Welcome to part two of my article titled, The Evolution of Raising Capital. Part one of my article, linked below, discussed where AITX just came out of in the capital raising cycle. This article focuses on where AITX is now in the capital raising cycle, and where they go from here if the business succeeds.
To recap, we covered what I label as the first two phases: the dumpster phase, and the climbing out of the dumpster phase. The last two phases I will cover today are called beginning to walk and running.
Beginning to Walk
Like I mentioned before, this is where AITX is just beginning to enter now (in my opinion). The company has begun to really get some traction with its products, revenues are growing exponentially, and the company can finally manage its costs better. Once again, the company needs to raise capital. However, this time the capital is more for exponential expansion, not for survival or to buy-out toxic debt. The general trend you should be noticing as we work through these three phases is sharing risk with investors.
This third phase, beginning to walk, moves us down to the end of that spectrum. Now, the company should start receiving some interest from investors, rather than the other way around, who want to take a stake in the company like partners. The investors want a longer-term investment and some minority, yet significant, stake.
Typically, companies will pitch to investors on their business model, how they plan to succeed, etc. Investors, if interested, will purchase some stake in the company at a slight discount to the market value, almost like a value discount. These investment companies want to see the company use their invested money to grow the business, hire more people, perform more R&D, etc. In return, these companies want to see long term price appreciation of the common stock.
They key difference here, just to reiterate what I said it up above because it’s important, is that the company and the investors have a truly mutually beneficial relationship. If you recall back in the dumpster days, the investors were just hoping to not lose all of their money and gambling that they could gamble on making a killing with a floundering company. This stage is different and a different breed of investors. These aren’t short term high risk high reward investors looking to extract investment gains from a company. These are long term investors, generally, which want to build a real company from the ground up and see their investments through.
How is AITX doing at this stage? Like I mentioned before, in my opinion they are just starting this phase. The first step in the right direction they’ve took is through their recently filed S-3 with the SEC. This is essentially a registration of certain securities, in this case common stock and warrants, that AITX intends to sell to investors.
This registration form goes through the securities offering, a background of the company, risks associated with the company, terms of the offering, how they will use the money, etc. In AITX’s case, it is registering their potential issuance of $30m in common stock and warrants. Think of it sort of like a master agreement, template agreement, or sometimes called a shelf registration. You figuratively put the offering on the bookshelf, and if you need to use it to raise capital you take it off the shelf and hand it to an investor.
Then, AITX has to identify investors which will meet the broad terms of the S-3. AITX has already found two investors to cover $20m out of the $30m, which occurred on September 10, 2021. So, we should see more details in the next 10Q for the period ended November 30, 2021. These investors can purchase stock and warrants, in bulk, at some slight discount to market value at their discretion.
One last thing that’s worth mentioning. GHS and White Lion, the two companies already signed on to invest up to $20m, aren’t exactly Chamath Palihapitiya or Peter Thiel. These are smaller investment funds that focus on investing in microcaps. To be quite frank, when you look at some of the other companies they’ve invested in, AITX is in some strange company. There’s everything from Chinese media, marijuana stocks, solar panels, you name it. So this is why I say AITX is right at the beginning of this phase, their caliber of investor isn’t quite the most well known yet. Still, the capital raising and concept is the exact same, just with more non-traditional capital funds. But with more success, AITX could see some more traditional funds invest in them.
So, all in all, AITX is working in the right direction. We will need to see if they can first meet their full funding needs, the $10m remaining out of $30m, within the next three to six months. Next, and this is covered in prior articles, but we need to see that this investment capital is actually being reinvested well. If it is, look to see AITX issue another funding round to grow even more. I will have an entire article on this describing why it’s not necessarily bad dilution to do this.
Given all of that, where could AITX go next?
I call this the running stage, and it’s really more complicated than this and probably encompasses a few mini stages, but this is where we see more mature companies raise capital. These are companies that are growing at a more modest pace and are looking for very conventional means of raising capital for acquisitions or large internal capital expenditures, like building new factories.
Typically, companies at this stage no longer want to issue new shares for capital as they can receive very favorable debt terms. This is where we start seeing companies getting billion dollar-plus loans at 4.5% interest with a ten-year term. This debt would then be paid off with their business’ cash flow, with the company operating with an acceptable amount of leverage.
AITX, frankly, is at least five to ten years away from ever getting to this stage. And it is far from certain that they ever will reach this stage. The first signs that they have begun entering this stage is more stable and consistently growing revenue, earning a profit, and a solvent balance sheet. Generally, AITX would then cease its issuing of new shares for investment and begin utilizing traditional debt once it has a stronger credit rating from S&P, Moody’s, etc.
Hopefully this shed some light onto how microcaps and penny stocks raise capital throughout the life cycle, and how it changes as a company becomes more successful. For AITX specifically, we’ve seen them emerge from the depths of despair when it comes to raising capital, but they are just now seeing the light. These next few years will be telling how well they can invest this first round of capital and grow the business.
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.