AITX Analysis – Thoughts on a Potential Reverse Split

As is the impetuous to many of my articles, there has been much chatter for months about whether or not AITX will implement a reverse split. The CEO, Steve Reinharz, has even commented on it directly saying they have no plans to do one. The point of this article is to go through briefly what a reverse split it is, why it has such a bad connotation, and the impact to an AITX investor in the event of a hypothetical reverse split.

Basics

At the most basic level, a reverse split has absolutely no impact on current or prospective investors. For example, in a 1-1000 split where I own 1000 shares which is 1% of a company with each share trading at 0.01 per share. My 1000 shares get exchanged for 1 share, but so does everybody else. I still own 1%, but my per share value is now 1000x higher. So, I’ve gone from 1000 shares trading at 0.01 to one share trading at 10 per share.

That’s all a reverse split is. It’s just shaving off some shares, with everyone left exactly where they started. What’s the big deal then?! Despite the simplicity of a reverse split, reverse splits can have some pretty serious implications…

Why are Reverse Splits Performed

Most times, a reverse split is executed for reasons which are detrimental to current shareholders, or they signal bearish sentiments. But they are not always necessarily bad.

Let’s lay out a situation. A company that has to raise capital via dilution (which is like 95% of the OTC) and that is not effectively reinvesting capital will, at some point, see their share price decline to extreme lows. For example, over time if the capital raised via dilution is squandered by a company, you will see the company go from trading at 0.10 per share to 0.001 in a matter of months. This could also be a now successful company that had extreme dilution in its earlier history and the share price remains deflated.

This situation leads us to our good or bad reasons for a reverse split.

Good Reasons

A company will never be able to up-list to the OTCQB, OTCQX, or NASDAQ with a share price that low. For example, if a stock is trading at 0.001 and it needs to be above 0.01 to be listed on the OTCQB, that means it has to increase by 900% and stay there. Because of this, a successful OTC company which had a lot of past dilution (five or ten years ago) may execute a reverse split to meet listing requirements to “accelerate” their listing on an exchange. They would likely reach that share price eventually, but this sped it up. This is probably one of the only “good” reasons for a company to do a reverse split.

Bad Reasons

In the same example from above, a bad reason for a company to execute a reverse split is that they are at threat of being delisted and need to artificially raise their share price. This would be the opposite of the above example. For example, a company trading at 0.02. expects their share price to keep falling so they pre-emptively execute a reverse split to give them breathing room. This, however, isn’t exactly a glowing recommendation of the company for how they think the company will be performing the in the near term. Therefore, you typically see large share price drops after a reverse split in this case.

Another more nefarious reason for a reverse split is price manipulation. Many times, a company will issue a reverse split to make the company seem more reputable by having a more “normal” share price. For example, say a scam company trading at 0.0007 executes a 1-10,000 reverse split. Each share would be trading at 7.0 per share. That seems like a pretty normal company share price, right? That’s not even a penny stock anymore! This psychological sentiment may artificially inflate a share price and give the company more attractive dilution terms to raise capital.

My last example and a personal favorite, sort of like the second example above, is to execute a reverse split at the same time as other corporate restructurings in order to make the company difficult to properly value. I call this a shotgun tactic.

I will not name any names in this article (they now trade on the OTCQB which is funny), but one of my favorite examples was that an company announced a reverse split, a spinoff, that they fired their CEO, and they were then filing an S-3 shelf registration all in quick succession. Out of that turmoil, my investment was up more than 100% when it had been negative days before. The whole point is price manipulation followed by more dilution at an artificially inflated valuation. The flurry of news in itself drives the price up which is exacerbated by the reverse split. This is bad for current investors as well as any new investors suckered into buying afterwards.

Key Points

To sum it up, if a poorly performing company executes a reverse split, it’s almost always a bad thing for current shareholders. If a well-performing or growing company executes a reverse split, in theory it has a net zero effect, but may actually be a good thing if it means an up-list.

AITX and a Reverse Split

Just to get this out there, AITX has done reverse splits in the past. The most recent one was in March 2020, with another in 2018 after Steve entered AITX. I won’t spend any time on these because, quite frankly, they don’t really matter right now to a current or prospective investor. We need to focus on a future reverse split.

Now that that’s out of the way…

Steve has come out many times that they do not intend to do a reverse split in the future. Period. He has never wavered on that, so I’m not totally sure where people keep getting the notion that they are going to reverse split. I cannot read minds or see the future, but it seems pretty clear he isn’t going to do one based on what he says. He fully plans to raise the share price organically through growth, etc. and not through a reverse split.

For the sake of argument, say AITX did plan to reverse split at a later date in order to reach the minimum 5.0 per share price for the NASDAQ, which is in my opinion the only reason they would need to do a reverse split. How would that affect a current investor, and should you be worried about that happening?

The answer to that question is really tied to your belief in the business model. If you believe in the business, then a reverse split as part of an up-list should be a great thing. The company isn’t doing it for scam reasons or manipulation, it’s simply to up-list, bring more attractive investment options, and bring notoriety to the company. It really comes down to trust in management and if you believe the reverse split is for nefarious reasons.

If they do execute a reverse split down the road, as with any OTC, pay very close attention to the intent behind the reverse split. Is it because the share price is dropping off of a cliff and it’s simply for price manipulation? Or is it being used as a tool to create shareholder value? In most cases it’s the latter, but it can be an effective tool for a company. Which one would AITX be if they did execute a reverse split? Only you can answer that.

All of that being said, the CEO has said time and time again that it won’t happen. But hopefully this article gave you some insights into analyzing a reverse split and understanding when it’s for the benefit, or detriment, of shareholders, and how you can apply this to a potential future AITX reverse split, however unlikely.

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DISCLAIMER – I CURRENTLY HOLD A LONG POSITION IN $AITX. THIS ARTICLE IS NOT FINANCIAL ADVICE AND IS INTENDED ONLY FOR EDUCATIONAL PURPOSES. 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.