Recently the CEO of AITX, Steve Reinharz, hinted that AITX would do a production run of the ROSA 3.0 for one thousand units. Note, this is all speculation and not one hundred percent confirmed. Though the CEO hinted it was likely. This is pretty significant as, according to the trusty AITX discord, there’s likely less than 250 units deployed total (of any AITX unit type).
Since the announcement, I’ve heard some chatter online about the production run and what it means for AITX, some of it incorrect. In this article I want to go through why this production run is being done, how it will reflect in future AITX financials, and the ultimate impact if they’re all deployed.
For a company in a stable business, when they are planning out their next year, six months, etc. they typically start with some kind of forecast demand or realistic sales target. From there, you back into how many units you need to produce in order to meet that demand forecast. For AITX, they think that this next generation of ROSA, the 3.0, can realistically sell one thousand units, and maybe even more, before a ROSA 4.0 comes out.
From a supply chain efficiency perspective, you want to produce as many units as possible in one production such that production equals your forecast demand. Why is this?
First, for raw materials, supplies, etc. you get volume discounts form your suppliers if you purchase all the raw materials at once. This is as opposed to just making small batches whenever an order comes in and order raw materials as needed. Your pricing power can be severely diminished, or many times suppliers won’t even work with you if you don’t make a large enough order.
Second, labor cost efficiency. If you have a production scheduled mapped out for six months, etc., you will know exactly how many people you’ll need, how many hours they need to work, and therefore approximately what your labor costs are. This means you can appropriately staff without having to pay overtime or, even worse, paying people for idle time.
Lastly, deployment time. For AITX, this would be the time from when a customer places an order to when it’s deployed, operational, and earning revenue. If AITX has to wait for a customer to order something before they actually start manufacturing, it could take weeks for them to get raw materials sourced, manufacture the product, get it to the customer site, and set it up.
Unless there’s some unique circumstances, typically when a customer orders something they want it ready as soon as possible. If the ROSAs are already manufactured, all that AITX needs to do is maybe slap some branding on it before it goes out to the customer for deployment. In my estimation, they could have it out the door and deployed within days of a customer order.
Financial Statement Impact
When products are manufactured but not yet sold, like in this case, there is no impact to the income statement that you will see. The costs raw materials, manufacturing costs, etc. will be capitalized and only be shown on the balance sheet as an increase inventory or similar line items like raw materials, etc. There will then be a a corresponding decrease in cash for payments to suppliers, manufacturing personnel, etc. You will then see these corresponding increases/decreases in working capital on the cash flow statement. You may see some uptick in some operating expenses that are not capitalized, but those should be relatively minimal.
When they are sold, then you will finally see revenue and the corresponding per unit production costs show up in the all-important income statement. You will see the monthly rental revenue AITX is receiving along with the cost of goods sold hitting the income statement, which is where those capitalized inventory costs will start flowing through to reach some periodic gross profit per unit. I can’t comment on this too much as I don’t know how AITX accounts for their cost of sales exactly, but the general concept applies.
So long and short, don’t expect to see any income statement impact for several months until AITX starts to actually sell the ROSAs. It might be a while depending on when orders come in. So, I don’t want to see any readers complaining about this asking where the thousand ROSAs are when the next 10Q comes out. But I can already visualize some brand-new Twitter account named DWNIJVWDNV343078924598 complaining about it to Steve on Twitter in three weeks and asking where the money is.
Financial Performance Impact
We now know that we won’t see any profit and loss impact until these are sold. But how much eventual profit are we talking about here?
I’m actually a little salty because I’ve spent the last few months trying to back into how much the per hour, per day, and per month approximate bill rate was for a ROSA. Full disclosure, my estimate was about $0.75 per hour. I thought I was so clever and was actually thinking about making an article about it. I even thought it was some kind of secret or the pricing wasn’t supposed to be public, so I was afraid to ask!
Then Steve, I think on the Discord, dunked on me and casually mentioned the ROSA bills at a standard rate (before discounts) of $1 per hour, which equates to $24 per day, $730 per month, or $8,760 per year. However, I think when it averages out it comes out to less due to volume discounts, dealer mark-ups, etc. So, for my purposes, let’s say the average bill rate will be about $0.90 per hour, or $657 per month and $7,884 per year, which is a bit more conservative. I wasn’t too far off, I guess!
To work down to a gross profit, we need to factor in those production costs I described above. I think the ROSA is not their highest margin product, so let’s say their gross margin on a ROSA is 75%.
Now, let’s assume AITX has a great middle of FY 2023 (when I think these would most likely start to get sold) and they sell all one thousand of their units. That would be annually:
- Revenue: $7.84m
- Cost of Sales: $1.97m
- Gross Profit: $5.91m
That’s almost $6m in gross profit that can be used to reinvest in the business and help pay for more R&D, more salespeople, etc.
However, and I’m going to sound like the bear gang, but it’s true. Even if AITX sells all one thousand of these units, they will be nowhere near profitable just off of these unit sales. AITX has now earned an additional gross profit of approximately $6m, but their operating expenses (SG&A, R&D, etc.) will likely be well above $15m in FY 2023, which are my estimated operating expenses for FY 2022. By FY 2023 operating expenses could even be in the $20m plus range.
So, in short, these sales will put a dent into being profitable and would be a great achievement if they were all sold. But this is not even close to being enough to reach profitability as I’m sure the AITX team knows all too well. On the bright side, Steve and the AITX team are incredibly ambitious and have high hopes for their sales targets. So, this production run may go from one thousand ROSAs, to two thousand ROSAs, and then maybe one hundred ROAMEOs, and so on. But this all part of the risk of the OTC, none of that is guaranteed!
This news of a thousand units of production is great news. It means Steve genuinely thinks they can sell one thousand units, which is well above their current deployed unit count. We likely won’t start seeing a financial impact for several months until these ROSAs get sold. And lastly, as the FUD gang will love to hear, selling all one thousand of these units will not make AITX even close to profitable. But if you are long, don’t be discouraged, if AITX can sell one thousand ROSAs, it makes it seem much more likely that they could sell two thousand ROSAs, then three thousand ROSAs, maybe another 100 ROAMEOs, etc.
For further reading and AITX analysis, check out all of my articles HERE as well as in the sidebar.
DISCLAIMER – I CURRENTLY HOLD A LONG POSITION IN $AITX. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES.