Understanding AJX Reported Revenues

This is an important general issue that I think is worthy of discussion on a separate thread.

Confusion relating to Alexium’s revenue figures is a common catalyst for HC discussions, sometimes heated, and no doubt will continue to be so. Why does this confusion exist? My interpretation is outlined below.

I think that while the business continues to grow a problem will always exist in correlating the Company’s contracted sales figures with revenue numbers appearing in its mandatory financial reports. The reason for this rests with the nature of its FR chemistry products and related business model, in combination with the definition of revenue that meets audited accounts requirements.

A key to this is the standard requirement that acquired sales cannot be included in audited reports as revenue until the product has been delivered to the customer (see Financial Note 2(r) in the Annual Reports).

Like many other businesses, chemical manufacturers normally would satisfy a sales order by taking a product off its inventory shelves and shipping it to the customer accompanied by an invoice. Those sales then would quickly become reportable revenue. Alexium is not in a position to do this.

The Alexiflam FR chemicals are produced as active polymers dispersed in water to form aqueous emulsions. Emulsions are basically unstable and have a characteristically short storage life before the active component separates out sufficiently as a coagulant to become unusable. This means that on receipt of a contracted sales order the next step is not to ship product, but rather to ship raw materials for manufacture at a site located near the customer. This accounts for the decision to employ a network of local toll manufacturers. It also facilitates the choice of customising individual products to meet local client needs.

The value of the sale then can only be reported as revenue after the manufacturing and further transport to the customer steps have been completed, generating an abnormal time lag in the accounting process. This would apply to any of the products in which FR chemistry is a component. It does explain also why the sales pipeline is much shorter for Alexicool alone.

Confusion therefore arises in trying to fit contracted sales figures reported at time of receipt by the Company with revenue figures appearing later in the audited accounts. The manufacturing time lag means that reported revenue must always be lower than related sales booked earlier within any reporting period. There always will be recorded sales not yet able to be invoiced.

This abnormality will have been a contributor to the shortfall of the final audited revenue figure compared with the sales revenue projected for CY2016 in the now infamous Foundations document. The extent of the contribution is unknown. The sales order book total for the year may have been much closer to the targeted figure than the invoiced revenues that satisfied the criterion for inclusion in the P&L statement by the year end deadline. Management’s often repeated expectation of meeting that target, even up to the final few weeks of the year, would have been based on the initial figures seen in its sales order books.

It would be difficult for the Company to give an accurate revenue figure for any current period without reference to each order’s invoicing and projecting likely delivery dates for unmet orders. I think this could explain much of the apparent reluctance of management to provide discrete revenue figures to which it is likely to be held accountable later for any discrepancies by disgruntled shareholders, and possibly has contributed to the reduction in formal communications to shareholders.

So as I see it management may be copping a bit of unjustified flack.

Open for discussion.

T7