'Cash flow negative for some time', says the Chairman, page-2

In my view a loan to finance R&D would be an appalling decision.  Servicing debt represents an ongoing outflow of cash.  Taking on debt to fund something that produces no cash inflow is pretty ugly.  We would effectively be using part of the debt funds to service the debt.  In this sense debt is even more dilutive than raising capital because the debt itself is offset against the net asset value of our investment, and the debt servicing costs come straight off the bottom line and delay/reduce profitability and eventual dividends.  I believe that research and development is the exact thing that should be capitalised.

What could reasonably be financed through debt is production where there is a direct revenue outcome to service the debt.  Depending on the circumstances, probably the most suitable instrument would be a line of credit rather than an outright loan.  We would draw down what was necessary to fund materials and production costs, and sales revenue would offset the credit funds when it is received.

In any case we have cash for well over six months of operation at the same level as the September quarter, and I would expect that from the December quarter onward we will see an increasing positive contribution to cash flow coming from sales revenue.  I don't expect that we need to be raising working capital before the September quarter next year.

I must admit to being deeply disappointed by the chairman's expectation that we'll be cash flow negative for some time.  I will be looking very closely at the December quarterly report when it comes out to see whether we have a clear line toward positive operational cash flow: that is payments received from customers to exceed payments for materials, production and distribution.  I would hope we can achieve clearly positive operational cash flow in the March quarter next year.  If we can't achieve it by the June quarter then it's a very bad indicator for future profitability.

If we're making progress toward positive operational cash flow then I'm relatively relaxed if we continue to burn more cash in research and development than we make from operations.  We have a lot of gearing up to do for a very big future.  We should be prepared to spend some money on getting it right and realising our potential.