I write about Arena (NASDAQ:ARNA) and because I do I see tons of comments, tons of email, and tons of private messages. Often these are communications that the reader is simply too shy to ask in an open forum. However, sometimes many readers may have a similar question, so I sometime take the time to post a question and an answer.
Recently I pointed out that investors would want to become familiar with Arena's cash position. The reason this is important is that there is a real potential, In my opinion, that Arena may have a need to raise cash in some way within the next year. That concept will sound outrageous to some considering that the company has $203 million in cash and another $50 investment in Taigen. However, when you consider that the company needs to maintain certain levels of cash (for business reasons and because the company is conducting human trials) the story is different.
In my opinion Arena needs to keep about $100 million in cash on hand, and could be down to that level (excluding the Taigen investment) between Q4 of 2014 and Q2 of 2015. As a result of this discussion I was asked about the $99 million in deferred revenue.
"Wouldn't the $99 million in deferred revenue be added to the $203 million in cash?"
The answer to that question is no. The cash represented by the deferred revenue is included in the $203 million. There is a distinct difference between cash, revenue, and deferred revenue.
- Cash includes revenue and deferred revenue
- Deferred revenue is simply cash that is on hand but has not yet been earned. It is earned by Arena meeting its end of the obligations relating to deals or contracts.
- Revenue is cash that comes in or deferred revenue that has become earned.
Simply stated, the cash on hand is the cash on hand. Deferred revenue is not an additional amount of cash.
Disclosure: The author is long ARNA.