Ann: Annual Report to shareholders, page-42

Keynotes from Prelim Final Report:

1. Revenue from chemistry sales up 693% from $3M to $24M from FY16 to FY17
2. Gross margin on chemical sales grew by 13.3% from FY16 to FY17
3. Total revenue up 12% in second half of the year compared to previous half.
4. Gross margin up 4.2% in second half of the year compared to previous half.
5. Revenue up 15% in Q4 compared to Q3 due to bedding sales ramping up to record highs
6. Gross margins up 32.3% (from -14.08% to 18.23%) in Q4 compared to Q3 (target 40%)

So we have confirmation that cash flow positivity has continued strongly (Points 5 and 6).

We have clear evidence that the slowdown in revenue growth (that people panicked about and thought the margin thing was an excuse for slowing business growth) was to indeed to focus on margins (Points 2, 4, and 6).

We have evidence that despite the focus on margins, revenue is still rising (Point 3 – noting that this excludes Pegasus revenue so it should be even higher).

Annual Report key ratios and financials:

1. Gross profit for the year = 296,458 (up from -362,636); first positive gross profit year for the company
2. Cost of Sales/Revenue = 98.8% (down from 112.1% in FY16); meaning they’re selling product ~14% more efficiently now and finally selling it for a profit
3. Admin Expense/Revenue = 6.4% (down from 45.4% in FY16); meaning they’re benefitting from economies of scale now
4. Employee benefits/Revenue = 19.2% (down from 122.4% in FY16); again meaning economies of scale
5. They have another $1.4M in receivables which isn’t included in the reported revenue but represent confirmed sales
6. They have another $2M in inventory which hasn’t been sold yet but has been paid for ($700k of which are finished goods)
7. Payment to suppliers and employees/Receipts from customers and other income = 155% (down from 407% in FY16); again meaning economies of scale

So we have clear confirmation here of what the company said about reaching a size and reputation in the market where they can benefit from economies of scale. In particular, AJX mentioned more recently that their raw material costs will start decreasing which is great because that’s the biggest drag on profitability right now and the biggest cost input to their margin, which they are targeting 40% for FY18 (Points 2, 3, and 4).

It cost them an additional $900k in admin and wages to generate an additional $21M revenue. As revenue increases, these costs will continue to drop as a % of revenue, which will continue to drive profitability. This is why it’s difficult for small companies to be profitable whilst expanding, because they don’t have economies of scale. In FY16 AJX paid twice as much in wages and admin than they earned in revenue whereas in FY17 they earned 4x more revenue than they paid in wages and admin.

Projection:

Now if we consider that beginning of Q4 was the first cash flow neutral month and that we have clear, audited evidence that this growth has continued, then assume the company trucks along like this without any additional growth (which is unlikely considering they have already won 2 new bedding customers through the reporting period and Pegasus is only just kicking in).

Q4 gross margin = 18.23%
Q4 revenue = $6.75M
Q4 qoq revenue growth = 15%

Then for FY18 we might expect the below revenues and profits:
Q1 revenue = 7.76M
Q2 revenue = 8.93M
Q3 revenue = 10.27M
Q4 revenue = 11.81M
Annual revenue = 38.77M (up 61.55% from FY17)

At the current Q4 gross margin (18.23%), FY18 gross profit = $7.07M (up 2384.5% from FY17)
At the target FY18 gross margin (40%), FY18 gross profit = $15.51M (up 5231% from FY17)

Considering it cost $900k more to make $21M, the $14.77M increase in revenue might warrant an additional $500k in costs, coming to $12.1M in SG&A expenses.

Which means at the current Q4 gross margin (18.23%), the FY18 loss will be $5M (down 60% on FY17 loss of $12.1M)

At the target FY18 gross margin (40%), the FY18 profit will be $3.41M.

Keeping in mind this assumes that revenue ONLY grows at the current quarter on quarter growth rate of 15% and that the company realises no additional economies of scale (which is wrong because they’ve only just recently noted cheaper raw material costs).