Excellent posting @mikebrisy and @jcmleng . I agree the ingredients are brewing nicely, there's certainly enough 'bravery' required here to suggest the upside is strong if/when sentiment eventually turns.

Just doing some share count due diligence, does anyone know the nature of the 42m of options at 'various prices' listed in the 3G. Given the total stock is only 26m this has the potential to be a significant item - I feel like I at least need to know what they are. Looking back over the years I can see the number was at over 100m back in 2021 and has been declining since, given there's not been significant dilution in that time and the trajectory of the shareprice I expect these are expiring worthless - maybe old employee options? Or something related to a past transaction? But I'd like to know - any ideas? Line AVHAE in the 3G.

@Longpar5 I think (but don't know for sure) this is the aggregate of Options for all employee schemes out to 2035, so 10 years worth. The other line items for options are, I think, for the named key management, as detailed in the remuneration report.

While 42m AVHAE's sounds scary from a potential dilution perspective, it is worth recognising that only two years ago this number was 88m, as large chuncks of them have lapsed being below their strike value on expiry.

And there is a wide range of exercise prices from around USD4.97 right up to USD21.93 (assuming they reflect the range of pricing of the individually disclosed schemes.)

Since 2023 SOI has only gone from 25.7m to 26.4m, but then again SP has been pretty poor over recent years, so presumably large numbers of legacy options have been lapsing out of the money.

The problem is that in this line item we cannot see the profile of dates the options become exercisable, nor the exercise prices. So I can't see any way to evaluate them.

Share count and dilution is defintely something to consider here, and it could become material if the share price advances significantly from its current USD6.40.

With annual opex at USD112m, it is clear that employees are getting a lot of options, but so far at least a lot of these seem to have lapsed because of repeated delays in getting to profitability.

A coarse way to size the exposure is to say: 42m x USD6.40 = USD270m. But they are not free options, so of course it is only some fraction of that, let's say anywhere from 10% to 50%, which would be USD27m - $USD135m. This range looks generous given historical performance.

We might then compare that to the wages bill exposure over 10 years, say for example, 70% of Opex for 10 years = USD800m.

So the share option exposure has an order of magnitude of 4% to 17% of Opex, because that's really what it is - a hidden part of Opex.

Of course, the proper way to evaluate the options is to use Black-Scholes, but we don't have the necessary information. Which I guess is the point of your post!

TLDR: I can't evaluate this, I'll monitor dilution as SP (hopefully) rises, it is a factor, but I am not worried about it.

Thanks @mikebrisy , not too long, did read :)

Agree, dilution will be one to watch if the share price rallies. And good work putting the options in perspective. I don't have much experience with "life science" type businesses and am always wary of them being run for the execs/doctors not the patients or shareholders. So my worst case is those options being very low strike price, but I tend to think the chance of that is remote. Will be nice to see the number continue to decline, if I end up deciding to invest I should probably just drop a line to their IR team to be sure

Great comments @mikebrisy . Have taken a bit of time to step back and re-evaluate the position with AVH and deciding what action to take. The straight line and persistent price drop of AVH has no doubt, been uncomfortable. Despite feeling really confident that I have fully considered the full 360 of the thesis, and it looks as promising as the future can ever be, this absolutely creates ongoing doubt as to whether I have totally missed something that the rest of the market is seeing. 

Having had a closer look at the points you raised, below, I topped up today at $1.85. This was at a 17M support level that I have been watching. Have also been building the position very slowly, so post top up, I am still at 3.3% allocation, with some room to increase the allocation as the price could still drop to the ~$1.425 levels from Oct 2022 - see chart below

I think Mr Market is offering up AVH at highly attractive levels relative to the risk/reward position. AVH has grown significantly in the last 18M, is expected to grow 61% this FY to $100m revenue, but yet the market has smashed it to a near 17M LOW, when AVH was in real trouble then. This really does not make sense and is hence, the opportunity!

Discl: Held IRL and in SM

1Q LOWER REVENUE SEASONAL IMPACT

This was a very interesting observation but I note the following with AVH:

Insurance Factor, Winter Weather Disruptions and Physician/Patient Behaviour - I did not think these came into play much given that AVH primarily focuses on burns and trauma cases, and very little elective/non-urgent procedures. Accidents happen/can happen at any time and when they do, they need to be fixed here and now. I also thought that burns cases in Jan from winter/heating-related issues would be about the same as burn cases over summer from wildfires etc, meaning, no seasonality

Hospital Budget Cycles and Inventory Management - this does seem to impact AVH, but in reverse, at least in FY24 ie. hospitals held back purchases until the New Year

But agree that if seasonality is at play, then the 1QFY25 results are better than it first appears!

CASH SHORTFALL AND POTENTIAL FOR A CAPITAL RAISE

Thought a bit more about the cash position.

It looks like AVH redeemed ~$10.7m of marketable securities in 1QFY25 to fund the cash gap in 1QFY25. 

2QFY25 - I expect AVH to redeem the $10.9m securities on hand, and assuming the 1Q Cash used in operations remain around $10m, the end quarter cash balance should be around $14.9m (same as 1QFY25) but there will be $0m marketable securities left

3QFY25 - assuming no improvement in cash and assuming Cash Used in operations remains around $10m, the Cash & Cash Equivalent of ~$14.9m at 30 June 25 would be completely drained

Which then leaves a potential cash funding gap of ~($10.0m), more likely closer to $10m rather than the $20m end:

• This assumes minimal sales from PermeaDerm and CoHealyx, similar to 1Q, pre-launch sales
• The upside of the $2.5m savings/quarter has not been baked into the above
• I can’t think of any capex spend required for the rest of FY25 - there are no known manufacturing capex costs as all the changes to manufacturing, including insourcing PermeaDerm have already been executed.
• After the recent sales re-org and cost takeout, I can’t see any further step increases in operating costs other than basic working capital requirements
• There should be no big R&D spend either as they ditched Vitiligo, and the focus will be on the post-market studies

So, fully agree with your view that any cash shortfall could be $10-$20m and also Jim’s comment in the Webinar that any cash shortfall would be “minimal”. A short term debt facility would make far more sense vs a capital raise/placement in terms of cost, not upsetting the market, ease of execution etc. Based on this, the risk of a cash shortfall is absolutely there, but I think the market’s pessimism/fear of a capital raise etc is quite overdone.

Debt Covenant

Also had a look at the debt covenant position. The 2QFY25 trailing 12-month revenue covenant is $78.0m. 9M trailing revenue is $56.5m, which means 2QFY25 revenue needs to come in at $21.5m, which aligns to your 40% pcp increase. It does feel do-able with a full quarters contribution of CoHealyx and PermeaDerm, albeit it likely to be a slow start, + normal Recell growth.

Chart

@jcmleng great notes. A couple of quick points.

Given that firms raise capital well before they run out of money, I think you have to allow for about $10m buffer, which is why I concluded they will raise,.... likely late this Q or early next Q, unless sales come storming back. I think this is in line with your analysis.

$AVH will also require Orbimed's agreement to raise further debt, which I imagine will come at a cost. So, I think cost of debt is high, and getting higher.

On a soft revenue 1Q vs. 4Q, I recognise their product usage is not elective. What is elective is hospital inventory management policy. I recognise your point about hospital budgets, but I think the industry data shows that Q1 tends to be soft in medical devices. Factors at play are that hospitals can also follow a Q4 buying push for two reasons: 1) use up unspent budget to avoid "use it or lose it" budget cuts and 2) making sure stocks are in place ahead of potential winter supply chain problems. While the winter phenomenon doesn't affect everyone, it probably impacts about 25% of the market in a significant way (MidWest, NorthEast and SouthEast states).

Another factor which $AVH used to blame poor 1Q 2024 sales, what that hospital VACs (Value Analysis Committees) were slow in appoving new products like ReCell GO and Permeaderm over the winter months last year. And sure enough, things came roaring back in Q2, This time, with Cohealyx being rolled out in 2Q, the winter "excuse" isn't available to management.

I'm pretty sure that the continuing price slump is because in each week that passes, " the market" is counting down the days to the next capital raising. I'm fine with that because I am confident it will be a modest raise, albeit an expensive one.

The shorts are smelling blood, too. The short position on NASDAQ has moved from 11.34% at 30th April to stand now at 14.02%.

Either there will be a raising within 4 weeks or a trading update to say there are promisiing sales of Cohealyx and Permeaderm.

If I had a stronger belief in management, I'd be loading up over the coming weeks. But there are too many historical optimistic statements that have had a delayed result. So, I am going to wait for the next sales update. On the plus side, even if there is a strong sales update, SP is so low, I'd still be able to top up at good value once some more data is in. However, this is risky and I am not prepared to increase my exposure at this time.

Wonderful idea and product and it's great that patients have an option like this.

As an investment though, this company has to be one of the worst over promisers and under deliverers of the last decade.

Despite sales growing from $2.8 million 10 years ago, to $97.4 million last year, the losses keep growing and in turn so does the never ending dilution.

It's true some businesses invest in growth and to capture market share for a while, before that growth turns them into profitable entities. It's also true that some businesses believe their own story (noble lie) but can't overcome selling or marketing the product below what it actually costs to provide that product. So, even though their sales grow they lose even more money every year. The only way they survive and for the management to keep getting nice perks is to ask some other poor sucker for more cash...

Maybe the handful of brokers that are predicting positive earnings in a couple of years are right and it will all work out. Or maybe they need to say that so they can keep getting more capital raisings away for them.

The other worry though is that it appears their patents run out over the next 8 years, so even if it does work out now, the competition is probably coming if they stick with the high margins.

Below is the tale of woe for the last 10 years across a bunch of important financial metrics. It isn't getting any better in recent years. If you believe the story and that they are finally going to make it all work, then I genuinely wish you the best of luck.

p.s. I humbly acknowledge that I have fallen victim to the exciting story of a revolutionary treatment for a big medical problem, courtesy of Paradigm Biopharma (PAR). It's been my biggest investment loss and mistake, as I have funded management while they under deliver. I stubbornly hold on in the hope the David Gardener approach might pay off but accept it may still go to zero. But I'm determined not to take that risk again, accepting I will miss out on the occasional huge winner.