In Sophic Capital’s Aires to Success report, we highlighted how the CEO of Sophic Capital client American Aires Inc. (CSE:WiFi, OTCQB:AAIRF) has developed, and is successfully executing against, a business model that leverages high-impact partnerships. In this report, we detail American Aires’ revenue model.
Revenue Model
American Aires generates revenues three ways: direct-to-consumer (DTC), international distributors, and OEM/licensing. DTC involves direct media advertising on channels such as Facebook, YouTube, TikTok, Rumble and Instagram. DTC also leverages content creation via podcasts and appearances on consumer programs like Dr. Drew and Ben Greenfield. International distributors facilitate ease of navigating the complexities to best serve international consumers. OEM/licensing applies to third party manufacturers or companies that choose to license American Aires’ electromagnetic field (EMF) protection products.
Management estimates that DTC and international distributors could drive about $600 million of global revenue over time. This is based on 80% of the adult population in targeted markets (primarily USA, Canada and Australia) then extrapolated globally, a 13% addressable market, 10% Aries market share across its targeted geographies and $400 Consumer Lifetime Value.
OEM/licensing has a $2 billion revenue potential. This opportunity is driven by opportunities to incorporate the Aires technology into consumer tech products, and is based on similar assumptions as DTC, but with lower wholesale pricing.
Together, these three revenue models suggest American Aires is just beginning to execute on large growth opportunities.
Finally, a key part of American Aires’ revenue model stems from its business strategy of generating loyal customers that translate into repeat business. In Sophic Capital’s Clearing the Aires report, we showcased American Aires’ suite of EMF protection products. The products scale in price as the effective diameters of coverage increase. American Aires’ loyal customers are repeat customers, often buying the same initial product for family or friends or purchasing higher-priced products with larger coverage ranges. Based on sales data, Management estimates that ~20-25% purchases are driven by repeat purchasers, who, once satisfied with their purchase, return to purchase products for their friends and family etc.
The Revenue Model is Working
In Sophic Capital’s Aires to Success report, we detailed how CEO Josh Bruni has implemented his tested business strategy of leveraging high-impact partnerships to generate co-branded content for far-reaching advertising campaigns. This strategy typically returns $3 of order volume for every $1 of variable advertising spend (Return on Ad Spend, or ROAS). This dynamic also implies that every additional dollar of advertising spend produces about $1.80 of Gross Profit (assuming a 60% Gross Margin, inline to slightly below Aires current levels). We examine the relevance of this relationship a little further in this report. Typically, new partnerships and marketing initiatives have a fixed cost component, which goes into the Company’s marketing expenses. Once these initiatives have been launched and ramped, the key tactic is to direct variable advertising spending towards them while employing rigorous analytics and metrics, which is CEO Josh Bruni’s area of expertise.
Since joining American Aires in late 2021, Mr. Bruni’s strategy has boosted sales fourfold through the end of 2023, 128% year-over-year in 2022 and 79% in 2023 to over $10.4 million (Exhibit 1). Note that on August 28, 2023, the Company entered a partnership with HUCK Project LLC (HUCK) whereby HUCK became a non-exclusive global, retail-only distribution partner. From January 1, 2023 to August 28, 2023 (the pre-HUCK period during the year), American Aires continued to build on the strength in demand and recorded sales of $5.5 million. For the remainder of the year, the Company sold through HUCK, generating $4.9 million of sales. From an accounting perspective, HUCK received the sales but American Aires got the profits. Combining American Aires and HUCK sales resulted in non-IFRS combined sales of $10.4 million, representing a 79% year-over-year growth.
Exhibit 1: Historical Annual Sales (CAD$)
Source: Company reports
Q3 2024 Demonstrated Continuing Robust Growth Going Into The Seasonally Strong Q4
During American Aires’ third quarter of 2024 for the 3 months ending September 30 (Q3 2024), the Company reported record quarterly order volume of $4.92 million, a 61% increase over the third quarter of 2023 (Q3 2023). After taking into account relevant accounting adjustments that include shipping revenue, returns, return provision and deferred revenue, American Aires’ reported sales increased 57% year-over-year to a record of $4.59 million versus non-IFRS sales of $2.92 million during Q3 2023. Note, Q3 2023 revenue is non-IFRS due to the former partnership the Company had with HUCK, where HUCK recorded the sales and American Aires received the profits.
Achieving its highest ever order volume and sales in Q3 2024 was an important milestone for American Aires, validating the business strategy and confirming actions undertaken in the first and second quarters of the year. These efforts in the first half of 2024 drove Q3 results and will likely spill into Q4 as well, mirroring the prior 3 years (Exhibit 2). And thus far, it appears as this is the case; in the Company’s Q3 2024 financial results press release, CEO Josh Bruni noted that from October 1 through 25, order volume grew 147% year-over-year to $2,004,516 versus $813,059 in the same 2023 period. Gross margins during both periods were 62% and 63% respectively.
Exhibit 2: Historical Order Volume Historically Weighted in Holiday Season (Q4)
Source: Company materials
The Q3 2024 quarter’s increase in order volume and reported sales was driven largely by the efficient deployment of scaled-up advertising and marketing budgets, which included strategic partnerships the Company entered into during Q2 and Q3 2024, including with the UFC, NHL star John Tavares, Canada Basketball, NBA star RJ Barrett, and the WWE. The quarterly performance extends the Company’s multi-year trend of strong revenue growth through widening its user base, opening new market segments, and expanding its overall reach and brand name recognition.
Compounding the order volume effects from efficient advertising and marketing spend was the content generated from the partnerships forged in Q2 and Q3 of 2024. Creating and leveraging co-branded content for the Company drives the marketing and advertising campaigns which, in turn, drives order volume and sales. The result of this strategy was the 61% year-over-year order volume increase in the quarter to a record $4.92 million. The Company’s Q3/2024 results are consistent with management expectations. Several of these partnerships are multi-year, which should provide ample co-branded content for American Aires to leverage as part of its continued growth.
Gross margin remained in the 60% range, coming in at 63% during Q3 2024 versus 62% in Q3 2023. Advertising and promotion and marketing expenses did scale to $3.45 million during the quarter versus $1.74 million in the previous year’s Q3. This resulted in an Adjusted EBITDA loss of $1.17 million in Q3 2024 compared to a loss of $0.38 million in Q3 2023. We note that increased losses were expected as the Company ramps its sales, spending to capture new customers and generate repeat orders, particularly to take advantage of the strategic league and athlete partnerships mentioned above. With continued growth in the 60-80% range, and once fixed costs level, variable ad spending should see more operating leverage, driving the Company to Adjusted EBITDA breakeven; perhaps once the Company generates annual revenue in the $35 million+ range, initial EBITDA break-even is likely on an annual (versus quarterly) basis since the business is highly seasonal, with Q3 and Q4 tending to be the strongest revenue generating periods for the Company. And with Q4 generally being the most robust seasonal quarter (accounting for an average 38% of annual revenues since 2021), order volume should continue to be strong while Adjusted EBITDA is expected to improve, strengthening the balance sheet. In fact, Q4 2023 saw a 79% increase in year-over-year order volume as well as recording Adjusted EBITDA profitability.
Coming Up…
In our next report, we’ll examine the capital structure of Sophic Capital client American Aires Inc. (CSE:WiFi, OTCQB:AAIRF) and also compare the Company’s valuation (as a multiple of sales) to some companies with similar business models and/or companies who operate in the health tech/consumer space.
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Disclosures
American Aires Inc. [CSE:WiFi, OTCQB:AAIRF] has contracted Sophic Capital for capital markets advisory and investor relations services.
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