Fosters Stockbroking Site Visit to US Operations Confirms Commercialization Is Scaling Up

PERTH, AUSTRALIA and GREER, SC--(Marketwired - Jul 27, 2015) - Alexium International Ltd (ASX: AJX) (OTCQX: AXXIY) is pleased to share the following comments that were reported by Fosters Stockbroking after attending a site trip to the Company's US corporate headquarters located in Greer, SC, to meet with key team members and VPs and tour the technical lab facilities.

In summary, the trip has reinforced our view AJX remains on track in 2015 to deliver significant commercialization targets in only its first year of sales. Based on our understanding of the sales pipeline and successful R&D program that can pivot existing Alexium products into new and niche markets, the earnings will continue to be transformational in 2016.

We reiterate AJX as one of our conviction picks for 2015 supported by our BUY recommendation and risked PT $1.10/sh. Confirmation of major contracts wins in the home furnishing, outdoor, transport and defense sectors will re-rate the stock through the remainder of 2015.

Highlights of the trip include:

Expert leadership team in the US textile community, with deep networks quickly delivering immediate results:

• We had the opportunity to sit down with the three key VPs of R&D (Dr Bob Brookins), Product Development (Reggie Didier) & Sales (Steve Gravlee).
• Dr Brookins was part of the original team who developed the RST platform with the US Air Force that spent circa ~U$30m before transitioning to AJX and now leads the chemistry team behind the Alexiflam FR products and associated IP. Dr Brookins is a PhD in chemistry, and for a scientist, appears solely focused on commercial applications and driving new product for gaps identified in the FR markets.
• Reggie and Steve are both 30-year veterans in the US textile sector that bring deep contacts and knowledge on how to sell and implement new technologies into the textiles market.
• Steve comes with key contacts into the bedding and decorative markets that already have delivered new contracts in only 4mths of being with AJX. Steve will lead the sales team across the outdoor, automotive, home furnishing and defense markets.
• Reggie is responsible for customer sample and production activities and is an expert at implementing next generation FR products within customer milling/finishing operations focusing on low cost integration.
• Growth in sales, R&D and product development staff is expected to ramp up in Q3 to support growth in the sales pipeline. AJX's operation is located in the heart of the 'textiles belt.'
• We should highlight the team on ground is rounded out by Dirk Van Hyning as President and John Hird, both of whom have 20+ years of textiles experience, focused on commercial and in particular military markets. Nick Clark also leads the team as CEO from Washington where he oversees the US lobby efforts and work with the defense sector.

Sales Pipeline experienced rapid growth in Q2 with 40+ customers now active across various stages of proposal, sample tests, production scale up and final contract:

• The sales pipeline update from the VP Sales highlights the material lift in customers now at various stages of the sales cycle and continues to rapidly grow. While we do not expect all 40 customers to sign, the growth in customers coming from inbound calls, networking, trade shows etc has materially grown from our reported 10-15 customers when we initiated research in April 2015.
• Customers for AJX will appear along the textile supply chain that includes: the Brand owner, Cut & Sewers, Textile Finishers and Fabric Mills/Weavers.
• As a reminder, the company estimates the immediate US market opportunity it has sized as suitable for the current FR textile products: Outdoor U$50m; Automotive U$100m; Home Furnishings U$100-200m and Defense U$240m. This excludes other growth markets and markets outside of the US.
• Management have indicated there are at least 1-2 customers across each of the key sectors progressing to a decision in 2015 that can deliver U$5-10m revenue per contract potential. Together with smaller contract wins, only 50% conversion of these opportunities could underwrite our CY16 revenue forecast of $50m. EBITDA margins are healthy in the range of 30-50%.
• We highlight that as each customer progresses through the sales pipeline orders for chemistry to implement production scale up are invoiced and billed, hence the announcements by the company about new 'purchase orders.'  This communication has been intentional to inform the market of successful penetration across all 4 target FR textile markets that has now been achieved. In our view, this is a message to the big three who do not typically focus on the FR textile market (ICL, Ablemarle, Chemtura). Their focus is on bulk markets that are the thermoplastics and outside of the current scope of Alexiflam chemistry.
• Our discussions indicate there are now 10-12 customers preparing for or in the final stages of production scale up using Alexium FR (across Outdoor, Transport, Home Furnishings) all with the potential to close under agreed volume based contracted customers for FR chemistry in 2015.
• Post the recent market update for the outdoor market, the company has confirmed it is now generating orders for Alexiflam products in all 3 commercial markets: transport, home furnishings and outdoor. Delays in finalizing the first outdoor tenting deal relate to securing satisfactory tolling partners located in Asia for the application of FR. This is now close to being resolved.
• And in transport, the maiden shipment of Alexiflam products have been shipped to Europe for a luxury car textile supplier.
• We expect the June 2015 quarterly report to show a strong uplift in cash receipts and commentary on revenue booked subsequent to the period. Early discussions are now taking pace with EU finishers and mills for early trials and scale up activities to state in Q3-4. The company still maintains it is on track for the delivery of 2015 revenues of circa $10m.
• Refer below to our notes on the sales activity related to the defense sector.

Q3 on track to confirm a material home furnishing client & demonstrate Alexium's breakthrough in new FR textile markets:

• What could be the next major stock catalyst is news confirming the conversion of production scale up has now transferred to contracted revenue in the home furnishing sector. As flagged to the market, this opportunity will start with monthly revenues in the U$200,000-300,000 range. This contract alone would underwrite the annual burn-rate of the company. Should volume orders exceed this level in Q4, this deal will demonstrate potential to scale to U$5-10m annualized sales.
• We understand this to be in the bedding sector which will become a high profile win for AJX and provide significant confirmation within the FR textiles market. AJX has the team and product to crack new markets not currently using FR treated Nylons, Nylon Cottons, Wool, etc. Indications are it is a globally recognized brand with potential to increase its FR volumes 2-3x if an entire product catalogue is sold with the Alexium FR branded product, just within the US market alone.
• As we have highlighted above, management are quietly confident multiple contracts of this scale could be converted through the next two quarters across each of the target sectors.

Work on the DoD opportunity has the team quietly confident of a maiden order in 2015:

• While discussions with the military remain highly sensitive, we came away from the trip with a much better appreciation of the multiple touch points within the DoD Alexium is now working on to secure a breakthrough US military contract. The market is rightly focusing on this area as a boost to the company as it will provide both high profile success and recognition within the FR textile industry/competitors and material economic benefits to the shareholders.
• The successful test work being undertaken under the FRACU program continues with the company selected for stage 2 (down select two). We understand the areas of scope for this work are being agreed upon and a result to follow later in the 2H 2015.
• However, what we have not correctly reported is there are other direct efforts being undertaken for the potential for material contracts wins using a NyCo fabric that sits outside of the FRACU program and success is NOT dependent on the outcome of the FRACU program.
• While we await further updates from management during the quarter, we highlight the global leader and existing supplier to the US for military combat textiles TenCate supplies the US military with over U$1 billion in product sales via its Defender M product. It also dominates many other major military markets. It is our understanding that all three global majors in the textile industry have failed to take TenCate on in this market; therefore we view AJX as on the watchlist of acquirers should it crack the military with multiple deals.
• We also remind clients of the clever work by Nick Clark and the board to attract the stature of US Brigadier General Cheney who joined as a Non-Executive Director last quarter. If AJX is going to be successful with a military procurement process it will not hurt having a former general of the US army in your corner.

We will provide a full research note upon returning to Sydney in two weeks. In the meantime, we maintain AJX is a BUY at reiterate our risked PT of $1.10/sh.

Foster Stockbroking acted as co-Placement Agent to Alexium's $8.45m Placement at $0.65 in May 2015, receiving a fee for this service. Foster Stockbroking is also engaged in providing AJX with corporate services for which it has earned fees and continues to do so. Services include but are not limited to, capital markets advisory, research, and marketing roadshows.