AITX Analysis – Q3 2023 10Q

I’m a bit late here… so sorry in advance but better late than never! I wanted to get down some thoughts / insights on AITX’s most recent 10Q. Let’s get right to it.

Financial Results

I won’t regurgitate financials like an AI written article, but I wanted to jot down some thoughts.

On the revenue front, RMR, when compared across the nine-month periods, is growing fairly steadily at around 62%. But we’re seeing nearly flat total revenue due to a decrease in device sales. However, we’re seeing device rental revenue dropping slightly from the prior year’s quarter, and it has actually dropped quite significantly from 228k to 154k from Q2.

All in all, revenue was… underwhelming. If you were disappointed a month ago when you saw the top-line, I don’t blame you. I was/am too. While over the nine-month period comparison we are seeing growth, it’s certainly not the 3-5x growth being discussed by management (all not guaranteed of course).

That being said, we’ve seen a pretty nice pickup in sales PR’s the last few months, and we know that ordered devices for the year should exceed 300. So there appears to be growth on the horizon, but so far through Q3 we haven’t really seen it to be frank.

As a final note, I see there’s a reserve for doubtful accounts for 100k… blegh. Not great given their annual run rate is around 1.6m right now.

Cash Position / Dilution

We are seeing a pretty flat spend in terms of OPEX and cash spend over the last few quarters. But this should be no surprise as Steve has said that this was a goal several times. It seems like, barring anything crazy, we should expect a net negative cash spend of around 3-4m per quarter for AT LEAST the next two or three quarters. Which brings me to…

Dilution! Outstanding shares as of Jan 6 was 5.37bn shares and outstanding shares as of market close on Feb 27 was about 5.78bn, so around 400m shares were issued in the last month and half roughly.

Depending on the share price Steve got as he was wheeling and dealing, it’s safe to say those generated somewhere around 3-4m dollars. Which is, like I mentioned above, about a quarter of negative cash flow which makes sense.

So I’m expecting dilution to slow down for at least the next three months or so barring anything major. But as the company is not going to become magically cash flow positive by Q2 FY 2024, don’t get your knickers in a twist when there’s another share issuance.

Also, the AS is around 6bn shares. So we’ll most likely see another AS increase in the next 3-6 months.

My take – it was always necessary. I don’t think anyone was expecting them to be cash flow positive already. My timeline is still 2-3 years at least but I hope I’m wrong! But hold that thought on cash flow… there’s more below.

Debt Update

AITX is still quite debt heavy right now as they’ve tried to limit dilution via debt issuance. By my count, they will have almost 8m in debt principal maturing by the end of the 2023 calendar year. As they’re not going to be cash flow positive by then, or if they are it won’t be THAT cash flow positive, we should be seeing some sort of refinance within the next six months or so I suspect.

If I was a betting man, I would think that Steve will be able to rollover the debt into maybe a two year note if he’s lucky. But the cost of rolling that over is going to be somewhat steep, so don’t expect a low interest rate. It will also probably be issued at a discount to cut down on cash interest expense.

Either way, expect a big refinancing round sometime in the next six months, I’ll be keeping a watchful eye as always!

Series F

There was one debt item I wanted to cover specifically… Steve issued a creative note for up to 4m in financing and issuable in 10, 400k increments. However, in doing so, he subsequently diluted his own major stake in equity via the Series F Preferred Shares. Each draw-down of 400k also allows grants a warrant to the investor to purchase 61 Series F warrants. In other words, they can buy 61 Series F preferred shares if they want to.

Without boring you with the details, this will dilute Steve’s position somewhat in the company. More detail here.

Needless to say, it’s nice to see a CEO put their money where their mouth is and really put their faith in the company like this.

FY 2024 Company Tentative Forecast

Deployed Devices / Revenue

One more interesting nugget in the MD&A section was the company outlined the deployments they are targeting by the end of the next fiscal year. They are:

  • ROAMEO – 25
  • RIO – 150
  • ROSA – 350
  • AVA – 100
  • RADDOG – 15
  • ROSS – 5000 (integrated cameras)
  • TOM – 35

That would be about 675 deployed devices, which are in addition to the 300 ordered for FY 2023 and the 187 ordered in FY 2022. So really, it’s not that crazy of goal.

They also believe that this will result in RMR of 800,000 and they claim that this enough to be cash flow positive.

As with most company forecasts, I am exercising caution when looking at this target. I actually think the goal is quite attainable from a sales perspective, but where I have trouble placing high probability on it is the “deployed” caveat they added.

RAD does not have the fastest lead times in the world, though they should be getting better. My rough estimate is that this would nearly double their amount of deployed devices by the end of FY 2023. This would involve a year of deployments never before seen at AITX, and they mentioned that they will only need to add 5%-10% headcount growth in production/deployment.

So I like the sales goal, but I’ll keep some reservations on deployments until we see how Q1/Q2 deployments are going.

Positive Cash Flow in FY 2024

As a separate point, I’m also not totally sure how 9.6m in revenue will make them cash flow positive. Let’s parse this out…

Let’s say 9.6m in annualized revenue. Gross margins are generally around 75%, so let’s say 7.2m in gross profit. Their OPEX run rate has been somewhere around 3-4m per quarter, so let’s say it stays flat around 3.5m per quarter. That’s 14m in OPEX. So an operating loss of 6.8m.

Now, we can reclass out depreciation (they are depreciation heavy) which generally runs at a rate of about 75% of COGS (but reported in OPEX). So that’s a non-cash expense of 1.8m within operating profit. Adjust that out and we have negative cash flow of 5m.

Lastly, if we want to adjust out stock comp we can. That is harder to forecast, but I sort of doubt we will see 5m of stock comp in lieu of cash compensation, especially when stock comp at Q3 was only 480k. But you never know I guess?

As I close, a couple of things that could tip the scales in their favor:

  • One thing I’m not considering are one-time device sales, which will tend to happen. So that could make up some of the difference, but that is near impossible to try to forecast out especially when device rentals are the push.
  • Gross margins could improve.
  • There could be cost cutting, especially at the higher up levels or more stock comp in lieu of cash.

So will they be closer than they have been? Absolutely. But I’m personally thinking it will be at least two more years until we see a nice healthy cash flow position assuming we have continued strong growth, which isn’t necessarily a bad thing. I DEFINITELY hope I’m wrong here!

Wrap Up

This probably sounded a bit negative, but I still really do like where the company’s potential is. I think everything is taking a bit longer than we thought, which tends to happen in the business world, but I am not really concerned.

My big things to watch going into the new fiscal year are:

  • A steady uptick in RMR quarter over quarter
  • Better production and lead times
  • Refinancing terms of the debt due in December

If we see some good results out of those three things, I think we are in for fine FY 2024!

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