The Conf call, page-50

Official written transcript to be provided so please take my notes as what I heard. Scuse the capitalisations where something stuck out to me and any typos.

I was impressed and glad I grabbed some more yesterday. Enjoy!

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Alexium Investor Call
Tue, Aug 22nd 6:30-7:30 PM US ET
Wed, Aug 23rd 8:30-9:30 AM AEST

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Initial setting of agenda
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Q FRACU program update,
We've never done a good job explaining the process for anything in the military.

Series of steps, 6 to go through to win a contract and displace an incumbent
1. whatever army, navy etc branch has to express a need
2. a group of producers have to work togther so that a prototype passess all tests
3. then, group does hazard assessment with miltary to make sure solution is safe
4. LUE - limited user evaluation say a few thousand, reason is doesn't matter how life-saving a garment is, if it's not comfortable, people won't wear it, warfighters carry lots of gear, comfort essential. LUE, several thousand uniforms trialled in actual service to assess garment across gamut of conditions, takes several months. If you pass these requirements, they will come back with a yes/no/modifications
5. Draft a MIL Spec
6. Supply inventory

Currently from a flame retardancy requirements for stage 2, solved that piece 18 or so months ago. What the military said at that time is that the fabric submitted is a little too heavy and not breathable enough. Those are not Alexium problems, they are fabric issues. So AJX tried to source fabrics from a wide range of sources and didn't make much headway.

9 months ago, partnered with a major fabric producer who approached AJX who are tailoring the construction of fabric to meet weight and breathability.

Bob shared working with fabric supplier and segments of the supply chain (military procurement down to yarn producers) to get that balance of fabric and solution.

currently in the risk assessment phase e.g. premethrin, pregnant women in fabric, working through military process to make sure product is safe. After this, next step is LUE.

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Q. product lines being developed such as Alexiflam NF, how to ensure adequate funding, bearing in mind cash flow balance has fallen in 6 months from 13m AUD to 3m AUD

Company currently no plans to raise equity. Currently refinancing debt facility, should allow drawing down more capital to fund activities. Recent financial performance has opened better financing options. Evaluated and chosen best one and now finalising ETA 31 Aug. due diligence and legal. Will give better terms on current debt, lower cost and also more capital for growth.
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Q. Alexiflam NF license?
Timeline of where this has come from, then Bob to provide more detail

Produced v1.0 a little over a year ago, once produced this, saw some level of difficulty organically peentrating FR markets with the existing business model. Alexiflam is not bespoke, the chemistry by itself applied in a facility for Cotton to achieve FR will provide the features. So it's much better suited to development license or exclusive license.

Reached out to three multi-billion dollar companies "hey this is what we have, are you interested?"
Shipped chemistry, feedback positive but all three potential partners (esp. electrics and resins) saw that durability esp with harsh chemicals not there. Getting to the end, now have a version that meets these. Have some learnings to apply.

Lots of fractures/manufacturers in the EU market better suit to licensing.

But these apply to other areas - lumber, fleece etc so taking a very strategic approach rather than 'one-size-fits-all' to maximise the opportunity to AJX.

A separate issue is that this is such a Novel product, needs to go through lots of registrations e.g. EU REACH. Working with partners to use their resources to share in the cost and expenses to bring this to market sooner. Bob to provide more input on current status:
A key thing on NF, lots of different parties in different segments of the FR market and then find a third party to whom they wholly handover the technology. Purpose of licensing structure is segment based, not a single market so need to be nuanced in how AJX approach this.

The current strategy will allow to work with the right people/companies with the right sales structures to attack the different market segments. Going into workwear markets where need to meet 100+ industrial launderings which takes much more copoeration with other business/material markets.

NF is a whole new chemsitry, new paradigm for doing FR for fibers and cellulosic materials.

Looking at licensees looking beyond just textiles.
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Q. NASDAQ listing status?
(Aaron) Obviously lots of advantages of NASDAQ - large investor market, brand awareness esp. in USA and also allows listing where operations are based.

Previously pursued listings but held off, waiting for improved markets, or strengthening of financial position.

Today, gone through the process of completing application. We are waiting currently to see how the market continues to strengthen and how products are going to grow on the market. Only going to get a strong position as revenue, margins and EBITDA improves - YOU WILL SEE THIS WHEN THE 4E COMES OUT...

Agressively pursuing cash flow positivity on an ongoing process.
Really a matter of time, not going to rush into it. Pursue when most advantageous time for the company.

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Q. What markets commercially in? Just Pegasus and Mattresses? Did we leave some-what made them unprofitable?

(In reverse order, Dirk)
2 primary goals in 2016 - establish name and reputation of AJX in marketplace, then grow the topline
Approach was driven with "bring us what you've got and we'll give you a solution". There was some 'technological hubris' - approaching as a proof of conept. Looking at what it woudl take, prove product but were unable to take advantage of economies of scale with that approach. AJX approach to price for what would be profitable at economies of scale but not at the lower quantities.

More recently, have established some of these larger economy of scale contracts and supplying these profitable. Reducing SKU's, raw materials, achieve economies of scale with as many of the 150 customers as possible and did a Pareto analysis to determine fraction of products that it woudl be very difficult to reach economies of scale and in a responsible way, help those folks find another way of achieving their goal - no point spending a year building a reputation and losing it.

Secondly, saw bedding business, if you look at ramp up from Dec-Jun/July, 5 metric T to 90. Thats with a SINGLE product. FL021 has 5 or six components. Handful of components, "that, coupled with 2016 strategy" - realised oppotunities to attack in the right spot to achieve good margins immediately.

Intend to replicate the mattress solution in others.

Bob (Tenting) - controversial findings from Duke UNiversity, Chinese manufacturers using flame retardant not designed to be used in tents, volatile/water soluble, carcinogen and not great for campers inside tents. Getting integrated into tenting supply chain overly complicated and not very reliable. While we might be providing an eco- friendly FR, what are the tent manufacturers adding to the process. Manufacturers were looking for a cover statement/due- diligence. So AJX now devleoping a combined, complete solution that provides water repellency, hydrostatic solution, All in one solution that can be taken into a facility and can be run with ease.

This is a product in the design, made sure to structure so that it would pass recognised standards and have just now completed this work. Sales team has gone to outdoor retailer show. GREAT RESPONSE. People really understand what this product will achieve and that it will address their concerns particularly around toxicity and carcinogenic factors.
i.e. Tenting not sidelined, stay tuned.

Aaron (FR and Cooling, what markets are we in)
Breakdown between FR and Cooling changed dramatically in last 18 months. Dec 2016, had no Alexicool sales or product commercialised. Came online 3Q CY 2016. Got first customer and started to ramp up. Up to 10/15% sales. Now about 50% or 45/55 or 51/49 split in sales between FR and Cooling.

Seeing in Alexicool, finishers in market fairly consolidated. One finished may have 15 bedding lines and finishers take a wide-reachin appraoch. Leads to large linear sales. FR, more stepped but expdecting significant growth with Alexiflam NF to swing pendulum back from Alexicool.
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Q. Bedding and mattresses?
Bedding sales align with housing market. Winter time is the slowest season for home buying and correlation with matterss industry. One of the biggest shows in January, made a big splash in the bedding industry with Alexicool, will likely see a small dip in current product line for Dec-Jan and then a bump that essentially cancels out.
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Q. HOw much current revenue is Pegasus. How much of CFN month in June is Pegasus? How much can we expect to see Pegasus adding to business?

Get asked this a lot. Thus far, Pegasus has ZERO CONTRIBUTION TO MONTH OF JUNE. Just now supplying to pegasus so expect progress. Pegasus is a small agressive company, source a lot of the components and put them together for big box stores. One area was to determine how to incorporate AJX into the finishers process. NOW STARTING TO SEE ORDERS WITH PILLOW CAPS(?).

Went to CHina and validated with customers. Expect to see the financial contribution of Pegasis - exciting.
Both good and bad havent realised any material income (had money from trials and some purchased chemsitry) but when we talk about revenue, we are talking about FULL SCALE PRODUCTION CHEMISTRY ON A BOAT - too large to ship air frieght.

Pegasus sell directly to walmart, sam's club, target etc. Those stores do not simply decide to buy a million pillows on their shelves withotu validating them. Multi step process where Pegasus goes out with samples, usually at say a 50 store trial, then 100 store to validate regionally as well as a product quality as whole.

Have not realised any revenue, all of that revenue will be expected in the next twelve months, very excited about the revenue potential there.
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Q. Cash flow positive a one-off?
Not a one-off, NEXT MONTHS TRACKING VERY POSITIVELY but conscious what can be shared per ASIC. Also learnt lessons from the past about what we share pre-emptively.
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Q. Patent applications?
Drafting patents, well protected.

Some of the patents are pending. The strategy for those - because so much of the work done is developing whole new chemistries. The composition of the material ends up being the main base of the patent family will be. Beyond that for key markets, have intellectual property protected in those areas. Have a patenet application in the works for FR NYCO for the military due to the potential size of the market.

Sometimes based on composition, sometimes the process. In other areas, as needed, target specific applications that woudl address those markets. ONe thing to keep in mind, when file a patent application, those are generally classed as provisional application, after a year, turn into a non provision patent application. Can take 18 months to 24 months due to bandwidth at USPTO to go from filed status to published. Also file patent applications in other key markets where applicable.
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Q. Workwear market update?
Question for Bob, Bob is over the whole of process and in his purview.
Bob: integrating the technical teams at AJX is key to what doing in workwear market (i.e the industrial applications where have consumers who have to wear FR garmetns). Do this with Alexiflam NF product. Many more applications beyond that but that is a significant share of the FR cotton market and central to the commercialisation strategy.

Scott Hunter(new VP sales with strongy industry contacts) and Bob working to leverage work from military application into workwear. THough miltary has unique standards, the alexiflam FR technology can be readily applied to new areas in the workwear market. Really seeing how Alexiflam FR can allow the design of new workwwear due ot the novel technolgy. Seeing some gaps the product is really well suited to serve. Really going to see the benefit of that work in 2018.

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Q. Nick Clark - role to drive efforts in Washington Dc. What will happen with him departing?

Role is still important, Non toxic Fr driven by government as well asliability. But also need to hone AJX role/strategy. Sharpen goal to two primary points, one to continue to educate lawmakers on role of FR and the need for it and to make sure it is the voice of science prevailing over the voice of fear. Science will always lead the market to high performance, safe products like Alexium. Targeting specific groups in washington.

But second point just as important to US federal governemnt. Address FR and FR regulation at a state level. A state like IL, Ca, Tx, if one of those states deicdes to enact legislation that is detrimental to alexium, that will have the same function as the the federal. E.g. a chair at pottery barn, dont want to make one chair for Ca and one for other markets. Rather, will supply one across all markets. So trying to hone focus on state houses of legislature and influencers.

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Q. Will we ever see alexicool or alexiflam labels?

Two very different answers, Alexicool - ABSOLUTELY - already being talked about - e.g. a maker of a product wants you to know it's cool technology.

Alexiflam - the same bed maker will not want any association with fires. Don't expect to see these labels.

Maybe finish off here, Aaron to readdress debt facility due to more questions on this. (noted above). Getting a 10M facility at 10% as opposed to previously 15% facility. Also a significantly longer term so need to repay quickly will be absent from new deal. Really excited to pursue new facility. Target date for closing new facility is Aug 31st.
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Closed 7:33 PM US ET