AITX Analysis – The Evolution of Raising Capital Part 1

The CEO of AITX, Steve Reinharz, has talked repeatedly in press releases, videos, and on Twitter about how the company has cleaned up its toxic debt and is now raising capital “like the big boys”. But what does that all mean? He’s never really gotten into the nitty gritty of how that happened, where they were before, and what they’re doing now.

This purpose of this article is to shed some insight into how AITX has evolved its capital raising methods as it has become, quite frankly, a more attractive investment. To lay out this article structure, we first need to talk briefly about some of the ways microcaps raise money when they are in the following crudely defined stages:

  1. The dumpster
  2. Climbing out of the dumpster
  3. Beginning to walk
  4. Running

We’ll walk through each of these in the context of AITX, as well as other penny stocks in general, speak about where AITX is now, and how their raising of capital will go in the future if they progress.

Because this article ended up ballooning, Part 1 will cover the dumpster and climbing out of the dumpster stages. Part 2, to be released soon, will cover the beginning to walk phase (which AITX is just starting), and the running phase.

The Dumpster


We all know penny stocks in the dumpster. They all probably have a great big “SHELL RISK” on OTCMarkets, little-to-no revenue, a ton of expenses, and no real clear growth prospects. These are ripe with pump and dumpers, many times by their own employees (I won’t name any names). You might be thinking then, how in the world do these companies raise money and who the heck would invest in them?

The most common form of investment in the dumpster companies are what’s called convertible debt or convertible notes. In its purest definition, they are a loan the company takes out with an accredited investor, typically bearing an interest rate well over 20%. The catch is the debt holder (the investor) has the non-transferrable right (they can’t sell it) to convert their owed money and interest into some amount of common stock.

Let me give an example. Say I own a dumpster company trading at $0.02 per share and I want to raise money to pay myself (I’m being harsh on purpose, this really happens). I reach out to accredited investors and ask for a $1m loan at 25% interest annually, for 3 years. But that’s still not a good enough deal because I’m in the dumpster! So, I add in the following, you can convert any owed principal and interest into common stock at 0.002 per share. This conversion may have a time limit, could be whenever, or could be at the discretion of the company (not usually).

The Company’s Perspective

The company is getting hammered on the conversion price. That conversion price is well below the current trading price. But the company needs money or it’s going under. So, they don’t really have a choice. Would they rather have a crummy deal and some money to stay afloat for 6 months, or to go under? Who knows, maybe we’ll become more successful and can pay off the debt! Worst case, we issue more shares, our stock price goes down, and I dilute my ownership, but the company lives.

The Investor’s Perspective

From the investor’s perspective, the conversion makes sense. But why the debt in the first place? Why not just purchase share at a cheaper price to the market price? One reason: priority of claims under liquidation. Investors think there’s a high chance this company goes bankrupt before the principal is due.

As a debtholder, your claim on your unpaid debt principal and interest comes before common and preferred shareholders. You likely won’t get all of your money back, but you’d get much more than if you had only owned shares. You’d be down in the pit with all of the pumpers on Twitter trying to get two cents on the dollar back in liquidation. Debtholders then need to be very strategic about when they convert and convert only when you know for certain you can sell your shares at a hefty profit and not get caught holding the bag.


I won’t re-hash this too much, but AITX did exactly this when it was in the dumpster in the RAD 1.0 days. For example, in the May 31, 2020 10Q, AITX’s total liabilities were $17.4m. Of that $17.4m, more than $10m was from convertible debt:

  • $6.7m from the principal associated with the debt.
  • $3.8m associated with the potential loss on conversion of that debt.
  • $3.2m of interest accrued on those notes, along with a few other non-convertible notes.
  • The outstanding share count was around 195m, and debt could be converted into about 565m shares.

In short, it’s bad and expensive to be this far in the dumpster. But no risk, no reward, right?

Climbing out of the Dumpster

Here is the stage where our companies start to gain some traction. Maybe they start generating some revenue and can see a light at the end of the tunnel. Customers are giving good feedback on their products; things are really starting to pick up!

Typically, your company is still very risky, just not as much as before, so you start exploring some new methods for investors which cost the company less. Also, you can now share more of the risk with investors. Before, those pesky debtholders had the company over a barrel, but now the company get them to have some skin in the game.


In my experience, there are a few common methods to recapitalize:

First, warrants. I sell them a call option where they pay me, for example, $1m. I give them the transferrable option to purchase shares at $0.07, while currently the stock is trading at $0.03. The investors only make money when the company performs better. We also get cash for the shares if they’re exercised. If we languish or don’t make it, the investor is out the cash. If we do make it big, the investor makes it big. But who cares, we’re all rich!

Second, convertible preferred shares. Imagine the above scenario with convertible debt/notes, but this time, the investor doesn’t have claims in liquidation. The investor is then allowed to convert their preferred shares after certain time periods are up, milestones are achieved, or sometimes whenever. This transfers more risk to the preferred shareholder, but they have much more of a vested interest in the company succeeding as they don’t have liquidation rights.

Third, one-off sales of common stock to individual investors and service providers. These are costly and inefficient, but many times companies will sell varying amounts of stock to accredited investors off the street. These could be for $10,000 to help make payroll that month, or for more. This is rarer. What’s more common is to issue common stock in return for services. Need to pay your accountant, give them stock!

Fourth, non-convertible debt. This is much less common at this stage, but some companies are able to get straight, non-convertible debt, at a somewhat reasonable interest rate. These typically have terms around two years, with the idea being that the company will be able to pay it off by then.

Lastly, convertible debt with better terms. This is basically my above example, but with better conversion prices and lower interest rates.

In the end, the idea is to share more risk with your investors so that everyone wants this thing to succeed.


AITX went through this phase from around Q3 2020 to Q4 2020 (ended February 28, 2021). If you want extreme detail, you need to read the 10k released for the year ended February 28, 2021. According to Page F-18 to F-22, the CEO Steve Reinharz refinanced this convertible debt a few ways. Focusing on the biggest debt, see debt with the footnotes X, XX, and XXX, presumably from the same investors respectively. X, XX, and XXX had the following liabilities at the time of re-finance:

  • X – $3.05m
  • XX – $3.9m
  • XXX – $0.310m

See below how they were refinanced:


Warrants and debt combinations – Steve took the convertible notes and refinanced with the noteholders. He negotiated down the terms of the debt into straight, non-convertible, debt with terms usually over two years at a manageable interest rate of usually 12%.

As part of the refinance, he then gave these investors warrants to purchase shares at some price above the current share price as of December 10-14, 2020. The warrants had an option to purchase at 0.002, and at the time the share price was around 0.001. Needless to say, we all know how quickly those investors made money on those warrants.


Series F Preferred Shares and Warrants– see my last article linked below on the F Series. Steve diluted his own personal net worth to negotiate down debt terms for the company using the F Series preferred shares. He also sold the investor a warrant similar to those above for X and XX.


Steve settled the remainder of the debt using some combination of the above, mostly with a warrants and debt combination, common stock payouts, using cash on hand, or convertible notes issued with better terms.

How did AITX do?

Honestly, I give this a solid B. Why is that? AITX did exactly what they were supposed to. They gave investors skin in the game and got more favorable terms. The only problem is, as we all know, in February basically every penny stock, including AITX, got pumped to obscene levels. AITX is currently trading just under $0.03, and their stock was over $0.25 in February for absolutely no reason.

What that means is many of those investors made a killing by exercising their warrants within a month or two. HOWEVER, we have to remember one thing about these warrants. It could have actually been much worse for the company had all of those note holders converted their debt rather than exchanged them for non-convertible debt plus warrants.

Also, one thing that slipped under the radar, many convertible noteholders converted their notes during the stock pump before Steve could refinance with them. I’ll quote the 10Q from the period ended November 30, 2020:

“Holders of certain convertible notes payable elected to convert a total of $2,094,934 of principal and $1,083,982 accrued interest, and $20,500 of fees into 1,889,155,010 shares of common stock. No gain or loss was recognized on conversions as these conversions occurred within the terms of the agreement that provided for conversion.”

That’s about a $3.1m liability converted into 1.89bn in shares. At the current share price of $0.03, that’s $56 million dollars, yikes! But hey, at least all of that conversion is done. The company tried their best. But much to the chagrin of bashers on Twitter, Steve cannot see the future.

At the end of the day, as of the period ended August 31, 2021, AITX only had $3,500 in convertible notes outstanding where the conversion price was below market price. Funny enough, Steve said that’s because they can’t find the debtholders! All of their remaining dilutive instruments share risk directly with the investors through warrants, traditional debt, or the F Series Preferred Shares. For the F Series, see my other article linked below. For the warrants, there are currently 778m shares outstanding that can be purchased at a weighted average price of $0.0875 per share, well above the current price around $0.03 per share.

The key to remember here now is this: the balance sheet was cleaned up considerably either through re-capitalization or those noteholders converting their debt. AITX has officially climbed out of the dumpster, and in my next post I will discuss how AITX has evolved their capital raising methods once again.

To be continued…

For further reading and AITX analysis, check out all of my articles HERE as well as in the sidebar.


1 thought on “AITX Analysis – The Evolution of Raising Capital Part 1”

  1. Do you expect AITX to reclaim a position of $0.06 again within the next 6 months? It's been a long, hard 2021 with this company but I do believe they have long-term worth.


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