Reported Revenue and Lagging Cash

Something to ponder on an unusually quiet Sunday afternoon.

“Alexium’s top and bottom line growth over the first two months of this year are unprecedented in size as our upcoming ASX 4C regulatory filing will show.”

Some found the above encouraging statement from the CEO this week confusing, since the top (sales) and bottom (earnings) lines are based on revenue but the 4C content reports on cash. I expect the revenue details will again appear in the commentary accompanying the report, as it has for recent quarters. But what is the likely timing difference between the two?

It has become almost folklore on the AJX forum that there are significant delays between booked sales revenue and the receipt of associated cash payments. Some contributors favour the likelihood of a delay of six months, but the general consensus now seems to be that any revenue reported for one quarter will not be banked until the next.

So is there evidence to support these assumptions? I can’t find any real indication in the accounts of significant delays of this order.

Revenue and cash receipt figures reported respectively for the last few half years are:
Half Year__ Dec15,_ Jun16,_ Dec16
Revenue__ $973K, $2.02M, $11.18M
Cash_____ $926K, $1.94M, $9.12M

Clearly there is a good correlation between cash and revenue amounts within each period and there is not a six-month delay, otherwise Dec16 cash receipts for example would have been around $2M rather than $9M. A similar fit is generally true for quarterly periods also, when revenue figures have been made available. This is not to imply that cash is received almost immediately, since delays at the end of a period are at least partially balanced by lagging cash contributions entering from the previous one.

A simple test is available. If cash were to lag booked sales revenue by three months, then the same revenue amount reported for a quarter should appear in the accounts at the end of that reporting period as payments yet to be received, specifically as a ‘trade debtors’ item.

Receivables are not broken down in half year reports, but they are in annual reports. The last one available shows (Note 8) receivables of $192K with a ‘trade debtors’ component of $137K at end of June 2016. Sales revenue reported for the Jun16 half-year was $2.02M, and by my estimate about $1.2M of that could be attributed to the second quarter. If so, that means that not much more than 10% of that quarter’s sales amount had yet to be banked going forward.

So to my mind the proceeds from the high growth in chemistry being shipped this year that has been referred to in recent management communications are likely to be reported not only as revenue but also much of it could appear as cash in the March 4C, unless of course it is on a slow boat to China, which is a real possibility.

What is the precedent base for the unprecedented growth that has been referred to? In size it would be the increase in revenue from $3.78M to $7.40M between the last two quarters. This represents growth of $3.62M or +96% in sales. If the March figures were to match that precedent then reported revenue would become either $11.02M or $14.50M respectively for the quarter. Unprecedented growth however would require these figures to be higher. It should be interesting to see to what extent management’s guidance achieves a balance between healthy enthusiasm and fact.

Anyway, some food for thought and I’ll open the matter for discussion. I’ve done my bit.