Warning low effort post! In honor of Q3 ending last week, I wanted to have some fun and write an article with some of my wildly speculative predictions of how I think the 10Q for the 3 months ended 11/30/2021 may look. What I want to do is stick to the income statement down to operating income and try to predict each line item. Then, after the 10Q is released, as part of my deep dive I’ll go back and grade myself on how I did.
More so than usual, reminder that this is all purely speculative and not a guarantee of outcome. In fact, this is probably my first article that is a bit more “stick your finger in your mouth and hold it up” in terms of analysis. I am actually not a huge fan of people with grandiose predictions about where a stock price is going or how a company is going to increase their revenue by 100000% in two years (rocket ship rocket ship). So I tried to ground my thoughts in at least a little bit of fact and apply a conservative lens.
Hope you enjoy and remember to let me know if you think I’m an idiot for these predictions. My preferred method of bashing is an account pretending to be me, a profile picture of Steve Reinharz from five years ago, and a 150-word run on sentence posted to Stocktwits.
To form our base, I’ve presented AITX’s financials below.
Net revenue for AITX is broken down into two categories. First, device rentals, which are when AITX manufactures a device and rents it to a customer at some rate per hour, day, month, etc. Second, device sales, which are when AITX just sells the device to a customer. As you’d expect, they own the device and can use it for as long as they want.
Let’s look at these separately.
This will be a separate article, but this is the key metric for AITX. Recurring revenue is king. Luckily for this sake of this article and me not looking like a complete fool, AITX announced guidance for Q3 2022 revenue on 10/21/2021. Key points were:
- Monthly rental revenue for October: over $80,000
- Monthly rental revenue for November: expected to be over $100,000
This is a bit of a layup, but let’s build this into our Q3 figure. Let’s be conservative and say October and November revenue was $80,000 and $100,000 respectively. That leaves September. I don’t think September would have been less than October, so let’s conservatively place it at $70,000.
That leaves us with rental revenue of $250,000 versus $120,000 in Q2. Nice jump, but much more work to be done…
In the same press release, AITX announced they expect $550,000 to $600,000 in non-recurring revenue i.e., device sales. Completely dummy proof. To keep the theme of conservative estimates, let’s go with $550,000 in device sales on the bottom end of the range.
Let’s get out our abacuses here and tally this up. $250,000 in device rentals and $550,000 in device sales is $800,000 in total net revenue. That would be the best quarter ever in AITX history! Great news, but let’s remember there’s a lot more work for them to go.
COGS and Gross Profit
Are you ready for some low-level analysis? Well, here it is. Gross margin will be equal to 75%, which is the simplest of simple averages of 70% and 80% in Q1 and Q2 respectively. You heard it here first folks! That brings COGS to $200,000 and gross profit to $600,000. Easy!
But seriously, AITX always achieves very impressive gross margins, and I wrote an entire article on it. AITX could very well achieve a margin higher than 75%, but I wanted to keep it on the conservative side once again. So don’t be surprised if their gross margin is 80% or higher.
Operating expenses, or OPEX, are a bit tricky. As you’ll see above, they constitute R&D, SG&A, Depreciation and Amortization, the operating lease, and fixed asset gains/losses. Let’s break these down.
R&D and SG&A
Recall that R&D and SG&A are the majority of the “people” cost in AITX, with R&D being mostly performed in Canada. We know AITX has been hiring more people and surely costs have gone up. However, by how much?
For SG&A, my current thought is that it has not grown more than the nominal growth between Q1 and Q2. Since it grew by $691,128 from Q1 to Q2, I’m going to broad stroke say that’s how it’ll grow by $700,000 from Q2 to Q3.
R&D, on the other hand, is another story. Based on Steve’s comments in AMAs, etc., it seems these are the positions the company is trying to fill. Technology developers seem like the most in demand position, mostly to be located at the Canadian affiliate. Have a flip through RAD’s careers page and you’ll see at least ten open positions for tech development in Canada.
While these are just the open positions, I expect they have already filled many more positions in Q3 vs. Q2. For this reason, I expect R&D to increase by 50%, so up from around $699,292 to $1,048,938.
Depreciation, and Amortization
This is primarily from manufacturing equipment, IT equipment, and rental devices. This should not change much, I have it increasing by 15% to $54,845.
Operating Lease and Gains/Losses on Fixed Asset Sales
This is the lease for AITX’s properties, primarily the REX, which are a fixed monthly cost. I am not aware of new leases at this time, so I will just assume the same Q2 number for Q3 of $75,212 even though it’s not going to be the exact same amount.
There will be no gains or losses on fixed asset sales. Why? Because I said so! But really, this is like asking someone if they’re going to sneeze sometime in the next year. Who knows and it doesn’t matter!
When we put all of my predictions together, it should look like this:
Now, the most important part, grading criteria. It wouldn’t be very fair if I didn’t outline my grading scale ahead of time. For each of the above line items, my scale will be the following based on how far off I was:
- A: 0% – 5%
- B: 5% – 10%
- C: 10% – 15%
- D: 15% – 20%
- F: 20% or greater
(And no rounding allowed, so statistically it is impossible for me to hit a whole number (0, 5, 10, etc.) exactly!)
Thanks for humoring me with this article. I needed a palate cleanser from some of the more dense articles I’ve been writing. Let me know here or on Twitter what you think of my predictions!
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.