I had a look at this company 2yrs ago and 1yr ago but due to the...

I had a look at this company 2yrs ago and 1yr ago but due to the cash burn and lack of visibility of where revenue growth was going to come from and how they would get to breakeven, I decided to leave it on the watch list.

I noticed the recent sp activity and acquisition so have had another look at their past 3 years of reports.

they have certainly managed to grow revenue nicely, with around 1.5m per year just 2 years ago, and now they do that in a single quarter. Quarterly revenue should hit 2m soon with annualised revenue of around 6.5m for fy21 which is solid top line yoy growth from around 3.65m in fy20 of circa 70-80%. What impresses me is that they have consistently grown revenue qoq over a 5 year period, which is what I like to see and more importantly it’s what micro cap funds and individual investors look for. They look set to continue revenue growth of >30% yoy at least for fy22 due to their pipeline of new contracts, natural volume growth within their major nsw/ Vic clients and their recent acquisition.

im impressed that they purchased a synergistic business at 1x annual revenue as the upfront cost, ie 1m payment for 1m revenue in a business that should drive cross sell synergies, operational/cost/software synergies etc. seems like a smart and good value purchase in a world where most m&a I see is either overpriced or a desperate move to manufacture eps growth in a plateauing company with too much cash.

I love that they have crossed the valley of death for micro caps to reach operational cash flow break even. I love even more that they did it by simultaneous >50% revenue growth and major cost cutting of non essential spend. I contrast this achievement to my investment in another similar micro cap 1ST which continually has missed their own forecasts and investor expectations in terms of revenue growth and has feeble top line growth but is rapidly burning cash so they have embarked on major cost cutting to try and stem the bleeding. I recently posted on their thread about my concerns re a company that is unable to generate adequate revenue growth to make any inroads into their quarterly 1m cashburn so they have no choice but to try and slash costs.

meanwhile AD1 has demonstrated their ability to drive revenue growth whilst reducing costs. This is a rarity in the investment universe and should drive shareholder value by minimising dilution other than for strategic m&a.

I think now is the time for me to take my first small position in this company.

I’m still not sure where the next phase of revenue growth is going to come from given that most revenue is concentrated from a couple of large customers. I would like to see contract with other state govt health networks, private networks like Ramsay/ healthscope/ svha etc or other non health large organisations within the public or private sector. I think they have at least a moderate chance of winning a few significant projects over the next year or two which would give them the next leg up in terms of positive recurring cashflow and thus a rerate in their MC. I think the upside outweighs the downside at this point of inflection in their journey, although make no mistake it will still be a bumpy ride from here over the next few years and it is still high risk with a possibility of going totally belly up if execution on winning new business and discipline on customer retention and cost control is not near perfect.