[At a Crossroads] DtnCRO ② Suspicious Surge in 'Contract Assets'...Revenue Rises but Cash Flow Turns Negative

Contract Assets Recognized as Revenue Before Billing
Cash Reserves Running Low... 77% of Current Assets Are Contract Assets

The 'contract assets' of DtnCRO, a KOSDAQ-listed company, have surged significantly. Contract assets refer to amounts recognized as revenue based on the progress of a project, even though payment has not yet been requested from the client. As a result, while DtnCRO's revenue has increased, its cash flow remains negative.

In particular, the market is paying attention to the fact that contract assets have increased much more rapidly than revenue, and that the ratio of contract assets to both revenue and current assets is high.

According to the Financial Supervisory Service's electronic disclosure system on January 14, as of the end of the third quarter last year, DtnCRO's contract assets stood at 18.2 billion won, a surge of about 65% compared to the end of 2024.

DtnCRO is a contract research organization (CRO) that provides non-clinical and clinical services. Contract assets are recognized as revenue based on the progress of research after signing service contracts with biotech companies and others. In accounting terms, they are considered revenue, but in reality, they are receivables for which payment has not yet been requested from the customer.

For example, if the company signs a non-clinical trial contract worth 1 billion won with a client, the entire contract is initially set as the order amount. Revenue is then recognized based on the progress rate determined by DtnCRO. Actual payments are requested from the client in the form of a down payment, interim payment, and final payment, but revenue continues to be recognized separately from these requests. Contract assets arise from the difference in timing between when revenue is recognized and when payment is actually requested.

Due to this structure, DtnCRO's revenue has increased, but its operating cash flow remains negative. As of the end of the third quarter last year, DtnCRO's revenue was 32.7 billion won, up 35% from the same period the previous year. However, operating cash flow was negative 3.6 billion won.

DtnCRO's contract assets have increased sharply since last year. The company's contract assets were 11 billion won in 2024 and 7.7 billion won in 2023. Even in 2022, when revenue peaked during the COVID-19 period, contract assets were only 9.1 billion won. At that time, the ratio of contract assets to revenue was 20.6%. However, in the third quarter of last year, this ratio rose to 56%.

It is also analyzed that the growth rate of contract assets far outpaces that of revenue. As of the third quarter last year, DtnCRO's revenue increased by 35% year-on-year, while contract assets increased by 108%.

Notably, contract assets account for 77% of DtnCRO's current assets, raising questions about the company's actual liquidity. DtnCRO's current ratio stands at around 48%. This means that the current assets recoverable within one year are less than half of the current liabilities due within the same period. Moreover, since most of these current assets are contract assets, excluding them would drop the current ratio to the 11% range.

The accounting industry views contract assets as similar in structure to 'unbilled construction work' in construction companies. Unbilled construction work refers to revenue recognized based on progress, but not yet billed to the client.

Unbilled construction work is often used in accounting fraud by construction companies. If the progress rate is overstated, revenue and profits increase. However, there is a risk that large losses may have to be recognized all at once later.

The 2015 Daewoo Shipbuilding & Marine Engineering accounting scandal is a case in point. The company accumulated trillions of won in unbilled construction work, inflating revenue and profits for years, only to eventually suffer massive losses. The Financial Supervisory Service concluded that Daewoo Shipbuilding & Marine Engineering arbitrarily raised its construction progress rate to inflate revenue and profits.

Therefore, the accounting industry advises close attention to whether the ratio of unbilled construction work to revenue is high, whether unbilled construction work is increasing faster than revenue, and whether operating profit is positive while operating cash flow is negative.

Meanwhile, a DtnCRO representative stated, "Since 2021, we have implemented designated audits and have applied very strict standards for revenue recognition. During last year's interim audit, we were also audited for the timing and accuracy of revenue recognition and the existence of related transactions, making accounting fraud completely impossible."

The representative added, "Since 2023, new orders have increased due to organizational renewal and investment activities, and revenue is also on the rise. We also expect to return to profitability in the fourth quarter of last year."