AITX Analysis – Q2 2022 10Q

Hello all! Better late than never… here are my thoughts on the AITX 10Q for the three months ended August 31 2022. I am going to just go rapid fire style on this one and give you my key points having read the filing. I’ll then wrap up with my general thoughts on the company and its trajectory.

Recurring Monthly Revenue

So year over year, recurring revenue is up about 100%. It’s always nice to see some growth, but so far we are falling short of Steve’s prediction for 3-5x growth in recurring revenue (per the last Q&A). This means that Steve is optimistic for Q3/Q4, which honestly makes sense to me.

We’ve seen some pretty good sales PR over the last few months and we know there is a large backlog being cleared through. It sounds like they’ve made good progress on the backlog, so one would expect that more and more devices are getting out in the field and earning revenue.

Because we aren’t close to 3-5x revenue yet, I would limit your expectations when it comes to revenue growth. To stay conservative, I’m still thinking maybe 3x revenue growth, but I hope I’m wrong (in a good way)!

Cash

Let’s face it, the company is still cash strapped and has eaten through their big cash position accumulated at the end of last fiscal year. We always knew this was going to happen, and it looks like the end of Q2 and into Q3 was when this came to the forefront. So while dilution was relatively minimal over the first six months of the year (only around 325m shares, or less than 10% of outstanding), it will increase.

And speaking of the devil, while not in the 10Q as it happened afterwards… Steve diluted his own position via his Series F Preferred Shares and raised around $3.5m via debt. I won’t analyze this yet as I don’t have much detail yet on how exactly he diluted himself and not common shareholders (his words, not mine). I will wait until the next 10Q and can give thoughts then.

What we do know: it is 3.5m in proceeds from debt on 4m principal, and a warrant to purchase Series F Preferred Shares which dilute Steve down from 65%-54%.

In other news, cash burn is holding strong at around 3-4m per quarter, which is signaling what Steve already said: his goal is to pivot towards being cash flow positive. That means controlling spend more and keeping expenses flat or even dropping expenses. I still think we’re a long ways off from cash flow positive, but again I hope I’m wrong!

Margins

Great news, margins are back up! Not much left to say here other than the growing pains of lower margins of the past few quarters is gone. This was due to some inventory issues that have been rectified…someone correct me if I’m wrong but it had to do with some obsolete inventory that was written off and expensed via COGS. Either way, our amazing margins are back which is really cool. I expect these to hold strong barring any one-time issues.

Debt

Other than the new debt mentioned above with the Series F, debt has held relatively steady over the past two quarters. However, I expect to see some more debt sprinkled in, in addition to another ~475k in debt issued just after the quarter. So far it has been used to supplement cash raised through selling shares, and I expect that to continue.

Big picture, we’re still seeing most debt repayments coming due near the end of 2023 and then all through 2024. So once again, we’re really going to need to see some cash flow growth out of the company or it is going to be incredibly expensive to refinance when those start coming due.

Bad Debts Expense

So no bueno, but AITX has grown their bad debts expense to be 145k for the six months so far this year. When your six-month revenue is around 500k, a bad debts expense of 145k is a sizeable chunk of your revenue already recognized… it’s actually quite a lot and not a great sign. So take that as you will…

HOWEVER, bad debts expense are not a guarantee that you will never collect on it. But actually booking the bad debts expense is a pretty strong sign that it’s unlikely. So don’t expect to recoup that.

Warrants Exchange

One interesting tidbit that I don’t think was announced, AITX essentially purchased warrants to purchase 955m shares in exchange for around 3m in debt. Remember, a warrant is basically a call option to buy more shares at a certain price. This is two things in my mind.

First, this is VERY bullish on the long-term success of the company. This is basically a stock buyback which is financed by debt. You don’t buyback stock unless you are very confident in its future performance or, in other words, you think it is undervalued.

Second, this is VERY risky. In buying back shares (or warrants in this case) with debt, you better hope the share price will actually go up in the somewhat short term. In the worst case, if the stock price keeps going down, it’s going to look pretty dumb taking out 3m in debt in order to purchase warrants which were valued at a previously higher price. Put another way, if the share price keeps dropping well below the warrant exercise price, the warrants are effectively worthless unless there is some glimmer of hope it will recover.

All in all, very bullish move, but also very risky. We’ll see how this one plays out! One way or another, it cancelled 955m potential new shares.

Series F Preferred

The second interesting nugget from the filing had to do with Series F Preferred Shares. Remember, these are the ones that let Steve convert his preferred shares into like 3.45x the outstanding common share count at any time.

Well normally that amount he can convert into is listed in the potential shares to be diluted along with warrants, convertible debt, etc. However, this quarter for the first time it is no longer included. Sorry to burst your bubble, but the conversion option still exists as we haven’t heard anything to the contrary… and believe me if the Series F Preferred went away the common share price would go up like 300% in a single day.

My interpretation of why they no longer show them as potential convertible… there’s some accounting / legal interpretation of the ever so famous clause in the Series F Preferred that said they cannot convert into common until the end of 2023. So my guess is… during this quarter they were able to get their legal / account people to say that “technically they can’t be converted during the quarter, so we don’t have to list them”. That’s my best guess? There is no other change to the terms to the contrary, so I’m operating under that assumption for now 😊.

My Overall Take

To be quite honest, this 10Q was a bit lackluster. I say lackluster because I really expected some quarter over quarter growth (Q1 to Q2 I mean). Instead we saw flatline revenue and flatlining costs. We all know this is a marathon, not a sprint, but not seeing the general upward trend is a little worrying.

That being said, it only takes a strong Q3 to more than make up for it (copium?), so I’m not completely writing off AITX by any means. But it doesn’t surprise me that there’s been a share price drop over the last few months given that actual tangible revenue performance has been mediocre. Especially when we see regular press releases with more and more sales, and yet revenue seems to always fall a bit flat.

In the end, we have to be prospective looking and not retrospective looking. We see there is a strong sales pipeline and obvious customer interest. It is just taking longer than Steve and all of us, frankly, hoped.

So all is not lost, but I personally need to see some more tangible financial growth over the next two quarters to close out the year. If not, I will start to be seriously concerned as all of that debt starts becoming due at the end of 2023 and into 2024.

Enough of my doomer take though – I still have a long position and am riding it out. And I still believe in the company as a whole, it’s just starting to make me a little more nervous than I have been.

Anyways, that’s all I’ve got. Thanks for reading all! I am trying the best I can to get more articles out, but life is busy 😊.

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.