AITX released a press release on April 5th which stated:
The CEO expects the combination of these changes and RAD’s strong sales funnel to result in monthly profitability within the next 9 to 15 months. While the Company has prepared forecasts aiming for positive cash flow by December 31, 2023, there are no guarantees that this target will be achieved.
I saw this and got excited for two reasons. One, well profitability and cash flow positive sounds pretty great! But second, I’m a numbers guy so I figured I’d take a crack at breaking this down.
In today’s article, I’ll go through a model on how this could pan out and how likely those goals are to be achieved.
Just to get this out of the way at the front, a couple of ground rules with me showing forecasts:
- What I’m forecasting won’t happen. I hope it’s close, but this is impossible to do.
- I swear if I see people quoting me that this is what’s going to happen… please don’t. I put disclaimers every time I do this with a company and without fail some bozo in the Discord is like “HUR DUR DUR DID YOU GUYS SEE SAM AKER SAID XYZ IS GOING TO HAPPEN WHAT A [insert either very nice or very mean adjective]” followed by a snarky comment chain on Twitter about how I’ve personally insulted him, his wife, his mailman, and his dog by not saying the most glowing things about their favorite stock.
- This is a framework to help you make YOUR OWN decision, so think of it as a tool, not the solution.
Let’s get started!
The Base Model
Modeling out AITX’s next year got out of hand pretty quickly, so there’s no way I can summarize in this article alone. So I created a google sheet with my model I developed in Excel. You can use this as a base reference and paste into your own excel and play around with the numbers.
You can find the model HERE in a read only version.
Please remember my rules above with this thing…
Now let’s break down the base model with some assumptions.
Time Period
The press release says they are aiming to be “monthly profitable” in the next 9-15 months and have “positive cash flow” by December 31, 2024. Those are different statements that sort of lead towards the same goal – operating profits and cash flow positive sometime near the tail end of FY 2024 (which ends Feb 28, 2024).
To keep this model from going completely off the rails, I’ve only forecast the final quarter of FY 2023 and a full-year FY 2024 income statement. So before some nerd decides to get nit-picky, yes this is a bit different to what the company was saying.
Essentially, we can try to forecast out some scenarios for FY 2024 and, assuming a general upward trajectory, we can infer if they are truly hitting the monthly profitability/cash flow positive goals at the tail end of the fiscal year.
For example, if we see a modestly negative EBIT and cash flow balance for the full year FY 2024, they are likely to hit that goal. If it’s not even close and we’re seeing returns like today, then it’s extremely likely they are not.
FY 2023 Base
Refer to the provided file. I used a modest Q4 FY 2023 forecast as we won’t have that for several weeks. But I’ve assumed a modest level of growth from prior quarters to keep it simple.
On the COGS and OPEX sides, I also kept these rather consistent with prior quarters for simplicity. I’ve also assumed a rather flat interest expense value as most of their debt won’t come due until FY 2025 and needs to be rolled over. So we should see interest expense remain about the same assuming additional financing is equity funded.
This gives us our base FY 2023 results.
FY 2024 Forecasting
Now here is where things really get off the rails (remember my rules at the front) so here is where you really need to play around with my assumptions. Let’s go down the line.
Revenue
I’ve given a range of revenue growth values of 2x, 6x, and 12x. Depending on how bullish you are, feel free to amend as you see fit. I see this range as a way to demonstrate potential outcomes even with extreme growth (12x would be crazy good, but unlikely).
To keep it simple, I’ve left one-time sales as a decent chunk of total revenue. We’ve heard many times that these are not the goal, but they seem to keep happening. So just to keep it simple, I assume rental revenue and device sales grow uniformly. Feel free to change.
COGS / Gross Profit
COGS are really just a construct of what gross margins with think the company will achieve. They sputtered a little of the gross margin front last year, but I think a relatively reasonable forecast range of gross margins from 70-80% works. As they expand, gross margins will theoretically increase from current levels as they more efficiently utilize their capital.
OPEX
OPEX is a very simplified forecast that relies heavily on what the company said was happening in terms of cost savings. They have already leveled off OPEX spend quite a bit over the last nine months, and I’m assuming that it stays level. However, I am taking into account a range of values for the forecast headcount reduction and expense reduction planning. The range was 100k-200k a month, so naturally my range was 1.2m to 2.4m per year in the worst and best case.
Now we have EBIT.
Interest Expense
Already discussed above, but I’m keeping this constant. This will probably fluctuate as a few loans come due in FY 2024. But I cannot read Steve’s mind, so I’m keeping it flat for now.
We now have earnings before tax. AITX doesn’t pay taxes (I feel like there’s a misinformed Bernie Sanders quote here), but nevertheless… earnings before tax = net income in their case.
Non-Cash Items
Now here is where I may lose some people. I will NOT be measuring this based on the standard “cash flow from operations” formula. That formula is rife with temporary cash to accrual differences that wash out over multi-year periods.
Therefore, for the Sam Aker approved formula (just kidding do whatever you want), I will consider it true “cash flow positive” if we see earnings before tax adjusted for the following non-cash items:
- Depreciation & Amortization
- Non-Cash Lease
- Inventory Write-down
- Right of Use Asset
- Stock Comp.
- Debt Discount Amortization
Side Bar – Debt Discount Amortization
For the sake of brevity, I will only explain debt discount amortization because it’s so large. When AITX issues their notes, they issue them at a discount to market interest rates. The carrying value of the debt is lower than the face value, thus at a discount. In good old US GAAP you have to amortize that discount over time, so by the time it’s repaid: Face Value = Market Value.
This, in effect, lowers the amount of interest paid to the debt investor, but it also means they receive less cash up front.
For example, with random numbers…
AITX issues a note with a 3% interest rate with a face value of 100 dollars due in one year. Say interest rates are actually 10% right now. So what kind of idiot investor (maybe someone who pays for a Timothy Sykes trading course??) would lend them 100 dollars? So the investor would say: instead, I’ll give you 93 now, you pay me 3 dollars in interest for the year, and then you pay me 100 dollars when it comes due. It all evens out.
So it’s a non-cash expense in that the cash hit was up-front and not dolled out in subsequent interest payments they would have had to make had the issued at a market rate.
Back to the discussion
Each of the above listed items are costs of doing business that mean AITX either already took the cash hit up-front (like with depreciation) or are stock comp and it’s pure non-cash.
So what did I exclude:
- Working capital (AR, AP, Inventory changes, bad debt, customer deposits, etc.) – these will wash out over time (in theory) assuming a general trend of growth.
- Accrued interest / deferred payments – they’re going to have to pay this eventually, so I won’t adjust it.
This gives us a nice clean picture of a fictitious steady state where AITX is or isn’t cash flow positive without factoring in the above temporary differences.
Is this a perfect method? No. Do you have to use it? No. Do I like it? Yes. Has anyone figured out what is going on with this Twitter account? Me neither, but I love the dog videos.
I feel like I’m losing the guy from rule #2 right now… GO BACK AND READ RULE TWO!
The Formula
Let’s summarize the formula, its is:
- EBT plus:
- Depreciation & AmortizationNon-Cash LeaseInventory Write-downRight of Use AssetStock Comp.
- Debt Discount Amortization
- Equals Adjusted Cash Flow
Now that we have our formula, let’s analyze.
FY 2024 Forecast Analysis
Model Results
Here is the part of the exercise where you remember rule #3 and start playing around with what YOU THINK reasonable growth forecasts are. Play around with it, see what you get, and think about how realistic that is.
From what I’m seeing, if we assume expenses and gross margins the way I did, they are going to need to hit EXTREME levels of growth to be cash flow positive for the full year FY 2024.
HOWEVER, this does not necessarily mean that they are not cash flow positive on a month-to-month basis near year-end. However, they would likely need something like steady 8x growth to start hitting that on a monthly basis at the tail end of the year.
To help visualize as well, I added a row for devices deployed. This is a GROSS OVERSIMPLIFICATION, but it assumes they have something like 350 devices deployed right now. Assuming the exact same device mix as right now (remember, they all have different bill rates) we can broad stroke say that devices need to grow uniformly with revenue.
So say they hit 12x growth for example – that means they’d need to have around 4,000 units deployed by the end of the year. I don’t even know if RAD has the capacity to do that. But that figure is certainly not correct, but it raises an important question – when thinking about your revenue targets, remember the number of devices needed to be deployed and think about if that’s actually possible in your opinion.
Now, go play around with the numbers and see what you can get.
My Spicy Take
Just because I can’t go a whole article with annoying people… if I haven’t annoyed you already, this might. I think it is very likely that AITX will NOT be profitable or cash flow positive (using my formula) by the end of FY 2024. I give it a 10% chance.
There we go, bring on the hate.
I just do not see a feasible growth scenario where that is possible in the next 12 months or so. They will need to have sold and deployed an astronomical number of devices in that period and I just can’t see how they do it when looking back at their performance over the last 24 months.
Do I think FY 2024 will be a great year? Sure. Will there be solid growth of 2-3x revenue? I hope so! Will I finally stop asking myself questions? Why do you ask?
ALL OF THAT BEING SAID
I think they will be able to make good progress on being cash flow positive and I think it’s a better FY 2025-2026 goal. As long as they keep up with the industry headwinds and adoption continues, which all indications point to that happening, there’s a lot of inertia pushing this company forward. This, coupled with competent management and effective products, gives me a good degree of confidence.
Nothing is certain and anything can happen, but my current forecasts show profitability and positive cash flow, just not as soon as they are hoping.
Wrap Up
Hope this helps visualize forecasting this path to profitability and positive cash flow. There’s a ton of unknown and anything can happen, so you need to play around with the numbers and come to an educated conclusion on what YOU think will happen.
My current opinion is that the announced goal is unfeasible, but not impossible, and it will take longer than the company is hoping.
It’s not the end of the world if it doesn’t happen. As long as there is steady growth and adoption by the industry, it’s only a matter of time. Some would say it’s #Unavoidable or #Inescapable (I swear there’s a better word there that Steve can think up…).
Anyways – thanks for reading and hope you enjoyed it!
Article Sponsors:
SEEKING ALPHA – Get an exclusive discounted offer for Seeking Alpha Pro: https://seekingalpha.me/SamAker
SITEGROUND – If you are interested in starting your own blog and/or need a hosting provider, I use SiteGround hosting and have had a good experience with them. Feel free to use the referral link here to sign up and help support my blog.
DISCLAIMER – AT THE TIME OF WRITING THIS ARTICLE I HAVE A LONG POSITION IN AITX. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. I AM NOT A FINANCIAL ADVISOR. DO YOUR OWN RESEARCH.
