I read the ".. contract is for the immediate supply etc. There are no other conditions." as this one has no recurring revenue.

Happy to be wrong though.

Being a small contract, the other question is how much margin there is. If margin is small then probably AVA was aiming for a big name on their list of customer references or maybe further work from Johnson Controls at expense of margin.

Hence the muted reaction.

Need to make more effort and make these contracts bigger such as doing more research on their customer and see where they can leverage more work and build on that. But I'm getting the impression they have not gone that deep? Just maybe if I'm right in my thinking this could have been bigger and the market would have felt more confident.

Although this is progress, still on the fence whether to get back in.

Another angle on this announcement is that perhaps the amount of this contract, i.e. 700K - so less than $1m in revenue, with no disclosure of how much of that would be earnings (profit) - that's just revenue - but the fact that a contract worth just $700K of revenue is marked as price sensitive is a warning sign in itself that they aren't winning many contracts, certainly not any that are going to move the dial very much. They need to be winning a heap of these to be heading in the direction that we need them to head in - towards that inflection point of becoming and staying profitable and then growing their earnings from there. I see no evidence that they're significantly closer to that inflection point.

They were travelling along nicely and then they sold off their profitable Services division (which resulted in significant financial rewards for AVA management at that time, which is the main reason that the division was sold IMO) and then it's been downhill from there. New management can polish a turd, but it's still a turd.

Chart and other data sourced from Commsec.

Hope is not an investment strategy, right @Strawman ?

Well said @Bear77, basically my view too while watching from afar. I am going to hazard a guess that the incoming half period reporting will be underwhelming. Revenue growth is nice but Ava isn't currently sustainable and there are some question marks around their ability to hit an inflection point. I don't blame the market scepticism. That said, if they manage to hit free cash flow without bullshit investment or other expenses this could well be an attractive valuation. I don't buy it though.

Long sales cycles with large and sluggish counterparties, coupled with the significant restructuring and product refinement under the new CEO is (potentially) part of the explanation as to why we haven't seen sales take off as fast as we might have liked.

I'm not sure if it's malfeasance or ineptitude, though. Maybe a little hubris from management in terms of pace, but if the outlook is more or less directionally right I'm happy to stick with it. As has been noted, the second half will be telling.

If we see any material miss, it'll be difficult to keep the faith...

Fair points @Strawman - and you could well be right, but it would probably be a good idea to have an exit strategy in place, in terms of: What would make me sell? And/Or: What is the minimum that this company needs to achieve, and over what timeframe, for my investment thesis to stay intact in my view?

I have found that writing down answers to such questions and then holding myself accountable to that does prevent a fair amount of additional losses with companies that do NOT recover. We don't need to make these answers public - so they don't need to be recorded here on SM for everyone to read, but we should have a good idea of the answers to these questions for the companies we hold.

If we always re-evaluate only based on company announcements, reports, and external reporting on the company or the sector, then we'll probably find that we are unwittingly engaging in some thesis-creep. What I mean is that if we don't have targets in mind, such as timeframes for certain events (such as cashflow positive, bottom line profitability, minimum growth rates, etc.) and we only look at each new piece of data on its own merits without any investing framework (such as a written investment thesis for that particular company) to compare it to, then we are repositioning the goalposts again and again in relation to the new data.

I know it ain't easy with these microcap and nanocap companies, because they can bounce around along the bottom for ages and then come good real quick and take off, however beware the ones that turn around and start heading south again in terms of important business metrics, which is what has happened with AVA since they sold their Services Division in 2021 - see here: AVA-sells-Services-Division-August 2021.pdf

And compare that to this:

Remember this:

"The consideration received will be approximately US$46.4 million payable in cash on completion of the Transaction. Of that amount, approximately US$31.1 million will be retained by Ava Risk Group, and US$15.3 million will be paid to certain Ava Global employees pursuant to accrued entitlements (both FY2021 incentive bonus and exit value calculation) under Ava Global's existing performance incentive plan previously disclosed to the market. "

Board and Management got to keep US$15.3m of the total consideration of US$46.4m (i.e. around one third of the total received), and then AVA paid a generous special dividend out to shareholders - see here: https://www.theavagroup.com/ava-risk-group-announces-fy22-results/

Highlights for FY22 include: "Cash distribution of $38.8m to shareholders during the year, via a capital return and special dividend."

Coincidentally their current market capitalisation is now less than what they paid out to their shareholders in FY22 - AVA is currently valued at $31.84m according to the ASX website today.

That huge capital return resulted in a massive share price decline - as capital returns of that magnitude tend to do - and the company also stopped making money because they'd sold off their most profitable division and none of the proceeds from the sale of that Services Division were reinvested back into the Business. They couldn't have been. Not with US$15.3m of the US$46.4m being retained by their Board and Management as bonuses and a further A$38.8m being paid out during the following 12 months to their shareholders - which of course included that same Board and Management.

Sure - Mal Maginnis wasn't there for that, but the other 3 AVA Directors (of their current 4-member Board) WERE there for that - they've been there since 2018 (Dave Cronin and Mick McGeever) and 2015 (Mark Stevens). So while it's fair to say that Mal has inherited a difficult situation - as in a poorly funded company that should really have had a lot more money at their disposal to fund their own growth - it also pays to remember that Mal is the only Board change since those decisions were made (Mal in, Rob Broomfield out), so they're still running with 75% of the same Board who oversaw those decisions in 2021 and 2022 that left the management with millions but the company seriously underfunded.

And then they paid out another small dividend late last year and that understandably copped a fair bit of critisism, and I actually tried to defend that dividend at the time, mainly because it was so small and rather immaterial and I didn't really think it would have a significant impact on the company, but I was wrong to defend it, as they should NOT have been handing out money to shareholders in the position they were in. Looking back now, I see that AVA director Dave Cronin owns 12.71% of AVA through his company Pandon Holdings (32,463,070 AVA shares) and is the company's largest shareholder. Mick McGeever holds 6 million AVA shares. Mark Stevens owns 1.7m AVA shares.

There's arguably an element of looking after themselves here rather than making decision that are in the best interests of ordinary retail shareholders. Just saying - it's worthy of consideration. Capital management is very important with small companies, and AVA's track record of capital management is pretty poor.

And I believe the share price is reflecting that:

So I haven't looked at their current management incentives in any great detail, but do note that they do use a lot of performance rights as part of their KMP remuneration - and some of those have been lapsing (hurdles not met) and some have been vesting (hurdles must have been ones you could step over easily) - see here: Change-of-Director's-Interest-Notice---Maginnis(05Feb2024).PDF - page 2: Vesting of 333,333 Performance Rights to Ordinary Shares plus Lapsing of 500,000 Performance Rights (Mal M). However it is clear that they were very incentivised to sell that Services division back in 2019 to 2020 and the Board allowed the date by which the Services division had to be sold by for management to secure those bonus payments (incentives) to be extended - TWICE! So they were very keen to get that money. And they did get that money, albeit it took them to 2021 and two time extensions on the bonus scheme to achieve it.

So incentives are important. How are the current management incentivised? And Capital Management. Again, it's really hard to say with hand on heart that AVA have been good capital allocators, unless you're talking about allocating capital to themselves as individuals - because they have certainly mastered that. But that is NOT good for ordinary retail shareholders when management are NOT being given bonuses for anything that in any way benefits ordinary retail shareholders, but instead are rewarded for selling off their most profitable division and NOT reinvesting the proceeds of that sale.

Has this leopard really changed its spots now, just by bringing in a new CEO/MD (Mal) with some new ideas but no cash to invest?

@Strawman

Example of confirmation bias. Don't worry, I'm nearly the same with CMM so join the club!

Good point on long sales cycles. My view is that it looks like AVA wanted to get a quick deal done rather than work on getting more leads from the customer and hopefully secure future work. But like what @Bear77 said, it worries me when the contract is small and we don't get any clues on profit margin. However,you can already imply that anything less than $1m will have a small margin and thus I think they just wanted to get their foot in the door with that customer than anything else in the "hope" they get further contracts.

And even if they scored many of these small contracts, your margins will still be small I suppose I assume, but then as the Tesco UK supermarket jingle goes - "every little helps".

However getting a big multi-million dollar multi-year contract and I think there is some flexibility on profit and plus more attention from the world that perhaps you have made it to the big league which is much better for AVA. Definitely would get my attention then and I would be a buyer again.

Excellent points guys.

I may have drunk the cool-aid at the time of divestiture -- ie. "we've got this really cool tech with a huge market opportunity, so we're going to focus exclusively on that".

Doesnt excuse the capital management though. Gosh, you laid it out well @Bear77 ...appreciate the reminder.

There are 3 key things for me to ensure the thesis is on track:

- Topline growth within ~10% of stated ambition

- more large customer wins and sign that these customers are expanding the relationship after initial trials

- little growth in the cost base (something Mal has emphasises a few times).

Good targets @Strawman

By the way, in terms of their poor capital management, did you notice I never even mentioned their $3m placement at 13 cps and their SPP in April/May this year after paying out that unexpected div last year after their huge special div and capital return the year before? This is not the way to grow a company that requires investment in marketing and sales to make people aware of what they have to offer and to secure sales and push to upsell to existing clients, let alone continued R&D to stay at the forefront of their industry (intrusion detection and asset/facilities security) and not fall behind. Really poor capital management over the past 3 years!

OK, so it's only been two months since I last trolled AVA here, but we've had AVA's FY24 Full Year Report last month, and...

Friday 6th September 2024: AVA had 2 trades in total throughout the entire day, for a total value of less than $5 K. Not $5 million. No. Five Thousand. All Day!

And that moved them up +2%.

This company now has a market capitalisation of $29 million and is not just disappointing, but fairly irrelevant as well.

Even if you've lost most of your dough already on AVA, couldn't you think of better places to either "invest" what's left, or at least spend it on something that will make you feel better than watching this thing keep driving into the ground? No matter what you've lost already, you could still lose more, unless you move it somewhere else, preferably somewhere better of course. Here, the trend is most certainly not your friend.

This company has a track record of paying their directors and senior management very well, including multi-million dollar bonuses when they sold their most profitable division a couple of years ago - and coincidentally haven't posted a profit since that sale - but they don't make money now, well, they make money, but they continue to spend more than they make, so they are not profitable, so there's no profits to share in, and a falling share price to boot, and there's nothing there that indicates to me that the frowns are going to turn upside down.

This is another company with heaps of promise (and plenty of promises), with better times just around the corner, but they're stuck on a roundabout, so the corner never ends.

[Disclosure: Not held. Did once. Not for a while but.]