Sparks - AOTI

AOTI reported a strong H126 performance, with improving profitability and cash generation ahead of a potentially important reimbursement inflection for TWO2, its topical oxygen therapy. Reported revenue increased 10.8% y-o-y to $35.3m, while underlying revenue growth excluding Arizona Medicaid was stronger at 18.8% (AOTI stopped accepting new Arizona Medicaid patients from 1 April 2026 following prolonged payer billing and payment disruption). US Department of Veterans Affairs (VA) revenue, which accounted for 57% of group sales, increased 16%, while underlying Medicaid revenue rose 21.5%. Gross margin improved 110bp to 88.8%, supporting a 16.6% increase in EBITDA to $3.6m and a 50bp expansion in EBITDA margin to 10.1%.

Encouragingly, AOTI also returned to positive operating cash flow of $0.9m, versus a $4.7m outflow in H125, supported by stronger VA performance and improved working capital. End-H126 cash stood at $13.8m, while net debt was broadly stable at $6.3m. The main balance-sheet sensitivity remains Arizona, where gross Medicaid receivables increased to $18.7m. Management remains confident in recovering historical claims, although the timing is uncertain.

The key near-term catalyst is potential Medicare coverage for topical oxygen therapy. In July, the Durable Medical Equipment Medicare Administrative Contractors (DME MACs) published a proposed Local Coverage Determination (LCD) supporting coverage for diabetic foot ulcers that have failed to heal after four consecutive weeks of optimised care. The public comment period closed on 5 September and the DME MACs now have up to 12 months from publication to finalise the LCD, followed by a 45-day notice period before coverage becomes effective. If finalised, this could materially expand reimbursement beyond AOTI’s existing VA and Medicaid base. Management estimates that broader US access could increase the addressable market c 65-fold to c $26bn, although this remains a company estimate.

Overall, we view H126 as a solid operational update ahead of a key reimbursement catalyst. FY26 guidance has been maintained at underlying mid-teens revenue growth, and EBITDA is in line with a current consensus of $6.8m. The key near-term investor considerations are the timing of the Medicare LCD, continued conversion of revenue growth into cash generation and resolution of the Arizona receivables position.