Ann: Appendix 4C - quarterly, page-32

From page 34 of last year's annual report:

"Revenue from the sale of goods is recognised at the point of delivery as this corresponds to the
transfer of significant risks and rewards of ownership of the goods and the cessation of all
involvement by the Group in those goods."

That is, revenue is recognised in the accounts when the product is delivered. Cash is recorded when it is received. Orders placed and paid for result in an increase in cash with revenue only rising when the product is delivered. The difference between cash payments from customers and revenue is reflected in changes in Income in Advance in the balance sheet.

Ahead of last years IPO, ZNO was accepting orders and taking payment of cash before actually delivering the product. Therefore revenue was lower than receipts from customers. For example, in the HY to December 2016, cash receipts were over $5ook while revenue was only $126k.

As a result, Income in Advance (pre-payments) stood $2.41m in June 2017. Since then, ZNO has been working on clearing this backlog of prepaid orders. As a result revenue has increased (due to deliveries of previously ordered goods) without a corresponding increase in cash received (since the cash had already been paid earlier).

As a result, by the December 2017 HY report, Income in Advance (pre-payments) had fallen to $1.25m from the $2.41m in June 2017. This is a fall of around $1.16m. During the same half year, revenue was $1.96m while receipts from customers were only $0.70m, a difference of $1.26m which is consistent with the $1.16m fall in Income in Advance in the balance sheet.

When the backlog of pre-paid orders is cleared, cash receipts should match revenue. We won't know know the level of prepayments until the Annual report for June 2018. However in the March quarter 2018, revenue ($0.92m) was approximately $0.73m ahead of cash receipts ($0.19m). Therefore pre-payments have probably fallen from $1.25m in December to around $0.52m. At this rate the pre-payment backlog should be cleared this quarter (June 2018).

The key question is, once the gap between revenue and cash receipts closes, will cash rise towards current revenue levels or will revenue fall towards current cash receipts.

Some of the recent rise in revenue comes from meeting previously placed order backlog. If there is no new growth in orders and no follow-up orders from existing clients, then revenue could drop.

Alternatively if they can achieve new order growth (e.g. from China) and existing customers place follow-up orders, then cash will rise.

Gets back to what you think about the potential for the product and also the ability of ZNO to put in place a marketing and distribution structure.

Hope this helps