Sell-in exceeded sell-through in Q4 2025; receivable days jumped seven; the largest customer’s inventory rose. Individually, each has an innocent explanation. Together, in the final year of a three-year performance period, they form a pattern. Both performance metrics cleared their targets in 2025. Without the profit that reverses in 2026, the payout would have been 62% instead of 142%.

The share closed at $95 after the Q4 2025 results and trades at $69 today, four weeks after the warning. Everything needed to see it coming was already public. Neither check is specific to Pentair: break receivable days out by quarter and ask whether anyone’s pay depended on the year just closed.

The anomaly

Pentair is an industrial company with volatile end markets; despite this it had beaten sales expectations every quarter since Q1 2020. None of Pentair’s named competitors (FactSet’s comp screen) had managed this consistent streak of beats. Watts Water Technologies was the closest with only one miss in Q1 2023. Pentair’s median beat was 1.7%, small and consistent — not the large, erratic beats sandbagged guidance produces. That leaves the reported number being steered towards the line ­— through accruals or real decisions like shipping early.

Behind the Numbers, a forensic accounting shop, has followed Pentair for years. Its 8 May 2026 note flagged a low refund accrual, a bad debt allowance it deemed unsustainably low, a warranty accrual that looked managed, and growth in receivables. Each potentially used to steer earnings.

A Peek Behind the Numbers

Pentair (PNR): Beneath the Beat

Pentair’s (PNR) latest quarter looked fine on the surface. The company reported adjusted EPS of $1.22, beating consensus by 5 cents, while revenue of $1.037 billion was modestly ahead of expectations. Core sales grew only 1%, but margins expanded again and management raised the low end of full-year adjusted EPS guidance…

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3 months ago · 6 likes · Behind the Numbers

On the year-end call on 3 February, management called out that sell-in was a little higher than sell-through but expected it to normalise in Q1 2026. Management repeated the message at investor conferences, adding one subclause at the J.P. Morgan Industrials Conference in March: ‘What will really be important is, as the product starts to leave distribution into dealers in Q1 and Q2’.

On the Q1 2026 earnings call in April, sell-through was characterised as encouraging but they acknowledged that current channel levels ‘may require our channel partners to reduce purchases in Q2 and Q3 to reflect 2026 pool industry growth’. This was paired with guidance that assumed flat sell-through volumes, with growth from price.

By 14 July, the channel inventory had grown into a $250m (16% of Pool segment’s FY2025 sales) hit to Pool sales and $155m to operating income.

Pentair had been here before. It flagged channel normalisation in Q2 2022 and guided volumes down by low-to-mid single digits for the second half. In Q3 2022 they framed it as a near-complete event, quantifying ‘nearly $200m’ to be cleared by year-end. By Q4 2022 that timeline had already slipped with the correction recast as a multi-quarter 2023 problem. Q1 2023 brought a further downgrade — guidance cut from low-double-digit to mid-teens Pool sales declines with two-thirds attributed to inventory. Q2 2023 pushed the guide to the high end of mid-teens, quantified the correction at roughly $150m for the year and moved the expected completion date out again to end of Q3 2023. What started as a quick $200m correction escalated over six quarters into $350m.

The accounts

Receivable days in Q4 increased by three days over three years and then jumped seven days in Q4 2025. A jump in receivable days indicates late-period sales, longer payment terms, or both.

Pentair is a seasonal business with a peak April to September (Q2/Q3). It uses an Early Buy program it describes as offering discounts and extended payment terms to help it smooth factory loading. Pentair does not provide details on the payment terms offered but Pool Corp describes Early Buy programs from its suppliers as allowing them to push payments until the high season in Q2.

Q1’s rise is steeper: 60 days in 2021 to 80 days in 2026. This is a natural consequence of distributors who rely on the Early Buy program, purchasing goods in Q4 and paying in Q2. Q4’s early-buy receivables sit unpaid through Q1 while Q1’s receivable days are measured against Q1’s own sales — the smallest quarter of the year.

A rise in receivable days can also signal customer credit problems. I do not think that is the case as receivable days in Q2/Q3 have been consistent at 44-47 days. The seven-day jump in Q4 2025 is either sales landing unusually late in the quarter or more volume than usual going through Early Buy terms — either way, sell-in beyond current demand.

When Under Armour pulled forward revenue to meet analyst expectations, it was visible in the receivable days. Starting in Q3 2015, and lasting until Q4 2016, Under Armour pulled forward revenue between 1.7% and 13.1% of revenue, averaging 5.7%.1 The break first showed in Q4 2015: 8.5% of revenue pulled forward and receivable days rose five days. Although Under Armour pulled forward only 1.0%-4.4% of quarterly revenue from Q1 to Q3 2016, the effect was still apparent in y/y change in receivable days.

Finished goods growing faster than sales can indicate a demand problem. As early as Q3 2021, Pentair’s finished goods started growing faster than sales, three quarters before management guided volumes lower, as easing supply chains met falling demand. The gap between finished-goods growth and sales growth stayed negative throughout 2023, 2024, and most of 2025, first turning positive in Q3 2025, three quarters before management lowered its full year guidance.

The finished-goods-to-sales metric has led the tops in Pentair’s share price.

The counterparty

At the same time as Pentair telegraphed potential destocking in channel inventory, its largest customer (widely believed to be Pool Corp)2 explained its rising inventory position as buying ahead of annual price increases in Q4 2025, with ‘some opportunistic purchases made ahead of current season price increases’ in Q1 2026.

With pool volumes flat to falling, Pentair has leaned on price — up at twice inflation since 2022. A natural consequence of Pentair aggressively pushing price is that its customers use the Early Buy program to lock in lower prices, taking more risk on end demand during the high season. The arrangement suited customers as payment was not due until Q2.

The channel had overestimated end demand throughout 2025 as seen in Pool Corp’s inventory-to-trailing-revenue increase every quarter. By Q1 2026, the inventory-to-trailing-revenue was three percentage points above the Q1 2023 level when Pentair had warned of a ‘year of inventory reduction’.

As a directional estimate of channel fill/drain, I have compiled Pentair’s Pool segment’s revenue growth minus Pool Corp’s revenue growth (data only stretches back to Q1 2022). This chart corroborates that the inventory has been filling since end of 2023, with Pentair growing faster than Pool Corp until the destock began in Q1 2026. The Q2 2026 figures are included for reference but would not have been available to an investor ahead of time.

The motive

The motive emerged last: the Q4 increase in receivables raised the question of whether management had an incentive to pull sales forward.

The fourth quarter is structurally under the most pressure to manage earnings. A weak first quarter still leaves most of the year to catch up; a weak fourth quarter does not.

Pentair had a performance share plan with a three-year performance period for 2023-2025. Each performance share unit entitled the holder to one share after three years, provided the targets were met. The award was measured on full-year 2025 alone.

The goals were adjusted EPS and return on capital, with 75% weight on the former and 25% on the latter. The adjusted EPS had a threshold of $4.10 (50% payout), target of $4.60 (100% payout), and maximum of $5.45 (200% payout). Pentair reported adjusted EPS at $4.92, comfortably above the target. The return on capital was similarly structured with a threshold of 12%, a target of 15% and maximum of 18%. Pentair was easily above the target at 16.7%.

Channel inventory ebbs and flows; a quarter of extra sell-in washes out in the next cycle. Pull the inventory swing into the right year and the cost is temporary while the vesting is permanent. A weak 2026 does hurt the later, overlapping awards — but by late 2025 the channel was already full and a weak 2026 was coming regardless. The remaining choice was whether the closing award drowned with it.

Part of the channel build inflated 2024 rather than 2025, which makes the full $155m an upper bound. Apply the $155m destocking hit to 2025: adjusted EPS would have been $0.78 per share lower at $4.14, and return on capital would have been 14.1%. The lower results would have pushed the payout from 142% to 62%. Payouts scale linearly between threshold, target and maximum, per the proxy. I used Pentair’s adjusted tax rate and averaged FY24/25 instead of the five quarters per Pentair’s methodology. I did not adjust inventory level upwards, understating the impact on return on capital. Using the $105m Q2 2026 impact instead of the full year expectations would have produced a payout of 84%.

What it was worth

After the Q4 2025 release you had:

1. Management calling out that sell-in was higher than sell-out

2. A seven day jump in receivables

3. Finished goods growing faster than sales for two consecutive quarters

4. Customer calling out prebuying and its accounts showing high inventory-to-revenue

5. Management motivated to hit its 2025 targets

Management had telegraphed the channel build, and embedded lower sell-in in the guidance. So it was reasonable to read the risk as priced in. What broke — as in 2022 — was the magnitude.

While a cheap valuation could have offset the emerging risks, the share sat at the top end of its 10-year valuation range on both EV/S and P/E for the next twelve months at 4.3x and 19.5x, respectively. The risk-reward was weighted to the downside.

Short interest was stable around 2% of the free float for over a year before the Q4 2025 report and then rose to around 4%.

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The numbers that did not add up

Fake revenue leaves three marks. Receivables grow, because customers either do not believe they owe anything or do not exist. Cash flow stalls, because growing receivables drain working capital. Margins go absurd, because fake revenue costs nothing to produce. KPMG's two reports found no evidence of call-offs or deliveries beyond a minor €100k delivery to MoveoMed and minor sample volumes in 2024. These breadcrumbs are all visible in Intellego’s accounts.

Receivables

Based on the annual accounts, receivable days grew consistently up till LTM Q3 2025. In late 2024, Intellego entered a factoring arrangement allowing it to sell receivables on a non-recourse basis, allowing it to derecognise the receivables from its balance sheet. The Q3 2025 report makes clear that a total of SKr133m receivables had been factored year-to-date. Adding these back to receivables shows that the supposed improvement was a result of factoring, rather than improved payments by customers.

Intellego explained the rise of receivables by saying that customers had grown used to extended payment terms early on to win market share. However, investors should have asked, why would customers buying $2 consumables need to finance their purchases from a company whose products are supposedly flying off the shelves?

While receivables on an annual basis showed a clear trend, the quarterly view is muddier.

Receivable days built throughout 2024 with a climax in Q4 2024. Then Q1 2025 shows a large and unexplained fall followed by a modest rise. Intellego entered a factoring arrangement in late 2024 and investors might have presumed factoring was behind the sharp fall. However, later disclosures show that Intellego did not sell receivables until Q2 2025. So, no available explanation accounts for the fall.

KPMG’s reports, published after the collapse, show that the quantum of fictitious sales materially increased from the start of Q1 2025. Counterintuitively, a sudden jump in fictitious sales causes the receivable days to temporarily fall.

Consider a company generating only fraudulent sales of $50 each quarter. In quarter 1, sales are $50 and receivables are $50; in quarter 2, receivables rise to $100, and so on. Receivable days is 90 days in quarter 1 and 180 days in quarter 2, increasing by 90 days each quarter because sales remain constant while receivables are never collected.

However, if the fraudulent sales suddenly jump to $200, receivables will increase from $100 to $300 on $200 of sales. In this case, receivable days falls to 135 days. Counterintuitively, receivable days declines from 180 days to 135 days when the level of fraudulent sales increases. In subsequent quarters, receivable days continues its upwards trajectory.

Stylised example:

This pattern fits what we observe from Intellego.

Inventory, PP&E, and the Yuvio reclassification

Despite spending over SKr40m on tangible investments in Q1 2025, PP&E barely budged q/q. The accounts showed no indication of large write-downs or sales of PP&E that could explain the lack of movement in PP&E.

Inventory on the balance sheet never surpassed SKr24m despite quarterly sales reaching almost SKr300m. With sales accelerating in 2025, inventory would be expected to increase at a similar pace to support the higher revenue base. How can inventory stay flat when sales grew >100%? Intellego showed an implausible improvement of inventory turnover in an already lean business.

Intellego presented its income statement by nature, which means production costs and inventory movements reconcile through a ‘change in stock’ line. A positive change means production exceeded sales; a negative one means the opposite.

Intellego’s change in stock was consistently negative through 2025 and 2024, and mostly negative in 2023. In Q1 2025 and Q3 2025, it was larger than the opening inventory balance — Intellego booked the cost of more stock than it had.

The Q3 2025 report adds an explanation to both the lack of PP&E growth and the change of stock. The company writes:

Change in inventory is affected by a reclassification from tangible assets to inventory as some of the tangible assets (Yuvio equipment) has been sold to customers and not leased as initially planned for. This reclassification also impacts the profit and loss statement as cost of goods sold (COGS) is increased. The total COGS impact coming from this reclassification amount to SEK 25 179 thousand in the third quarter, and SEK 52 320 thousand for the first nine months. (Q3 2025 report, emphasis added)

So, the company bought Yuvio equipment and initially classified it as tangible capital as it planned to lease the equipment. Subsequently, it sold these devices instead. While the note reads as if Intellego restated the YTD figures this appears not to be the case as the YTD in Q3 2025 equals Q1-Q3 summed. Moreover, there is no note of how the change impacted revenue in prior quarters as we would expect if cost of goods was impacted.

Instead, the disclosure is merely providing additional detail on its accounting during Q1-Q3. Intellego has essentially classified Yuvio devices as PP&E. Then when these were sold, Intellego first reclassified the PP&E to inventory and subsequently credited inventory while debiting change in stock. This single reclassification explains both anomalies — why PP&E did not grow with tangible investments, and why change in stock exceeded opening inventory.

Cash flow trailing profits

Cash flow from operations trailed EBIT every quarter despite factoring receivables and misclassifying inventory as PP&E — both of which flattered 2025 working capital. That gap is the pattern of revenue recognised but not collected.

Margins and per-employee economics

As the cost of fictitious revenue is zero, margins of companies with fraudulent revenue tend to the absurd which is why a margin comparison with peers is a fruitful exercise. The UK fraud Patisserie Valerie produced margins comparable to Starbucks — a bakery selling perishable cakes should not earn what a global coffee chain earns. The margin gap was the signal.

Intellego at 62% LTM Q3 2025 EBIT margin, rising 19 percentage points y/y, was excellent and an outlier by any reasonable standard for a company selling physical products.

There is no clean peer for Intellego’s margins. Even against Google — one of the most profitable companies in the world — Intellego’s EBIT per employee ran 2.5x higher.

The per-employee metrics were supercharged in 2025, with revenue jumping from SKr4.7m in Q3 2024 to SKr18.1m by Q3 2025. Likewise, EBIT per employee jumped from SKr1.3m to SKr10.6m over the same period.

Intellego disclosed the number of employees on a geographical basis in its annual report. Group headcount in 2024 was 62, of which 55 sat in the UK — presumably all Daro. That leaves seven employees generating the rest of the group’s revenue. If Intellego’s headcount held at seven through 2025, the implied per-employee revenue reaches almost SKr200m, up from SKr27m in 2024. This assumption is reasonable as total group headcount was stable year-over-year. It further raises the question why Daro Group needed so much more staff than Intellego.

Booked before received: the MoveoMed order

On 4 October 2025, Intellego announced a €22m order for Yuvio devices. When the Q3 2025 report, for the quarter ending September, was released on 10 November 2025, it became evident that the company had recognised revenue prematurely and that the revenue must have been fabricated. The share fell almost 60% on the day.

The €22m was announced in October 2025 and in a clarification release on 8 October 2025 the company stated:

The UVC disinfection equipment has been sold and when delivered, will generate significant revenue for Intellego in the future. Selling UVC disinfection equipment to hospitals, as well as to partners and distributors, is an integral part of Intellego’s business model. (emphasis mine).

The “when delivered” indicates that the products had not been shipped as of 8 October 2025. However, reading the Q3 2025 report with quarter end in September, it is evident that the MoveoMed order had been recognised. The report states:

The larger Yuvio order [to MoveoMed], SEK 243 million, equipment was sold in late Q3 and the invoice has an upfront payment, quarterly payments and is due in 24 months wherefore the invoice has been discounted for the full amount over a 24-month period. (emphasis mine)

Two aggressive moves at once: revenue booked before the equipment shipped, and 24 months of instalments recognised upfront as a discounted lump sum. Booking revenue before shipment breaks the company’s own revenue recognition policy, which states:

Revenue from product sales is recognized at the time when control of the goods is deemed to be transferred to the customer. The Group has assessed that control, in accordance with the applied delivery terms, is transferred to the customer when the products leave the Group’s warehouse, this also applies to the Group’s fixed-price projects. (translated from Swedish in the 2024 annual report, p. 15, emphasis mine)

However, the Q3 2025 report states the order provided under EXW terms — under which the seller makes goods available at its own premises and the buyer bears all costs and risks from that point — allowing the order to be recognised before leaving Intellego’s warehouse. It also clarified that the order was received in late September but not communicated until October due to internal governance.

The ordered products were available in stock and provided under EXW terms. Due to the order size, the Company’s governance and compliance process was activated. This process follows a strict protocol to verify that an order is accurate and reconfirmed. This process includes e.g. external confirmations and approval by Intellego’s board. The order was filed in late September but communicated first in early October to the market due to the internal governance and compliance process. (emphasis mine)

On 12 September, Intellego announced that it had met its EBIT SKr400m target. As became evident in the Q3 2025 report, this was achieved by booking the MoveoMed order in Q3 rather than Q4. However, it also exposed the revenue as fabricated.

To align with the company’s own timeline, the MoveoMed order must have been booked before it was received.

H1 2025 EBIT was SKr287m. By 12 September, the company said it had surpassed SKr400m — incremental EBIT of SKr113m.

Q3 2025 revenue was SKr294m. SKr243m came from the MoveoMed order. The remaining SKr51m was incremental revenue up to 12 September.

SKr113m of EBIT on SKr51m of revenue. The maths demands the MoveoMed order be inside the 12 September figure — but the company says MoveoMed arrived in late September, supposedly after the 12 September announcement.

As discussed in part 1, the day before Dagens Industri reported that two senior figures had quietly left in August: Daro’s CEO and the head of North America. That likely compelled the company to confirm EBIT had surpassed SKr400m the next day.

What was knowable and when

In mid-2022, the two-step consolidation of Daro and the promotional releases ahead of the warrant subscription period were softer signals. Investors would likely have dismissed both as an honest mistake and a company under pressure. The earliest hard-to-dismiss evidence appeared in late 2022 when HAI expanded its initial $60k order into a supply agreement worth at least SKr1.5bn over nine years.

By mid-2023, two further independent signals appeared. First, HAI placed an order worth $10m whilst still lacking regulatory approval. Second, Intellego announced the RCS order, which raised two concerns: RCS’s CEO told the press he was unaware of the order or of Intellego, and Intellego subsequently claimed the order related to its European distributor — a one-employee company with turnover of ~SKr7m.

The signals escalated during 2024 with Likang and progressively worsening cash flow as receivables piled up. The fraud accelerated through 2025: beat-and-raise with incremental margins that did not make sense. Three CFO changes in the final twelve months. Revenue and EBIT per employee higher than Google’s. This climaxed with the MoveoMed order, which proved beyond any doubt that the company was making it up as it went along.

Reviewing the RCS and HAI counterparties and performing basic channel checks on the US market would have given a very different picture from the fivefold increase in North American revenue Intellego reported. Anyone with nous enough to email a US reseller would have avoided this doughnut. The earliest evidence to avoid the share surfaced in 2023, but investors should have waited until the share stopped reacting to good news — EBIT surpassing SKr400m in September 2025 — before shorting.

The market was not fully fooled. A company growing 100x with 60% EBIT margins should trade on a high multiple. Intellego, at the time of the 10-Bagger Substack article in October 2024, traded at 7.9x earnings. The multiple priced in scepticism — just not the scepticism that the earnings themselves were invented.

The accounts alone could have been dismissed. Combined with the commercial reality and the behavioural signals, they could not.

Share Where Were the Signs?

Appendix

The signal that was not: taxes

As the joke goes, only two people know the real profit of a company: the CFO and the taxman. Two divergences flag aggressive accounting: book tax expense versus what the pretax number implies, and cash tax paid versus book tax.

Intellego reported strong profits across 2024–2025 and booked income tax expense to match. Cash tax paid in those years remained low or slightly negative. This fits the pattern of aggressive accounting but is legitimately explained by the time lag built into Sweden’s preliminary corporate tax system.

Sweden bases this year’s tax payments on last year’s profit, with only a standard uplift, unless the company files an updated preliminary return.

Book taxes land in the year the profits are earned. Cash tax for the same year is settled later — when the Tax Authority issues the final assessment, often in the following year or the year after that.

The fraud occurred in 2024–2025, exactly when book profits and tax expense spiked. The low cash taxes in those years were driven by preliminary taxes set against earlier low-profit years — a legitimate lag, not a fraud signal. Intellego in fact paid cash tax on fictitious profits — the company has since applied for refunds of 2024 and 2023 income tax — which confirms the lag was doing real work, not concealment.

At the core of the case is the former CEO, who is under investigation by the Swedish Economic Crime Authority on suspicion of gross fraud and gross accounting fraud. Following his arrest in November 2025, Intellego hired KPMG as forensic accountants. KPMG concluded that essentially all the parent company’s reported revenues were fictitious: SKr640m out of SKr644m (99%) for 2025 sales and SKr137m out of SKr159m (86%) of 2024 sales should not have been recognised.

The alleged mechanism was straightforward: the former CEO provided altered purchase orders to the auditor, removing or changing critical terms and conditions to justify revenue recognition. Following the arrest, trading in the share was halted and the company has since been delisted from Nasdaq First North.

The fraud unravelled in November 2025, when discrepancies around export receivables surfaced. Intellego had assigned three purported export receivables against Likang to Svensk Exportkredit (SEK) under guarantees from Exportkreditnämnden (EKN). SEK and EKN jointly filed a police report for suspected fraud later that month. In February 2026, after Intellego admitted the claim, Stockholm District Court ordered repayment of the full €11.6m.

Before the arrest, the forensic engagement, and the trading halt, the signals were already there. This two-part article walks through what was visible and when. Part 1 shows the red flags visible without reading the accounts. Part 2 turns to the accounts themselves and the lessons for investors.

The promise

Intellego was founded by Claes Lindahl in 2011 and listed in 2021. The company made UVC dosimeters — small patches that change colour once a surface has received a sufficient UV dose, giving hospitals, transit operators, and food producers a simple, visual proof of disinfection. Independent academic research validated performance equal to or better than incumbent at a lower price point. The business model was straightforward: a cheap, recurring consumable sold into a safety-regulated industry – the holy grail of a good business for some investors.

From 2023, breakthrough orders began arriving. Sales reached 100x their 2020 level, with EBIT margins of 62% on a Q3 2025 LTM basis.

The commercial reality

The commercial reality was inconsistent with the growth Intellego reported. On the demand side, customers were too small to absorb the announced orders, headline commitments escalated even as the regulatory conditions underpinning them slipped, and independent channel checks showed end-market demand had collapsed. On the supply side, the contract manufacturer lacked the capacity to support reported sales, and Intellego’s own warehouse held expired stock.

Size mismatch

On 19 June 2023, Intellego announced a SKr60m order from Radical Clean Solutions International, with a three-year sales forecast of SKr150m. Company filings showed the distributor had ~SKr7m revenue, ~SKr0.3m gross profit, <SKr1m in total assets, and one employee.

On 4 October 2025, Intellego announced that its subsidiary Yuvio had received a €22m order for UV disinfection devices to be delivered in 2025. The order was from MoveoMed, which had total assets of ~€0.6m in 2022.

Escalating commitments

From 2021 to 2023, Intellego’s communicated economic potential with HAI escalated from $60k to multi‑hundred‑million figures, while FDA approval was repeatedly delayed and HAI remained a 2–10 employee company. In December 2021, Intellego announced a $60k order from HAI, conditional on FDA approval expected in 2022. By October 2022, the relationship had been restructured as a supplier agreement under which Intellego could receive at least SKr1.5bn and up to SKr4bn over nine years according to HAI’s forecast, still conditional on FDA approval. In July 2023, Intellego announced a $10m order and stated that deliveries had already started, with HAI estimating first sales in early 2024. HAI received FDA approval for its QIKCAP system on 23 December 2025, as reflected in De Novo decision DEN250004 and Intellego’s 29 December 2025 announcement, roughly three years after the initial expected approval date and nearly two years after the projected first sales.

For Likang, headline commitments escalated while the releases continued to stress regulatory dependency and future market ramp‑up. In June 2024, Intellego announced a $16.2m minimum commitment over three years for certain UVC dosimeters and devices in China. In November 2024, Intellego and Likang expanded their collaboration with five‑year agreement for an additional disinfection product in China with stated minimum volumes of $360m, conditional on regulatory approvals and other standard conditions, with volumes to be achieved progressively and sales launch projected for late 2025. In March 2025, Intellego headlined a further expansion to six additional Asian markets as “$360m–1.4bn over five years”; the stated minimum for the new markets was $360m, with the $1.4bn upper figure dependent on product mix, and the release again stated that volumes were conditional on regulatory approvals and would be reached over a five‑year period with sales launch expected in 2025.

Likang is a subsidiary of Yuwell (Jiangsu Yuyue Medical Equipment and Supply Co., Ltd.), a Shenzhen‑listed medical equipment company with ~RMB7.6bn (~$1.05bn) in 2024–2025 group revenue. Yuwell’s public disclosures contain no mention of Intellego, UVC dosimeters, or multi‑hundred‑million‑dollar purchase commitments, despite Intellego’s claimed $360m minimum representing more than one‑third of Yuwell’s annual group revenue. The relevant segment Clinical Equipment and Rehabilitation Solutions, which includes infection-control products — generated only ~$295m in 2025, making the $360m minimum larger than the entire segment’s annual revenue.

When contacted by Maius Partners, Yuwell confirmed a 2024 cooperation agreement between its Zhongyou/Likang subsidiary and Intellego for UV disinfection efficacy‑monitoring products, but stated that the value of the cooperation “is determined by actual business volumes rather than a predetermined amount,” omitting any reference to Intellego’s touted $360m minimum and making no mention of a separate $360m–1.4bn agreement in 2025, thereby contradicting Intellego’s framing of fixed minimum commitments.

Collapsed demand

Independent channel checks suggest US reseller demand had collapsed long before Intellego’s reported figures would imply. American Ultraviolet, an exclusive distributor since 2019, told Øystein Barmen that dosimeter cards “were a huge hit in 2020-2022” but that volumes had since fallen sharply. Pro Lamp Sales reported a 60% sales decline in 2022 followed by stabilisation. Against that backdrop, Intellego reported North American revenue growing from SKr8.8m to SKr302m through Q3 2025.

The quarterly breakdown makes that figure harder still to explain. North American revenue of SKr253m was booked in H1 2025 – yet the 9-months 2025 stands at SKr302m despite only booking SKr31k of North American sales in the quarter.

For context, Mediuminvest estimated Intellego’s revenues implied a global market share of 5% despite selling a $2 consumable and noted that geographic revenue swung wildly between quarters with no obvious reason.

The supply side is no less troubling. According to Dagens Industri, Intellego manufactured its dosimeters at Stema Specialtryck in Borås. Public filings show Stema turns over roughly SKr100m and neither its accounts nor its website mention dosimeters. Even with high gross margins, Intellego’s scale and growth trajectory should have left a visible imprint on its only manufacturer.

The physical evidence, when it finally appeared, was unambiguous. Montega, the company’s sponsored equity research firm, visited the production site and posted photographs of the inventory. The picture shows stock that expired in 2024 in a company supposedly posting hypergrowth.

KPMG’s investigation later found that Intellego had improperly recognised revenue from HAI, Likang, and MoveoMed, among other customers. It also confirmed that the supplier’s total production capacity could account for only ~15% of the volumes required to support the recognised revenue, while actual deliveries amounted to a fraction of that.

Tariff evasion as competitive moat

Management attributed its strong margins partly to the 5–10x markup it could earn on Yuvio devices.

Customers can, for example, acquire a [Yuvio] device at a low upfront cost (with no margin for Intellego) combined with a long-term commitment to purchase dosimeters, or choose to buy at market price with a high gross margin for the Group. Intellego’s global reach together with its flexible commercial terms, enables for Intellego to have a strong negotiation position which can result in gross margins over 50% for the devices. Intellego can for example buy a device from one region for 5 000 – 10 000 USD and resell it in another region for approximately 40 000 – 50 000. (Q3 2025 quarterly report, emphasis mine)

What prevents buyers from sourcing directly and capturing that spread themselves? This is precisely why traditional distributors tend to earn thin margins. Management’s answer was its global network, which it suggested shielded it from the tariff burden facing US-based manufacturers:

Through Intellego’s subsidiary Yuvio, we are uniquely positioned to offer disinfection devices that many competitors cannot, thanks to our extensive global network. For example, a US-based manufacturer often faces challenges entering the European market due to tariffs, regulations, and technical requirements – areas where Intellego has extensive experience and proven capability. This allows us to source devices from one part of the world and successfully launch them in another without major obstacles (emphasis mine)

The tariff argument does not hold. Duties are levied on the product and its country of origin, not on the identity of the importer. A US-manufactured UV device attracting an EU import tariff pays that tariff whether the importer is the manufacturer’s own subsidiary or Yuvio. Intellego has no special exemption.

Historical accounting irregularities

The first sign that disclosure was managed rather than made arrived in August 2022.

Two days before its Q2 2022 report, Intellego announced that it would expand to the UK via the acquisition of Daro Group. A single sentence in the original release stated Daro would be consolidated from 1 June. Then the Q2 2022 report showed that revenue surged 400% y/y for the July-ending quarter. Nothing in the Q2 report flagged that one month of Daro was inside the figure. The balance sheet showed no goodwill, no subsidiary holdings — the standard tells that an acquisition had closed.

It later emerged that Intellego had completed the acquisition in an unusual two-step process where the income statement was consolidated as of June 1 2022 – adding one month of Daro sales to the reported figures – whilst not consolidating the balance sheet until Q4 2022. As Daro was eight times larger than Intellego on 2021 numbers, even one month of sales had a material impact on the Q2 2022 figures.

Intellego was fined for multiple Nasdaq rule violations in 2024, including the lack of disclosures for Daro.

Nasdaq’s Exchange argued that Intellego should have disclosed the Daro acquisition on 1 June 2022 — when the agreement was signed and control was taken — rather than 23 August 2022, and further that the Q2 2022 interim report (25 August 2022) failed to make clear the extent to which the key ratios included Daro, thereby not enabling a complete and correct assessment under Article 17 MAR.

Beyond the Daro disclosure issues, Nasdaq’s Disciplinary Committee found Intellego in breach of the Rule Book on four further counts: misidentifying the counterparty to a ~SKr60m order, providing incomplete disclosure around a ‘global market evaluation’ press release, failing to include parent-company financials in its 2022 annual report, and failing to announce a change of Certified Adviser — the Nasdaq First North-mandated firm responsible for ensuring the issuer meets its listing, disclosure and ongoing Rule Book obligations.

The counterparty misidentification involved announcing an order from “Radical Clean Solutions” but clarifying days later after press inquiries that the customer was Radical Clean Solutions International, a one-employee European distributor.

The disciplinary committee fined the company twelve times the annual fee (SKr2.2m) and wrote:

“The Disciplinary Committee finds that the violations are serious, and therefore a fine must be imposed as a sanction. In view of the repeated violations and the fact that the reasons for these appear to primarily be due to a failure in the capacity to disclose information on the part of the Company, the Disciplinary Committee sets the fee at twelve times the annual fee.” (emphasis added)

The pattern was framing by omission — orders named to imply a bigger customer, acquisitions disclosed without flagging their effect on the headline numbers, evaluations announced as material news without the substance to back them.

Promotional management: beat and raise on steroids

In July 2022, the warrants from Intellego’s 2021 IPO were due for subscription. The company needed the financing with only SKr5.1m of cash and 62% sales decline in the previous quarter. At SKr9.43 against a SKr9.36 strike, the share sat seven öre above the line separating a clean financing from a dilutive rescue.

The subscription window ran from 15 to 27 July. Across twelve days, four releases hit the wire: on 8 July, news of late‑stage negotiations that could lift 2023 revenue past SKr100m and confirmation of alternative financing; on 15 July, the subscription period opened; on 18 July, the cancelled Feiyang acquisition, on which the share rallied 20%; on 19 July, disclosed insider buying; on 20 July, a financing update. Despite the drumbeat of releases, only 48.5% of warrants were subscribed.

The company needed the market to act; the news flow was engineered to make it do so. Three years later, the same promotional reflex returned.

In 2025 the share rose fivefold on a series of beat-and-raise quarters that, on inspection, made no sense. Sales guidance rose by SKr200m. EBIT guidance rose by SKr240m. The implied incremental margin was 120%. That is implausible for a company already running world-leading margins.

On 28 February, the Q4 2024 report guided to 2025 sales above SKr500m and EBIT above SKr160m. On 1 April, preliminary Q1 figures showed net sales of SKr200m and EBIT of SKr100m; on the same day, CEO Claes Lindahl bought 844 shares. Three days later, on 4 April, EBIT had surpassed SKr160m — the full-year target.

On 27 May, guidance was raised to sales of SKr600m and EBIT of SKr250m. On 1 July, preliminary Q2 figures showed net sales of SKr200m and EBIT of SKr100m. Three days later, on 4 July, EBIT had surpassed SKr250m.

On 27 August, guidance was raised again to sales of SKr700m and EBIT of SKr400m. On 9 September, Lindahl bought 363 shares. Three days later, on 12 September, EBIT had surpassed SKr400m.

Two further signals were visible to anyone watching closely. CFO churn and a moment of theatre from the CEO.

During one investor call, Claes Lindahl took a phone call mid-presentation, answered what sounded like the company’s auditor, and told the audience: ‘the accountant is as calm as a bowl of soured milk, I can tell you that.’ (A Swedish idiom for unbothered composure.)

Then, the facade cracked on 11 September. Dagens Industri reported that two senior figures had quietly left in August: Daro’s CEO and the head of North America. North America accounted for 88% of Intellego’s Q2 2025 sales. The US subsidiary, according to the paper, had one employee.

The next day Intellego raised guidance again, but the share did not move. The market had stopped believing the numbers. From its 12 September peak of SKr213, the share fell 55% by 9 November. The next day, the Q3 report drove it a further 57% lower in a single session, to SKr41 — a cumulative 80% fall from peak. On 17 November, Lindahl was arrested on suspicion of gross fraud. The following day, trading was halted.

The pattern was years old before 2025: framing by omission, news engineered around what the company needed the market to see. None of this required reading the accounts. Part 2 shows the accounts told the same story.

A closer look at the company’s accounts and financial footnotes reveals several red flags that could have alerted investors to the impending overstatement.

WHSmith description

WHSmith is a British retailer that operates stores selling books, stationery, magazines, and newspapers, primarily within airports and train stations, following its divestiture of high street locations in 2025. The company operates through directly run stores, franchises, and joint ventures. Historically, its operating margins have been around 10%, with a post-COVID return on invested capital (ROIC) of 6%. The company's share price peaked in late 2019 and has been declining since.

WHSmith entered the U.S. market through two acquisitions in 2018 and 2019, with the U.S. segment gaining prominence after the company divested its high street locations in 2025. Following the pandemic, the number of travellers to the US steadily increased; however, the growth rate has declined, with the last twelve months' (LTM) figures falling in May and June 2025. This anaemic growth and slowing foot traffic have created a more challenging environment for the North American division to meet its targets.

What is supplier income?

Supplier income is revenue retailers receive from their suppliers, typically through discounts and rebates. This income is earned through various agreements, including those for volume-based purchases or promotional activities. For example, a retailer can receive "margin support," where a supplier pays the retailer to subsidise the cost of a promotion. See the appendix for an illustration of accounting for a change in estimate relating to the expected volume discount.

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WHSmith’s accounting policy

The first area to review is WHSmith’s accounting policy relating to supplier income. Below is WHSmith’s supplier income policy found on pages 128-129 in the 2024 annual report, with some omissions and my commentary.

The Group receives income from its suppliers in the form of supplier incentives and discounts (collectively “Supplier arrangements”). These incomes are recognised as a deduction from cost of sales on an accruals basis as they are earned for each supplier contract. […] Supplier incomes that have been invoiced but not received at the year end are recognised in Trade receivables, or in Trade payables where the Group has the right of offset. Incomes that have been earned but not yet invoiced are accrued and are recorded in Accrued income. […]

Supplier income reduces the cost of goods sold and is either recognised in trade receivable (if invoiced), trade payables (if WHSmith owes the supplier), or accrued income (if WHSmith has not invoiced it yet).

Retrospective discounts:

Income earned based on sales or purchase volume triggers set by the supplier for specific products over specific periods. Income is calculated and invoiced based upon actual sales or purchases over the period set out in the supplier agreement, and is recognised in the income statement as it is earned. Where the period of an agreement spans accounting periods, income is recognised based on forecasts for expected sales or purchase volumes, informed by current performance, trends, and the terms of the supplier agreement. […]

Supplier income is estimated by management and is based on sales and purchasing trends.

The carrying value of inventories is adjusted to reflect unearned elements of supplier income as the product has not yet been sold. This income is subsequently recognised in the cost of sales when the product has been sold.

Inventory valuation is reduced by discounts relating to unsold products and recognised in the cost of goods sold when the product is sold.

Promotional and marketing activity:

Supplier income from promotional and marketing activity includes income in respect of in-store marketing and point of sale, supplying dedicated promotional space or receiving margin support for products on promotion. Income for promotional and marketing activity is agreed with suppliers for specific periods and products. Income is recognised over the period of the agreement. Income is invoiced when the performance conditions in the supplier agreement have been achieved.

Based on accounting policy, supplier income affects either the cost of goods sold, inventory, trade receivables, accrued income, or accounts payable. WHSmith further discloses the amount of supplier income recognised within accrued income and accounts payable in the relevant footnotes.

Analysis

The supplier income is recognised as a reduction in cost of goods sold. Hence, we expect gross margin improvements if more supplier income were recognised. We observe a clear upward trend with a notable jump in 2024. The lower gross margin during 2020 and 2021 is related to subdued travel during the pandemic. According to the release, the issue refers primarily to the North American division. While I have not found specific disclosures around the gross margin for North America, the company writes in its 2024 and 2023 annual reports of improving gross margins for the segment.

According to the policy, supplier income may be recognised in trade receivables. Hence, days sales outstanding (DSO) is relevant to review. WHSmith is a retailer that either charges in cash or by card. Credit card processing takes one to three days. Hence, days' sales outstanding should be minimal, and growth in this metric is likely related to invoicing suppliers for promotional activities. For instance, WHSmith’s peer, Avolta, reports “trade and credit card receivables” and “other receivables”. The latter contains receivables relating to advertising, loans, services provided to suppliers, subtenants, etc. Avolta’s trade and credit card receivable days were 1.5 in 2024. WHSmith shows an apparent increase in receivable days, with a notable jump in 2022. The increase in 2022 may be attributed to the continued recovery in the travel sector, with revenues growing by 58% year-on-year. Revenue growth in the first half of the year was 45%, indicating an acceleration in the second half. This could explain a higher-than-usual level of outstanding receivables following the peak travel season.

Indeed, 41% of stores are franchises, with another 8% under JV agreements. A rise in these could explain the increase in receivable days. However, the number of stores under JVs and franchise agreements has remained stable, and thus, their receivables should be, too. Moreover, the proportion of directly run stores has risen from 40% to 51% from 2021 to 2024. Thus, I find it unlikely that this explains the rise in receivable days.

WHSmith has a year-end in August after peak travel season, which likely flatters its working capital metrics. Based on FactSet’s fiscal DSO and calendar DSO, the former is typically lower.

Meanwhile, using FactSet figures on calendarised DSO for WHSmith and its Avolta peer, we see DSO has been trending in opposite directions since 2022, with WHSmith increasing while Avolta decreasing. Note that Avola, formerly Dufry, merged with Autogrill on 1 November 2023, almost doubling turnover, which could have impacted its DSO profile.

WHSmith’s accounting policy further states that accrued income is impacted by the amount of supplier income recognised where the invoices have yet to be sent to the supplier. Since the invoice has not even been sent, it is a low-quality source of earnings. Fortunately, WHSmith discloses the specific amount of supplier income recognised within accrued income. We also see a strong upward trajectory starting in 2022, indicating that more supplier income is being recognised relative to sales.

Usually, when supplier income is an issue, payables decrease as a greater proportion is offset by volume rebates. At the same time, only a part of the discount is recognised in the inventory valuation, as part of the inventory has been sold and is consequently reflected in the cost of goods sold. For instance, the supermarket operator Tesco’s 2024 annual report offset GBP138m of payables while only netting GBP12m in inventory. Therefore, payable-to-inventory can signal supplier income issues. In September 2014, Tesco disclosed that it had inflated its profits by GBP250m due to the improper recognition of income from suppliers. Yet, evidence of the issue was discernible beforehand in the company's payables-to-inventory ratio.

However, this signal would not have worked for WHSmith, which saw this ratio rise instead. WHSmith discloses the amount of supplier income netted within the payables and has varied by only a GBP1-3m per year on a balance greater than GBP100m. Moreover, unlike Tesco, which has an inventory turnover of over 20x, WHSmith’s inventory turnover is only around 3x. Thus, in the former, a greater proportion of the expected discount would be recognised in cost of goods sold as the inventory would be sold before the payables are settled, while in the latter, a greater proportion remains in inventory.

Quantifying the issue ex ante

WHSmith has indicated that the overstatement is around GRP30m. Investors looking at WHSmith before the announcement would not have this luxury. Thus, I tried to quantify the size of the issue using the average DSO for receivables and supplier income days between 2018 and 2021 (before the issue seemingly took root). This analysis shows the issue could be up to GBP60m, with excess supplier income of GBP23.1m and excessive receivables of GBP35.2m in 2024. Since my estimate of excess supplier income is slightly less than the GBP30m announced by the company, the growth in receivables may be unrelated to supplier income. Nonetheless, the rapid growth is worrisome.

The chart below shows the amount receivables and supplier income must decrease/(increase) to equal the 2018-2021 average DSO of 8.7 and 1.9 days for receivables and supplier income, respectively. There is an apparent change starting in 2022, which stems mainly from the jump in receivables discussed earlier. Supplier income refers to the supplier income recognised within the accrued income.

I have tried to assess the impact on the group’s gross margin by removing the change in “excess” supplier income and receivables from gross profit. This yields a 0.5pp to 1.7pp lower gross margin between 2022 and 2024.1

After these adjustments, operating profit (before non-underlying items) still grew. However, the growth rate and absolute operating profits would be lower, both likely resulting in a lower valuation.

While it would not have been immediately apparent that the issues were isolated to the North American division before WHSmith’s specific disclosure, making the same adjustments to that segment’s operating profits would have revealed a vastly different growth profile and lower profits on an absolute level. The North American segment has been a key part of the investment thesis since the company divested its high street locations in 2025. Consequently, the valuation would likely have been lower without the boost from early recognition of supplier income. It should be noted that the North American segment was part of the broader Travel segment before 2021.

Conclusion

Reviewing WHSmith’s accounts, it is evident that there were red flags that could indicate issues with supplier income. Gross margin was improving while receivables and supplier income within the accrued income category saw significant rises following the pandemic. The trend in receivables days was counter to Avolta. Identifying these issues should have triggered investors to demand an explanation from management, and if unsatisfactory, could have avoided the stock (or shorted it). I believe quantifying the total overstatement and the impact on each financial year is more fraught with errors and involves more assumptions. However, some reasonable guesses could have been made.

One takeaway from this case study is that small balance sheet movements significantly impact low-margin businesses. For instance, supplier income grew from GBP14m in 2023 to 2024, representing less than 1% of total assets. However, the same GBP14m would impact operating profit before non-underlying items by over 6%.

Appendix: Accounting for supplier income

Below is an illustration of how supplier income and volume rebates are accounted for.

WHSmith has an agreement with a supplier that if it buys 10k units, it gets a GBP5k discount.

WHSmith buys 5k units at GBP10 each. At the time of purchase, WHSmith does not believe it will meet the volume requirement to earn the discount. Inventory increases by GBP50k, and accounts payable by the same amount.

WHSmith later sells 2k units, reducing inventory by GBP20k.

Subsequently, WHSmith acquired 3k more units.

After acquiring the last 3k units, WHSmith now believes it will meet the volume discount (change in estimate). The discount equals a GBP0.5 reduction in per unit price (5k/10k). Thus, it makes the following adjustments:

If WHSmith had already paid the invoice by the time it thought it would earn the discount, WHSmith would debit its accounts receivable (if the invoice was sent) or accrued income (if the invoice was yet to be sent) instead.

BICO is a leading provider of life science solutions and laboratory automation that enable more efficient development of new treatments with greater specificity and reduced need for animal testing.

According to the statement made by the board’s chairman, a whistleblower investigation found the company’s aggressive sales culture during the years 2017-2021, which, after an internal investigation, wrote down its accounts receivables in 2022. The write-down of accounts receivables was communicated in a profit warning announced on 2022-07-15. The stock fell 60% on the day. A few months before, on April 26, 2022, it was announced that the CFO, who has been CFO since BICO’s start, abruptly left the company on the day.

Specifically, the chairman stated:

1. Aggressive sales culture

2. Young and inexperienced management team

3. Several quick acquisitions created deficiencies in control systems

This resulted in some sales being recognized in the incorrect period and some that should not have been recognized. Complicating the situation was that during 2020/2021, the pandemic created challenges in meeting customers, and thus, demo equipment was sent to customers that, in some instances, was recognized as revenue.

Since the issue concerns aggressive sales culture and accounts receivables, the main areas to review are sales, revenue recognition, accounts receivables, and contract assets.

Sales grew at a 180% CAGR between 2017-2022

The first thing that stood out to me is that BICO showed a sales CAGR of 180% between 2017 and 2022, growing from SEK13m to SEK2.240m. This type of sales growth is bound to create risks, particularly concerning internal controls, as it’s hard to scale an organization properly to manage such growth. A significant part of the growth was achieved through acquisitions.

Accounts receivables

The most straightforward metric to review is days sales outstanding (DSO). These steadily increased from about 60 days in 2017 to over 120 days at the end of Q419. Increasing DSO can indicate that BICO offers customers more favourable payment terms to entice sales or that customers have payment difficulties. It could also be the result of fake sales.

Interestingly, the BICO 2018/2019 report states that it generally has a consistent payment term of 30 days. While this phrasing was dropped in subsequent filings, BICO’s DSO was above 160 days in the same report.

Rapidly growing firms will see an upward trend in accounts receivables as sales will be skewed to the end of the period, and the receivables associated with those sales will not have time to be collected before the end of the period. This could partly explain the receivables growth.

BICO was a heavy acquirer, which can complicate the analysis of accounts receivables.

Acquisitions complicate the analysis as the acquired accounts receivables are incorporated into the accounts fully on the balance sheet date. In contrast, sales associated with the acquisition are recognized from the consolidation date. Thus, a large acquisition made late in the period will only include a few weeks/months of sales while the entire accounts receivable balance is included.

Since BICO was acquisitive, I’ve used two methods to adjust its DSO figures. The first is to remove the acquired sales and accounts receivable for the period to achieve a like-for-like figure (blue in the chart below). This isolates BICO’s underlying performance. Note that accounts receivable for BICO’s acquisition of SCIENION have not been disclosed. Thus, I’ve used other current assets as estimates of its receivables. The 2020 period has also been adjusted from 16 months to 12 months. This method best represents BICO’s underlying business.

I’ve also used a second method, effectively adjusting sales as if the acquisitions were done on 1 Jan of the year but using the reported accounts receivables figure. This yields a very different result. I believe the discrepancies come from the acquired companies having better collection cycles and fewer fake receivables that will never be collected than ‘Core’ BICO, effectively reducing the merged entity’ DSO figure. For example, summing the accounts receivables and annual sales for the eight acquisitions separately disclosed in 2021, the DSO for these are 63 days. The same year, BICO’s DSO was over 170 days. The latter is the average of BICO’s DSO without the acquisitions and the acquisitions.

Based on the first method, my analysis suggests that BICO’s underlying collection performance was worsening, as indicated by the blue bars. Thus, acquisitions could not explain the high DSO number.

Old receivables

All accounts receivable are not equal. Therefore, investors must study the ageing analysis of the receivables. BICO’s ageing receivables analysis reveals two interesting aspects.

Between 2018 and 2020, BICO saw a growing number of past-due receivables and a spike in more than 120 days old in 2019, reaching 22% of total receivables, up from 10% the year prior. In other words, a fifth of BICO’s customers were four months late on their payments.

In 2021, BICO changed its disclosures for receivables, changing the ageing buckets so that the range is broader (e.g., 31-90 days rather than 31-60 days) and also added more ‘buckets’ to the table, separating receivables up to 365+ days late. While this puts a spotlight on receivables past the previous 120+ days cut-off point, it does obfuscate the trend analysis in addition to optically improving BICO’s receivables that are just past due. For instance, investors had better insight into the distribution in the previous table as the buckets were narrower. However, with the broader buckets, investors don’t know if the receivables between 31-90 days old are skewed towards 90 days or 31 days. Thus making it harder for investors to spot the issue.

The chart above shows that the new presentation resulted in a greater share of receivables appearing less overdue (31-90 days) and a falling share of older receivables. This is the expected pattern.

The old presentation had three almost equally sized buckets regardless of the past due date. Investors likely perceive this as a bigger issue than a relatively small share of receivables that are >365 days overdue, as seen in the new presentation.

Using the old receivables table for 2018-2020, more than 10% of receivables were consistently over 120 days old, and using the new receivables table for 2020-2020, receivables more than 180 days old were consistently above 10%. While I’m not an expert in BICO’s market, and this analysis should be complemented by its peer groups, these figures appear to be high. A common sense question to ask is: if a customer has not paid within half a year, will it ever pay?

BICO’s annual reports state that most customers, such as universities and large pharmaceutical companies, support low receivable loss allowances. If customers are credit-worthy, the other explanation for ageing receivables is that they do not believe they owe BICO anything. While pharmaceutical companies may hassle BICO on longer payment terms, I do not think universities have such an incentive.

Additionally, BICO states that several of its customers routinely pay late, suggesting that customers are either not creditworthy or do not believe they own BICO anything; that is, BICO has billed for something the customer has not ordered. This seems reasonable, given the chairman’s statement that, in some instances, revenue was recognized for demo equipment.

In 2021, contract assets started showing up on BICO’s balance sheet. These represent revenue that has been recognized, but the invoice has not been sent to the customer. Contract assets are common and not necessarily improper. However, I believe they are a lower-quality source of revenue. This is because they significantly rely on management’s judgement and are hard to audit.

Triangulating BICO’s statement that its customers are credit-worthy and the ageing receivables, it appears reasonable to suspect that BICO was billing customers prematurely and aggressively booking revenues.

While outside the scope of this article, cash flow during this period was significantly negative, with more cash outflow than net income. This was partly driven by slow receivables collection.

The hard stuff

While a diligent investor might have spotted the accounting issues described and avoided the stock, from the short-selling perspective, the hard stuff is risk management and market timing. I’m sure these issues could have been spotted in 2019 or 2020. However, before the market recognized the problems, the stock saw a 12-fold increase from 2016 to 2021, with a 150% increase in 2020 alone. Thus, short sellers would be without a job long before the market recognized their thesis.

In this case, the share did not collapse until there was a greater sell-off in the market. However, shorting at any point on the downward slope would have yielded great results. In percentage terms, the return is better from 1 to 0 than from 300 to 50, although shares going to zero are uncommon. Moreover, the short position can always be increased as the share falls if the conviction remains.

BICO ticked many boxes investors look for, such as founder-led, structurally growing markets and high insider ownership. While these attributes can result in phenomenal stocks, investors should not become complacent.