth ownership in the company, it’s just less than when you buy a common share in a company with a more straightforward capital structure.
In addition to the potential convertibility of the F Series, AITX also has warrants outstanding of around 1.2b common shares. The weighted average exercise price is around 0.06, so we likely don’t see these start being exercised anytime soon (barring anything major). But it’s something to keep in mind as it represents a hefty number of shares, though nowhere near the F Series.
Remaining CEO Compensation (Series G Preferred)
One last point, Steve has some remaining potential CEO compensation that’s outlined in the 10k based on some objectives. This is different from the cash bonus he paid himself (the 1.5m that was controversial). He’s already earned around 2m from this from various different performance objectives, but he still has a few outstanding that you should know about.
I’ve outlined below.
- #1 – share price above 0.30 for 10 days – 10m common shares
- #2 – share price above 0.5 for 10 days – 30m common shares
- #6 – share price above 0.10 for 10 days – $250k
- #7 – share price above 0.20 for 10 days – $500k
- #9 – 50 units from one customer in one order – $500k
- Outstanding stock options
- 10m common shares at 0.15
- 30m common shares at 0.3
- #3 – sales in a quarter were greater than FY 2021 total revenue
- #4 – deployed 150 devices
- #5 – sales in FY 2022 exceed 1m
- #8 – RAD 3.0 launched by November 30 2021
So as you can see, Steve still has some more compensation coming his way potentially. However, the majority of the compensation remaining has to do with the share price going up SIGNIFICANTLY. Remember, we’re at like 0.014 right now. So the share price going above 0.5 is a long way away. Either way, just remember that this is out there and don’t start screeching on Twitter if/when these objectives trigger.
Anyways, that’s all I’ve got! Look out for Part 3 which will go through some looking forward predictions for the company for FY 2023 now that the 10k is out. 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.