Silex Systems Ltd
Annual Report 2016

Plain-text annual report

S i l e x A n n u a l R e p o r t 2 0 1 6 www.silex.com.au Annual Report 2016 Important Notice Forward Looking Statements and Business Risks: Some risk factors that could affect future results and commercial prospects include, but are not limited to: the outcome of the GLE restructure which Silex is participating in, results from the SILEX uranium enrichment engineering development program being conducted jointly by the Company and GLE; the demand for natural uranium and enriched uranium; the time taken to develop the SILEX technology; results from IQE’s commercialisation program and the demand for cREO™ products, the potential development of competing technologies; the potential for third party claims against the Company’s ownership of Intellectual Property; the potential impact of government regulations or policies in the USA, Australia or elsewhere; and the outcomes of various commercialisation strategies undertaken by the Company and/or its Licensees GLE and IQE. Silex Systems is a research and development Company whose primary asset is the SILEX laser uranium enrichment technology, originally developed at the Company’s technology facility in Sydney, Australia. The SILEX technology, licensed exclusively to GE-Hitachi Global Laser Enrichment LLC (GLE) in the USA, is currently in the engineering development stage and plans for commercial deployment remain distant and high risk. Silex also has an interest in a unique semiconductor technology known as ‘cREO™’ through its ownership of subsidiary Translucent Inc. The cREO™ technology is exclusively licensed to IQE Plc based in the UK. IQE is progressing the cREO™ technology towards commercial deployment in various advanced semiconductor products. The outcome of IQE’s commercialisation program remains high risk. The commercial potential of these two technologies is currently unknown. Accordingly, the statements in this report regarding the future of the SILEX technology, the cREO™ technology and any associated commercial prospects are forward looking and actual results could be materially different from those expressed or implied by such forward looking statements as a result of various risk factors. SIlEx SyStEmS lImItED ABN 69 003 372 067 Company Directory Directors Dr L M McIntyre – Chair Dr M P Goldsworthy – CEO/MD Mr R A R Lee Mr C D Wilks Audit Committee Mr R A R Lee – Chair Dr L M McIntyre Mr C D Wilks People & Remuneration Committee Dr L M McIntyre – Chair Mr R A R Lee Mr C D Wilks Company Secretary Ms J E Ducie Registered Office and Principal Place of Business Suite 8.01, Level 8 56 Clarence Street Sydney NSW 2000, Australia Stock Exchange Listed on the Australian Stock Exchange, Ticker: SLX Listed on the OTCQX International, Ticker: SILXY Postal address: PO Box 364, Sydney NSW 2001, Australia Auditors 📞 +61 2 9704 8888 📠 +61 2 9704 8851 ✉ 💻 www.silex.com.au investor.relations@silex.com.au Share Registry Computershare Registry Services Pty Limited Level 5, 115 Grenfell Street, Adelaide, South Australia 5000, Australia GPO Box 1903 Adelaide South Australia 5001, Australia 📞 Enquiries: Within Australia: 1300 556 161 Outside Australia: +61 8 8236 2300 ✉ web.queries@computershare.com.au 💻 www.computershare.com.au PricewaterhouseCoopers Solicitors Baker & McKenzie Bankers Australia and New Zealand Banking Group Limited American Depository Receipts (ADR) Information Silex Systems Limited’s ADRs may be purchased on the US OTCQX market. Details are as follows: Ratio: 1 ADR = 5 ordinary shares Symbol: SILXY CUSIP: 827046 10 3 9414F102 Exchange: OTCQX Country: Australia Contents Chair’s Report CEO’s Report Business Overview Company Overview Directors’ Report Corporate Governance Statement Concise Financial Report Independent Auditor’s Report to the Members Shareholders’ Information Company Directory 2 4 6 12 16 40 41 52 54 57 Chair’s Report Dr Lisa McIntyre Chair Dear Fellow Shareholders, The year ended 30 June 2016 was another difficult year during which the nuclear fuel markets remained severely depressed, and this continued to have a negative impact on our share price. With two world-class technologies currently under license to leading commercial organisations, this is an issue which is of concern to us, particularly when our current cash reserves of ~$49 million, is equivalent to ~$0.29 per share. In response, we continue to pay particular attention to the execution of our business strategy, to risk and to governance whilst ensuring we remain able to respond to challenges as they occur and remain poised for substantial activity once the market for nuclear fuel inevitably improves. Despite the challenges that exist in the market for nuclear fuel, we continue to push forward with activities to support our Licensee, GE-Hitachi Global Laser Enrichment LLC (GLE) in the commercialisation of our unique and potentially disruptive core technology – the SILEX laser-based uranium enrichment technology. Our recent activities include actively participating in the restructure of GLE announced in April this year, with Silex playing a substantially increased role in the commercialisation program and taking the lead on the search for new investors. We also made significant progress during the year with the completion of the Company’s strategic business review announced 30 June 2014. This resulted in the licensing of the Translucent cREO™ technology to IQE Plc based in the UK and the sale of Solar Systems’ assets. “Our Management team and board continue to make progress against a backdrop of difficult business conditions and strategic challenges.” Our Management team and board continue to make progress against a backdrop of difficult business conditions and strategic challenges. We are pleased to see discussions advancing with several parties interested in investing in SILEX technology Licensee, GLE and the progress that has been achieved in the engineering and economic validation program in key project activities at both the Wilmington and Sydney project sites. Finally, GLE’s negotiations with the US Department of Energy regarding the strategically important tails reprocessing opportunity in Paducah, Kentucky are nearing completion. We also successfully transferred our unique semiconductor cREO™ technology during the year to IQE Plc, the global leader in the design and manufacture of advanced semiconductor wafer products. IQE’s effort and focus that has been applied to the advancement of Translucent’s unique cREO™ technology to date is encouraging. If this technology is successfully deployed by IQE, Silex stands to earn a significant royalty stream of up to 6% of the revenues IQE generates from use of this technology. A full update on our activities is provided by Dr Michael Goldsworthy, our CEO/MD, in his following report. 2 Silex Annual Report 2016 Corporate Governance Outlook Despite the challenges that currently exist in the nuclear fuel markets and for the commercialisation of the SILEX technology, we remain encouraged by the future for the global nuclear industry and the inevitable turnaround in the nuclear fuel markets that will come in the next several years. We continue to believe the SILEX technology, being our core asset and the only third generation laser enrichment technology being commercialised in the world, is the best path forward to re-build long-term value for our shareholders. I would like to thank our shareholders for their interest and support of Silex during these difficult market conditions and poor share price performance. I look forward to updating you again at our Annual General Meeting in November. Dr Lisa McIntyre Chair 4 October 2016 We have restructured and reduced the size of our Board in recent years to reflect the changing requirements of the Company and to ensure a mix of directors on the Board from different backgrounds with complementary skills and experience. We welcomed Robert Lee to the Board on 1 July 2015 who was formally elected by shareholders at our 2015 Annual General Meeting, to replace Andrew Stock who retired on 31 August 2015. At the present time, we believe our Board has the appropriate mix of skills, experience and industry knowledge for our current opportunities and challenges. We have successfully implemented our major strategic review and strategy to significantly reduce our operational cash burn and devote our resources to the commercialisation of the SILEX technology. Since the announcement of our strategic review on 30 June 2014, there has been a 75% reduction in head count Company wide and we have combined various roles and responsibilities to streamline operations and reduce costs wherever possible. We were of course saddened to see a number of valued team members leave the Company. Some difficult remuneration decisions have also been made in recent years which impacted the Company’s Key Management Personnel: details are provided in our Remuneration Report. Financial Performance Our net loss for the year was $3.4 million decreasing by $32.5 million compared to the prior year and in line with our stated restructure objectives. Our prior year result was heavily impacted as a result of outcomes from our strategic review and the decision to focus the Company’s efforts on the SILEX technology. Whilst we commenced the reimbursement of GLE shareholder GE-Hitachi’s funding obligations during the year (expense of $2.6 million for the 6 months to 30 June 2016), we continued to reduce our operating expenses with a saving of $0.8 million compared to the prior year. Silex Annual Report 2016 3 “At the time of writing, Silex is in a strong financial position with cash reserves of ~$49 million.” CEO’S Report Dr Michael Goldsworthy CEO/Managing Director The global nuclear fuel markets remained depressed during the year and continued to create a challenging business environment for Silex and Licensee of the SILEX technology, GE-Hitachi Global Laser Enrichment LLC (GLE). Despite this situation, Silex continued to push forward with activities to support both licensees in the commercialisation of our unique and potentially disruptive technologies – the SILEX laser-based uranium enrichment technology and the Translucent cREO™ semiconductor technology. Our activities with respect to the continued development and commercialisation of our core asset, the SILEX technology expanded during the year, following GE- Hitachi’s announcement that they are looking to exit GLE. Silex negotiated and executed a term sheet in April 2016 with GE-Hitachi that provides the framework for a full restructure of GLE. Specifically, the term sheet provides Silex with an option to become a shareholder in GLE, and the right to assign in part or in whole the acquisition terms to third parties. Accordingly, Silex has taken the lead on the search for new investors in GLE with discussions advancing with several interested parties. The efforts to restructure GLE are being conducted in parallel to the ongoing technology development project, with good progress being achieved in the engineering and economic validation program with key project activities at both the Wilmington and Sydney project sites. 4 Silex Annual Report 2016 The Paducah commercial plant opportunity negotiated by GLE with the US Department of Energy (DOE) continues to be viewed as an ideal path to market for the SILEX technology. At the time of writing, an agreement between GLE and the DOE regarding the strategically important tails reprocessing opportunity in Paducah, Kentucky is expected to be finalised in the near future. The long term fundamentals for the SILEX technology and GLE are underpinned by the anticipated recovery of the global markets for natural and enriched uranium. Key contributing factors to the expected recovery of the nuclear fuel markets include the restart of nuclear reactors in Japan, which have been largely shutdown since 2011, and the continued growth in global nuclear energy capacity. Despite the ongoing delays in the restart of Japanese reactors, we have been encouraged by recent developments in the nuclear industry in the US, UK and continued support for extensive nuclear build programs in China, Russia, India and South Korea. We therefore remain encouraged by these positive developments and continue to believe the SILEX technology, being our core asset and the only third generation laser enrichment technology being commercialised in the world, is the best path forward to deliver value to our shareholders. “Silex remains firmly committed to providing ongoing support to the GLE commercialisation program activities” The restructure of the Company announced on 30 June 2014 has now been finalised, resulting in the licensing of the Translucent cREO™ technology in September 2015 to UK-based semiconductor company IQE Plc and the sale of Solar Systems’ assets. Both subsidiaries ceased operations during FY2016. At the time of writing, Silex is in a strong financial position with cash reserves of ~$49 million. Outlook Silex remains firmly committed to providing ongoing support to the GLE commercialisation program activities at both the Wilmington and Sydney sites whilst leading the process to restructure GLE with new investors. Subject to successfully completing the GLE restructure, we will aim for the commercialisation program to be ramped up again as soon as practicable, in anticipation of the commencement of a recovery in the nuclear fuel markets. Our mission remains to deliver the unique and disruptive SILEX laser uranium enrichment technology as the next generation technology for the global uranium enrichment industry. We look forward to sharing our results with you and providing a further update at the Annual General Meeting in November. Dr Michael Goldsworthy CEO/Managing Director Silex Annual Report 2016 5 Business Overview Business Facts Platform Nuclear Fuel for Clean Electricity Generation Locations Technology Development: Silex: Lucas Heights, NSW, Australia GLE: Wilmington, North Carolina, USA Corporate Office Sydney, NSW, Australia The SILEX Laser Uranium Enrichment Technology Business Description Silex invented and initially developed the ‘SILEX’ laser- based uranium enrichment technology in Sydney during the 1990’s. The technology was licensed exclusively in 2006 to GE-Hitachi Global Laser Enrichment LLC (‘GLE’), a business venture currently comprising GE (51%), Hitachi (25%) and Cameco (24%). Silex and GLE jointly continue to commercialise the technology for potential deployment in the USA. The target markets are the global nuclear fuel markets for natural and enriched uranium, worth several billions of dollars annually. Background The SILEX technology was invented by Silex Systems scientists Dr Michael Goldsworthy and Dr Horst Struve in the mid 1990’s. In order to facilitate the potential commercial deployment of the technology in the United States, an Agreement for Cooperation between the governments of the United States and Australia was signed in May 2000. In June 2001, the technology was officially Classified by the United States and Australian governments, bringing the project formally under the strict security and regulatory protocols of each country. In 2006, Silex signed a Technology Commercialisation and License agreement with General Electric Company (GE) to develop and commercialise the technology to enrich uranium for use in nuclear power reactors around the world. Since 2008, the project has been managed by GE subsidiary GLE. Uranium Enrichment Naturally occurring uranium must be enriched before it can be used as fuel in a nuclear power reactor. Enrichment is a technically difficult process and constitutes a major component of nuclear fuel costs accounting for around one third of the cost of nuclear fuel and up to 5% of the total cost of the electricity generated at current prices. Uranium enrichment involves increasing the atomic concentration of the ‘active’ 235U isotope from 0.7% in natural uranium to approximately 5% required for reactor fuel. GLE and Silex are jointly developing the SILEX third generation laser enrichment technology: • Separation of Isotopes by Laser EXcitation (SILEX) • Highly selective excitation of 235UF6 to separate isotopes The two methods of uranium enrichment used to date have been the now obsolete Gas Diffusion (first generation) and Gas Centrifuge (second generation). Silex’s third generation laser-based process provides much higher enrichment process efficiency compared to these earlier methods, potentially offering significantly lower overall costs. 6 Silex Annual Report 2016 The Nuclear Fuel Production The SILEX Technology License Agreement with GLE The SILEX technology can be utilised in 2 steps of the Nuclear Fuel Cycle to produce: 1. Natural grade uranium via re-processing of tails inventories; and 2. Enriched uranium for use as fuel in nuclear power reactors. The SILEX Technology The SILEX technology is a unique laser-based process that has the potential to economically separate uranium isotopes as well as several other elements. It has a number of advantages over other uranium enrichment processes including: Silex’s agreement with GLE is an exclusive worldwide commercialisation and licensing agreement for the SILEX technology. The underlying value in the agreement with GLE is a perpetual royalty of up to 12 percent payable to Silex, comprising: • A base royalty of 7 percent of revenues generated from enrichment services using the SILEX technology; and • An additional royalty of up to 5 percent based on the total cost of deployment whereby the lower the cost of deployment per unit production, the higher the royalty. Additionally, under the commercialisation and license agreement there are potentially two further milestone payments payable: • SILEX laser technology has inherently higher efficiency • US$5 million – on commencement of construction of the resulting in lower costs; initial commercial plant; and • Smaller environmental footprint than centrifuge and diffusion plants; and • Anticipated to have the lowest capital costs of all enrichment technologies. Significantly, the SILEX technology is the only third generation laser-based uranium enrichment technology under commercial development in the world today. • US$15 million – upon verification by the US Nuclear Regulatory Commission of construction compliance and operational readiness of the initial commercial plant. These milestone payments follow the US$15 million milestone payment that was received by Silex in July 2013, triggered by the successful completion of the Test Loop Phase 1 Program Milestone: Technology Demonstration and Validation. Uranium Production Refinining & Conversion Enrichment SILEX/GLE Other Fuel Fabrication Electricity Power Distribution Power Plant Silex Annual Report 2016 7 Business Overview (continued) Activities During the Year in Review GLE Restructure The Company’s primary focus in FY2016 was on the continued development and commercialisation of our core asset – the SILEX technology, and in more recent months, the restructure of our Licensee GE-Hitachi Global Laser Enrichment LLC (GLE). GE-Hitachi Nuclear Energy (GEH) announced in April that they are looking to exit GLE, due to changes in business priorities and the continuing difficult conditions being experienced in the nuclear fuel markets. On 29 April 2016, Silex signed a term sheet with GEH securing an exclusive option to acquire GEH’s 76% interest in GLE, and the right to assign in part or in whole the acquisition terms to third parties. Under the term sheet signed with GEH, Silex further agreed to reimburse GEH its pro-rata share of funding for the Wilmington operation for CY2016. This is in addition to Silex funding the development of commercial-scale laser systems at its Lucas Heights facility in Sydney. GLE shareholder Cameco (24% owner of GLE) remains supportive of Silex’s efforts to restructure GLE. Silex has taken the lead on the search for new investors in GLE, with a preference for securing high calibre strategic investors who are capable of supporting GLE’s transition to market with the SILEX technology. Discussions continue to advance with a number of interested parties, two of whom had commenced due diligence activities at the time of writing. Silex firmly believes that GLE is the best vehicle to take the SILEX technology to market, based on the preservation of several key assets which will underpin GLE’s value going forward. These assets include: • The highly skilled and specialised engineering team based in Wilmington (in addition to the highly talented laser development team in Sydney); • The Test Loop demonstration facility that has operated since 2010 and continues to advance the technology towards full-scale demonstration; and • The combined construction and operating license (COL) granted by the US Nuclear Regulatory Commission in 2012 for a potential commercial enrichment plant in Wilmington, NC. In addition to the abovementioned key assets, the Paducah commercial plant opportunity (to produce natural grade uranium from the reprocessing of tails stockpiles owned by the US Department of Energy (DOE)) has been negotiated exclusively between the DOE and GLE. 8 Project Activities Update - Phase II: Full-Scale Engineering and Economic Validation The focus of the Company is firmly set on the remainder of the commercialisation program for the SILEX technology. Phase Objectives Test Loop technology demonstration and NRC commercial plant license approval Phase I Phase II Status Completed 2013 Economic and engineering validation for the initial commercial production module Commenced in 2013 Phase III Construction of the first full-scale commercial production facility To be confirmed Whilst the pace of this commercialisation program was slowed significantly by GLE in July 2014 in line with continued adverse conditions in the nuclear fuel markets, the technology engineering and economic validation program has continued to achieve significant progress during FY2016. Key technology demonstration activities relating to improved process efficiency and scaled-up laser system performance were completed during the year in review at the Wilmington and Sydney project sites respectively. Subject to successfully completing the GLE restructure with new investors on board, we will aim for the commercialisation program to be ramped up again in the near future, in anticipation of the commencement of a recovery in nuclear fuel market conditions. “The Paducah commercial plant opportunity continues to be viewed as an ideal path to market for the SILEX technology. ” Silex Annual Report 2016The Paducah Opportunity The Paducah commercial plant opportunity continues to be viewed as an ideal path to market for the SILEX technology. The opportunity would allow for the initial commercial deployment of the technology on a smaller scale and at a lower cost, representing a lower risk path to market for investors and other stakeholders. The opportunity would involve construction of GLE’s proposed ‘Paducah Laser Enrichment Facility’ (PLEF) utilising the SILEX technology to reprocess hundreds of thousands of tons of high assay tails inventories owned by the DOE. An agreement between GLE and the DOE facilitating the tails reprocessing is nearing finalisation. The tails reprocessing would occur over a period of 40 years or more, resulting in the production of natural grade uranium which could then be sold into the expanding global uranium market. At a nominal production rate of around 2000 metric tons of natural uranium hexafluoride (UF6) per year (subject to applicable regulations), this would rank as a large ‘Tier 1’ uranium mine by today’s standards. Subject to a recovery in uranium market pricing and receipt of required regulatory approvals and securing project financing, the Paducah commercial plant opportunity represents an ideal bridging project to full commercial deployment for our potentially disruptive laser enrichment technology. Wilmington Enrichment Plant Opportunity In 2012, GLE obtained a combined construction and operating license (COL) from the US Nuclear Regulatory Commission (NRC) for an enrichment plant of up to 6 million separative work units (SWU – the unit for enrichment) planned for Wilmington, North Carolina. The Wilmington plant COL approval is the first license granted in the world for a commercial laser enrichment facility. Domestic enrichment capacity in the US is currently approximately one third of the total US enrichment requirements. In this light, there remains considerable interest from US utilities in the possibility of a new US-based enrichment supplier as the enrichment market recovers Nuclear Power Outlook Challenging market conditions continued to impact the nuclear fuel markets throughout FY2016. This was not unexpected given the continued slow pace of the restart of the Japanese nuclear reactor fleet following the Fukushima disaster in 2011 and the announcement of the premature retirement of a number of reactors in the US and Europe. As a result, demand for enrichment and uranium remains low and accordingly prices are currently depressed. Longer term, a more positive outlook remains for the nuclear industry, driven by the merits of nuclear power as a clean emissions-free source of base load electricity becoming better understood around the world. Ten new reactor units commenced operations in the past year giving a total of 445 operable reactors globally. With an additional 61 reactors under construction and 170 planned – the demand and supply fundamentals of the nuclear fuel markets are set to recover in the coming years. Billions of dollars of investment continues to be made every year in the nuclear industry with new nuclear plant builds continuing in the US and the UK, as well as more extensive programs in China, Russia, India and South Korea. This is in addition to extensions being granted to the operating lives of existing nuclear plants which could see many of these plants generating clean, reliable and affordable baseload electricity for up to 80 years. Nuclear Fuel Market Outlook The predicted growth in nuclear reactor build as highlighted above underpins the forecast market conditions that could support increasing demand for nuclear fuel from the early 2020’s. Both uranium and enrichment (U/SWU) price recovery and uncovered demand are expected to improve, according to industry analysts Ux Consulting and others. In addition, given the current environment which has precipitated the curtailment of future projects and expansion opportunities and shuttering of existing capacity by both U and SWU producers, ‘accessible’ supply could decrease as demand increases. This provides potential for GLE and the SILEX technology to participate in the annual global market for uranium and enrichment from the early 2020’s. We therefore remain encouraged by these positive developments in the global nuclear industry. We continue to believe the SILEX technology, being our core asset and the only third generation laser enrichment technology being commercialised in the world, is the best path forward to deliver value to our shareholders. 9 Silex Annual Report 2016 Business Overview (continued) The Translucent cREO™ Semiconductor Technology Business Description Over the past decade, Silex subsidiary Translucent Inc developed a novel set of semiconductor materials known as ‘Rare Earth Oxides’ (REO™) for application to the manufacturing of next generation devices in the semiconductor, digital communications and power electronics industries. Following the extensive pursuit of business development options for Translucent, an exclusive License and Assignment Agreement was signed with UK- based IQE Plc (LON:IQE) in September 2015. IQE is the global leader in the design and manufacture of advanced semiconductor wafer products. “IQE is the global leader in the design and manufacture of advanced semiconductor wafer products.” The Translucent – IQE Agreement Following the signing of the exclusive License and Assignment Agreement with UK-based IQE in September 2015, an initial license fee payment of US$1.4 million was paid by IQE in March 2016 following the transfer of the cREO™ technology to IQE’s Greensboro, North Carolina manufacturing facility. In accordance with the agreement, the product development and commercialisation activities are to be conducted by IQE during a 30-month option and license period. Should IQE elect to exercise the right to purchase the technology within this period, the payment of a further US$5 million will be made. More importantly, the potential commercial applications that IQE have identified for the technology may result in an attractive perpetual royalty of up to 6% of revenues generated by IQE from use of the cREO™ technology. 10 Activities During the Year in Review Following the successful transfer of Translucent’s unique epitaxy equipment and associated cREO™ technology to IQE’s North Carolina (NC) production facility, effort and focus has been applied to the advancement of the unique cREO™ technology. IQE have been producing cREO™ templates on silicon wafers using one of Translucent’s production reactors for a number of months. The semiconductor characteristics of the templates produced are an excellent match to previously achieved results by Translucent. A second production reactor devoted to development and commercialisation of additional cREO™ materials recently entered service at the Greensboro facility. These production reactors will continue to produce product templates for the IQE Group and select commercial partners, with initial focus on RF (wireless) communications and power electronics device materials. Business Facts Platform Semiconductor materials Locations Technology Development by Licensee: IQE: Greensboro, North Carolina, USA Corporate Office Sydney, NSW, Australia Silex Annual Report 2016Silex Annual Report 2016 11 Company Overview Historical Background Our mission is to deliver the unique and disruptive SILEX laser uranium enrichment technology as the next generation technology for the global uranium enrichment industry. 1988 1996 Silex is established by founder Dr Michael Goldsworthy as a technology research and development subsidiary of Sonic Healthcare Limited, an Australian publicly listed company. Silex is divested from Sonic Healthcare Limited and sets about establishing the commercial viability of the SILEX technology. 1990 Silex begins researching the isotope separation concepts of co-inventors Dr Michael Goldsworthy and Dr Horst Struve. 1993 The unique principles of the SILEX (Separation of Isotopes by Laser EXcitation) Process are formulated. 1995 ‘Proof of Principle’ demonstration of the SILEX Process is achieved at the Company’s laboratories in Lucas Heights, Sydney. Uranium enrichment, the largest market for isotope separation, becomes Silex’s primary focus. 1998 Silex lists on the Australian Stock Exchange (ASX) under the symbol ‘SLX’. 2000 An Agreement for Cooperation between the US and Australian Governments is signed, paving the way for continued development of the SILEX technology for uranium enrichment, and facilitating its future transfer to the US. The first macroscopic demonstration of the SILEX uranium process is successfully achieved. Silex wins the 2000 Australian Technology Award for Excellence in the Manufacturing and Engineering sector. Silex raises $36 million through a share issue to assist in funding the development of its technology portfolio. 12 Silex Annual Report 2016 2001 2008 The SILEX technology is officially Classified by the US and Australian Governments. The implications of classification relate mainly to security protocols. 2002 GE-Hitachi Global Laser Enrichment LLC (GLE), formed as a subsidiary of GE-Hitachi Nuclear Energy (GEH) to commercialise the SILEX technology, announces it has selected its Wilmington, North Carolina, headquarters site for the first potential commercial SILEX uranium enrichment facility. The SILEX Uranium Enrichment Project achieves a key milestone with the first full demonstration on practical uranium enrichment using the SILEX ‘Direct Measurement Facility’ at Lucas Heights, Sydney. GLE is notified that the US Nuclear Regulatory Commission (NRC) has approved a license to operate the Test Loop for the demonstration of the next generation SILEX laser uranium enrichment technology. 2004 Silex successfully commissions the world’s first silicon laser enrichment pilot plant. 2006 Silex and the General Electric Company sign an exclusive Technology Commercialisation and License Agreement for the SILEX laser uranium enrichment technology in May, with US Government authorisations received in October. 2007 GEH and Cameco Corporation announce that Cameco, the world’s largest uranium producer, has joined the GLE venture. Cameco paid US$123.8 million for a 24% stake in GLE. GE retains 51% ownership with Hitachi at 25%. 2009 In August, the US Nuclear Regulatory Commission (NRC) announces it has accepted GLE’s license application to construct and operate a commercial SILEX uranium enrichment facility in Wilmington, triggering a ~36 month review process. In July, GLE announces the on-schedule start-up of the Test Loop to evaluate the next-generation SILEX laser uranium enrichment technology. Transfer of the SILEX Uranium Enrichment Project to GE’s Wilmington, North Carolina (USA) nuclear fuel plant is completed in the first half. Hitachi joins GE as project partner. 2010 GE-Hitachi signs Letters of Intent for uranium enrichment services and support using the SILEX technology with Exelon and Entergy - the two largest nuclear power utilities in the US. In April, GLE and Silex announce the successful completion of the Test Loop initial measurement program. Silex successfully completes a $50 million capital raising in October. 2011 Silex successfully completes an $89 million capital raising and a share purchase plan which raises a further $20 million. Silex Annual Report 2016 13 2012 2015 Work continues at reduced pace on the commercialisation of the SILEX laser uranium enrichment technology at GLE’s test loop facility in Wilmington, North Carolina (with GLE funding) and at Silex’s Lucas Heights laser facility in Sydney (under Silex funding). In September, Silex subsidiary Translucent Inc’s unique semiconductor technology known as ‘cREO™’ was exclusively licensed to IQE Plc based in the UK. Under the terms of the License and Assignment Agreement, IQE has 30 months in which to elect to acquire Translucent’s technology. Translucent ceased its Californian operation in December 2015 following the successful transfer of the technology and commercialisation program to IQE. 2016 GEH announced in April that it is looking to exit GLE, due to changes in business priorities and the continuing difficult market conditions. Silex subsequently successfully negotiated and executed a term sheet with GEH securing an exclusive option to acquire GEH’s 76% interest in GLE, and the right to assign in part or in whole the acquisition terms to third parties. Accordingly, Silex has taken the lead on the search for new investors for GLE. Discussions continue with a number of parties interested in investing in GLE and the SILEX technology commercialisation program. In September, the US NRC approves the world’s first Construction and Operating License for a commercial laser enrichment plant utilising the SILEX technology at Wilmington, North Carolina. 2013 In May, GLE and Silex achieve the successful completion of the Test Loop Program Phase I Milestone: Technology Demonstration and Validation in Wilmington, North Carolina – triggering a US$15 million milestone payment from GLE to Silex (which was received in July 2013). Silex lists on the OTCQX exchange in the US under the symbol ‘SILXY’ in June. 2014 The US Department of Energy (DOE) selects GLE for future operations at its Paducah, Kentucky Site. The DOE and GLE commence negotiations for a 40-year contract to have the SILEX Technology commercially deployed for the re- enrichment of depleted uranium tails. In June, Silex announces completion of a strategic review of the entire business, determining to refocus efforts on its primary economic asset, the SILEX laser uranium enrichment technology. The strategic review also involves an accelerated transition to market for subsidiaries Solar Systems and Translucent. In July, GLE announces its own restructure in response to worsening trading conditions in the global nuclear fuel markets, initially triggered by the events in Fukushima, Japan in March 2011. The changes result in the consolidation of GLE’s operations. Importantly, the key commercial terms of Silex’s licence agreement with GLE do not change. 14 Silex Annual Report 2016 Concise Financial report for the year ended 30 June 2016 Silex SyStemS limited & itS SubSidiarieS abN 69 003 372 067 directors’ report Your directors present their report on the consolidated entity consisting of Silex Systems Limited (Silex or the Company) and the entities it controlled at the end of, or during the year ended 30 June 2016. 1. Directors and Company secretary The following persons were directors of Silex Systems Limited during the whole of the financial year and up to the date of this report: Dr L M McIntyre - Chair Dr M P Goldsworthy Mr R A R Lee Mr C D Wilks Mr A M Stock was a director from the beginning of the financial year until his retirement on 31 August 2015. The Company secretary is Ms J E Ducie BBus, CA, GAICD. Ms Ducie was appointed to the position of Company secretary in 2010. Before joining Silex, Ms Ducie held a senior finance position in the Construction industry in the Middle East and prior to that worked as a Senior Associate with a Chartered Accounting Practice. 2. Principal activities During the year, the principal activity of the Company was the continued development and commercialisation of our core asset and foundation technology – the laser isotope separation process for uranium enrichment known as the SILEX technology. In addition, the Company’s restructure announced on 30 June 2014 was finalised, resulting in the licensing of the Translucent Inc. cREO™ semiconductor technology and the sale of Solar Systems’ assets. Both subsidiaries ceased operations during the year. 3. Dividend No dividend payments were made during the year. No dividend has been recommended or declared by the Board. 16 Silex Annual Report 2016directors’ report 4. Review of operations and activities Information on the operations and financial position of the consolidated entity and its business strategies and prospects is set out below and in section 8 ‘Likely developments and expected results of operations’. trading results A summary of consolidated revenue and results is set out below: Revenue from continuing operations (Loss) before income tax expense Income tax expense Net (loss) from continuing operations Net profit/(loss) from discontinued operations Net (loss) for the year Net (loss) is attributable to: Owners of Silex Systems Limited 2016 $ 2015 $ 1,617,655 3,674,860 (4,700,759) (2,284,993) – (4,700,759) 1,303,871 (3,396,888) – (2,284,993) (33,659,803) (35,944,796) (3,396,888) (35,944,796) Key information about the consolidated operations, results and financial position Comments on the operations and the results of those operations are set out below: the Silex technology Commercialisation Program The Company’s primary focus in FY2016 was on the continued development and commercialisation of our core asset – the SILEX technology, and the restructure of our Licensee, GE-Hitachi Global Laser Enrichment LLC (GLE). As announced to the ASX on 18 April 2016, GE-Hitachi Nuclear Energy (GEH) is looking to exit GLE, due to changes in business priorities and the continuing difficult market conditions. Silex subsequently successfully negotiated and executed a term sheet with GEH on 29 April 2016 securing an exclusive option to acquire GEH’s 76% interest in GLE, and the right to assign in part or in whole the acquisition terms to third parties. Accordingly, Silex has taken the lead on the search for new investors for GLE, with a preference for securing high calibre strategic investors who are capable of supporting GLE’s transition to market with the SILEX technology. Silex believes that GLE is the best vehicle to take the SILEX technology to market. Discussions continue with a number of parties interested in investing in GLE and the SILEX technology commercialisation program. Under the term sheet signed with GEH, Silex agreed to reimburse GEH its pro-rata share of funding for the Wilmington operation for CY2016. This is in addition to Silex funding the development of commercial-scale laser systems at its Lucas Heights facility in Sydney. The combined funding from Silex for the Wilmington operation and the laser development activities in Sydney is expected to be up to $10m during CY2016. GLE shareholder, Cameco, 24% owner of GLE, remains supportive of Silex’s efforts to restructure GLE. Meanwhile, the technology engineering and economic validation program has continued to achieve pleasing results during FY2016 with program milestones achieved at both the Wilmington and Sydney project sites. Activities in the Test Loop facility in Wilmington, North Carolina (NC) resulted in the successful demonstration of key process efficiency improvements which should translate into lower operating and capital costs. Ongoing laser system development activities in Sydney resulted in the initial demonstration of a prototype commercial-scale plant laser system during the year. 17 Silex Annual Report 2016directors’ report Challenging market conditions continued to plague the nuclear fuel markets throughout FY2016. This was not unexpected given the continued slow pace of the restart of the Japanese nuclear reactor fleet following the Fukushima disaster in 2011 and the announcement of the premature retirement of a number of reactors in the US and Europe. As a result, demand for enrichment and uranium remains low and prices are currently depressed. However, we continue to believe that the outlook for the nuclear industry in the long term is positive as evidenced by the start-up of 10 new reactor units in the past year bringing the total number of operable reactors to 445 worldwide. With an additional 61 reactors under construction and 170 planned – the demand and supply fundamentals of nuclear fuel markets are expected to recover in the coming years. We remain convinced that the best way to create value for our shareholders is to continue to focus our efforts on the restructure of GLE and to potentially become a shareholder in GLE ourselves such that we can have greater visibility and influence over the technology commercialisation program going forward. discontinued Operations – translucent and Solar Systems In June 2014, Silex announced a major restructure which aimed to return the Company’s focus solely on the SILEX laser enrichment technology. The restructure has been completed and resulted in the exclusive licensing of Translucent’s unique semiconductor technology known as ‘cREO™’ to IQE Plc based in the UK (LON: IQE). IQE is progressing the cREO™ technology towards commercial deployment in various advanced semiconductor markets. Under the terms of the License and Assignment Agreement signed in September 2015, IQE has 30 months in which to elect to acquire Translucent’s technology. Translucent ceased its Californian operation in December 2015 following the successful transfer of the technology and commercialisation program to IQE. Silex subsidiary Solar Systems Pty Ltd also ceased operations during FY2016. Various property, plant and equipment and technology assets have been sold to third parties. Financial review A summary of our consolidated income statement is set out below: 2016 $ 1,617,655 1,467,828 (60,107) (2,550,261) (3,091,636) (951,041) (433,766) (699,431) – (4,700,759) 1,303,871 (3,396,888) 2015 $ 3,674,860 42,475 (154,296) – (4,017,953) (642,304) (474,107) (713,668) – (2,284,993) (33,659,803) (35,944,796) Revenue from continuing operations Other income Research and development materials Development expenditure Employee benefits expense Consultants and professional fees Rent, utilities and property outgoings Other expenses Income tax expense Net (loss) from continuing operations Net profit/(loss) from discontinued operations Net (loss) for the year 18 Silex Annual Report 2016 directors’ report The net loss from ordinary activities of $3.4m decreased by $32.5m compared to the prior year. The net loss is comprised of the loss from continuing operations of $4.7m (an increase of $2.4m compared to the prior year) and the profit from discontinued operations of $1.3m (an improvement of $35.0m compared to the prior year). Further commentary on the results from our operations and the factors contributing to the decreased net loss from ordinary activities (after tax) attributable to members is provided below. Continuing Operations - Silex Systems The Silex Systems segment result was a $4.7m loss in the current year compared to a $2.3m loss in the prior year. The increased loss was largely due to a reduction of $1.5m in Recoverable projects costs revenue on the Uranium Enrichment Project. Interest income also decreased to $1.6m in the current year compared to $2.2m in the prior year as a result of lower interest rates and lower average cash / term deposit holdings in the current year. There was an increase in expenses from continuing operations of $1.8m compared to the prior year. This was mainly due to $2.6m of Development expenditure in the current year relating to Silex’s reimbursement of GEH’s pro-rata share of funding for the Wilmington operations. This was offset by a reduction in other expenses of $0.8m as a result of the Company’s lower operating cost structure. In addition, there was a $1.4m increase in Other income which was mainly due to $1.5m for the R&D tax incentive for Silex’s Lucas Heights operations. discontinued Operations –translucent and Solar Systems As a result of the exclusive License and Assignment Agreement for Translucent’s proprietary cREO™ technology that was signed on the 15 September 2015, the technology was transferred to IQE Plc during the year. IQE is responsible for the completion of product development and commercialisation activities during a 30-month license period. The Translucent operations in Palo Alto, California ceased at the end of December 2015. The Silex Board announced the cessation of the Solar Systems business operation on 30 July 2015. Various property, plant and equipment and technology assets have been sold to third parties with proceeds of $2.3m received during FY2016. At the time of writing, all remaining assets of the Solar Systems business have been sold. The net profit from discontinued operations of $1.3m in the current year includes the operations of Translucent and Solar Systems. The current year included $1.8m License Fee income from IQE compared to $nil in the prior year. Reversals of impairment of property, plant and equipment ($0.2m) and intangibles ($0.2m) improved the result in the current year compared to impairments of $8.9m and $10.4m for property, plant and equipment, and intangibles respectively in the previous year. 19 Silex Annual Report 2016directors’ report balance sheet A summary of our balance sheet is set out below: assets Total current assets Total non-current assets total assets liabilities Total current liabilities Total non-current liabilities total liabilities Net assets equity total equity 30 June 2016 $ 30 June 2015 $ 55,098,350 1,706,048 56,804,398 61,951,409 67,451 62,018,860 2,950,265 104,728 3,054,993 4,451,614 113,110 4,564,724 53,749,405 57,454,136 53,749,405 57,454,136 As at 30 June 2016, total assets were $56.8m. Significant assets are cash holdings of $51.3m (cash and term deposits), trade and other receivables of $3.5m and Available-for-sale financial assets of $1.6m. Total liabilities were $3.1m and included trade and other payables of $1.8m and liabilities associated with our discontinued operations of $0.7m. 5. Earnings per share earnings per share for (loss) from continuing operations attributable to the ordinary equity holders of the Company Basic earnings per share Diluted earnings per share earnings per share for (loss) attributable to the ordinary equity holders of the Company Basic earnings per share Diluted earnings per share 2016 Cents 2015 Cents (2.8) (2.8) (2.0) (2.0) (1.3) (1.3) (21.1) (21.1) 20 Silex Annual Report 2016directors’ report 6. Significant changes in state of affairs The financial position and performance of the Company continued to be affected by the implementation of the outcomes of the strategic review announced by the Board on 30 June 2014 which aimed to return the Company’s focus to the development of its foundation technology and core asset – the SILEX technology. Silex announced on 2 May 2016 that it had signed a term sheet with GE-Hitachi Nuclear Energy (GEH) providing a framework for the parties to negotiate an acceptable restructure of GLE. Under the term sheet, Silex has agreed to reimburse GEH its pro-rata share of funding for GLE Wilmington operations whilst conducting a search to identify new investors for GLE and the commercialisation program. Silex’s execution of the strategic review resulted in a number of significant changes and cessation of operations for subsidiaries, Translucent Inc and Solar Systems during year ended 30 June 2016. A License and Assignment Agreement between Translucent Inc and IQE Plc was executed on 15 September 2015. The Agreement provides for the completion of product development and commercialisation activities during the 30-month license period by IQE. As a result, the Translucent technology has been transferred to IQE’s facility in North Carolina and the Translucent facility in Palo Alto, California was vacated in December 2015. In addition, the cessation of the Solar Systems business operation was announced on 30 July 2015. This resulted in the sale of the assets including the properties at Bridgewater and Mildura and the termination of the lease and exit of the manufacturing facility at Abbotsford. In July 2016, the Company completed the sale of the IP and associated manufacturing assets. There were no other significant changes in the state of affairs of the Company during the financial year not otherwise dealt with in this report. 7. Matters subsequent to the end of the financial year Between 30 June 2016 and 22 September 2016, the IQE Plc share price (LON: IQE) has increased considerably. Combined with movements in exchange rates the value of the shares (disclosed as Available-for-sale financial assets) has increased by approximately $1,160,000 since 30 June 2016. Gains or losses arising from changes in the fair value of shares classified as available-for-sale are recognised in other comprehensive income. The financial effects of the movements in fair value since 30 June 2016 will be recognised in the financial statements for the year ended 30 June 2017. The consolidated entity is not aware of any other matters or circumstances which are not otherwise dealt with in the financial statements that have significantly, or may significantly, affect the operations of the consolidated entity, the results of its operations or the state of the consolidated entity in subsequent years other than those referred to above. 8. Likely developments and expected results of operations Overview Silex is a research and development company whose primary asset is the SILEX laser uranium enrichment technology which is licensed exclusively to GE-Hitachi Global Laser Enrichment LLC (GLE). As outlined above, GE-Hitachi Nuclear Energy (GEH) is looking to exit GLE, due to changes in business priorities and the continuing difficult market conditions driven by the Fukushima disaster in 2011. This announcement followed the slowing of the pace of the SILEX technology commercialisation program by GLE in July 2014. Silex continues in its efforts to restructure GLE through the introduction of new investors who can support GLE and the SILEX technology’s transition to market. 21 Silex Annual Report 2016directors’ report In light of the above, the timing of future potential milestone payments and royalties under the Technology Commercialisation and License Agreement signed with GLE may be significantly delayed by several factors, including the slowdown in the pace of GLE’s commercialisation program announced in July 2014, the outcome of the restructure of GLE currently being led by Silex and the timing of the recovery in the markets for uranium and enrichment services. The implementation of the Company’s major strategic review announced on 30 June 2014 involved decisions to cease the Solar Systems operations in Victoria and the Translucent operations in California. An exclusive License and Assignment Agreement for Translucent’s technology was signed in September 2015 with UK-based IQE Plc (IQE) as noted above. The outcome of IQE’s commercialisation program remains high risk. The Company’s future prospects and results remain largely dependent on the outcomes of the commercialisation programs for the SILEX and cREO™ technologies, the GLE restructure and a recovery in the accessible markets for both uranium and enrichment services. business strategies and future prospects the Silex technology Commercialisation Program The SILEX technology is currently in the final phase of a commercialisation program involving engineering scale-up and economic validation. Silex has taken the lead on the search for new investors in GLE, with a preference for securing high calibre strategic investors who are capable of supporting GLE’s transition to market with the SILEX technology. Discussions continue to advance with a number of interested parties. We remain convinced that the best way to create value for our shareholders is to continue to focus our efforts on the restructure of GLE and to potentially become a shareholder in GLE ourselves such that we can have greater visibility and influence over the technology commercialisation program going forward. Silex firmly believes that GLE is the best vehicle to take the SILEX technology to market, based on the preservation of several key assets which will underpin GLE’s value going forward. These assets include: • The highly skilled and specialised engineering team based in Wilmington (in addition to the highly talented laser development team in Sydney); • The Test Loop demonstration facility that has operated since 2010 and continues to advance the technology towards full- scale demonstration; and • The combined construction and operating license (COL) granted by the US Nuclear Regulatory Commission in 2012 for a potential commercial enrichment plant in Wilmington, NC. In addition to these key assets, the Paducah commercial plant opportunity (to produce natural grade uranium from tails stockpiles owned by the US Department of Energy (DOE)) is being negotiated exclusively between the DOE and GLE. The focus of the Company is firmly set on the remainder of the commercialisation program for the SILEX technology. Whilst the pace of this commercialisation program was slowed significantly by GLE in July 2014, the technology engineering and economic validation program has continued to achieve pleasing results during FY2016. Key technology demonstration activities relating to improved process efficiency and scaled-up laser system performance were completed during the year in review at the Wilmington and Sydney project sites respectively. 22 Silex Annual Report 2016directors’ report GLE and Silex continue to conduct a stage-gated approach to commercialisation of the SILEX laser enrichment technology, albeit at reduced pace, with the following three phases: Phase Phase I Phase II Objectives Status Test Loop technology demonstration and NRC commercial plant license approval Completed 2013 Economic and engineering validation for the initial commercial production module Commenced in 2013 Phase III Construction of the first full-scale commercial production facility To be confirmed Status of Nuclear Fuel Markets Challenging market conditions continued to impact the nuclear fuel markets throughout FY2016. This was not unexpected given the continued slow pace of the restart of the Japanese nuclear reactor fleet following the Fukushima disaster in 2011 and the announcement of the premature retirement of a number of reactors in the US and Europe. As a result, the demand for enrichment and uranium remains low and prices are currently depressed. A key contributing factor to the expected recovery of the nuclear fuel markets is the restart of nuclear reactors in Japan, which have been largely shutdown since 2011. At the time of writing, only 3 reactors are connected to the grid in Japan with another 22 reactors in the restart approval process, according to the World Nuclear Association (WNA) (world-nuclear.org). Despite the slow pace of restarts, Japan remains committed to nuclear power generation with a target to produce around one fifth of its power from nuclear energy by 2030. Longer term, a more positive outlook remains for the nuclear industry, driven by the merits of nuclear power as a clean emissions-free source of base load electricity becoming better understood around the world. Billions of dollars of investment continues to be made every year in the nuclear industry with new nuclear plant builds continuing in the US and the UK, as well as extensive programs in China, Russia, India and South Korea. This is in addition to extensions being granted to the operating lives of existing nuclear plants which could see many of these plants generating clean, reliable and affordable baseload electricity for up to 80 years. Ten new reactor units commenced operations in the past year giving a total of 445 operable reactors globally. With an additional 61 reactors under construction and 170 planned – the demand and supply fundamentals of the nuclear fuel markets are set to recover in the coming years. We therefore remain encouraged by these positive developments in the global nuclear industry. We continue to believe the SILEX technology, being our core asset and the only third generation laser enrichment technology being commercialised in the world, is the best path forward to deliver value to our shareholders. However, the risks surrounding nuclear industry growth prospects and the related nuclear fuel market conditions, and the outcome of the GLE restructure, could impact the commercialisation program outlined above and ultimately the timing of future potential milestone payments and royalties under the Technology Commercialisation and License Agreement signed with GLE in 2006. 23 Silex Annual Report 2016directors’ report 9. Information on Directors a) directors’ profiles The following information is current as at the date of this report: dr lisa mcintyre bSc (Hons), Phd, GaiCd. Chair – Independent non-executive director Experience and expertise Other current listed company directorships Independent non-executive director for four years and Chair for two years. Extensive experience as a Company Director. Current roles include icare NSW, HCF, Cover-More Group Limited, GenesisCare and Your Tutor Pty Ltd. Executive career in strategy, commercialisation and performance support as a senior partner of global strategy firm L.E.K. Consulting for 20 years. Non-executive director of Cover-More Group Limited since November 2013 Former listed company directorships in last 3 years None Special responsibilities Chair of the Board Member of Audit Committee Chair of People & Remuneration Committee Interests in shares and options Ordinary shares – Silex Systems Limited Options over ordinary shares – Silex Systems Limited 48,230 Nil dr michael Goldsworthy bSc (Hons), mSc, Phd, FaiP, GaiCd. Chief Executive Officer/Managing Director Experience and expertise CEO/MD for twenty four years. Founder of the Company and co-inventor of the SILEX uranium enrichment technology. Other current listed company directorships Former listed company directorships in last 3 years None None Special responsibilities Interests in shares and options Chief Executive Officer / Managing Director Ordinary shares – Silex Systems Limited Options over ordinary shares – Silex Systems Limited 5,979,055 1,102,207 mr Christopher Wilks bComm, FaiCd. Non-executive director Experience and expertise Other current listed company directorships Non-executive director for twenty eight years. Finance director and CFO of Sonic Healthcare Limited. Various other directorships held of public companies held over the last thirty years. Executive director of Sonic Healthcare Limited since 1989 (Finance director since 1993) Former listed company directorships in last 3 years None Special responsibilities Business development and corporate strategy Member of Audit Committee Member of People & Remuneration Committee Interests in shares and options Ordinary shares – Silex Systems Limited Options over ordinary shares – Silex Systems Limited 2,814,021 367,035 24 Silex Annual Report 2016 directors’ report mr robert lee bSc, mba, GaiCd. Independent non-executive director Experience and expertise Independent non-executive director from 1 July 2015. Experienced company director, corporate adviser and former Executive Director of Macquarie Group Limited. Currently a non-executive director of Westmead IVF and Maple-Brown Abbott Limited. Other current listed company directorships Former listed company directorships in last 3 years None None Special responsibilities Chair of Audit Committee Member of People & Remuneration Committee Interests in shares and options Ordinary shares – Silex Systems Limited Options over ordinary shares – Silex Systems Limited The following individual is a former director of the Silex Board: mr andrew Stock beng (Chem) (Hons), Fie aust, GaiCd. Independent non-executive director until 31 August 2015 Experience and expertise Non-executive director for 2 years Other current listed company directorships Non-executive director of Horizon Oil Limited (director since 2011) Former listed company directorships in last 3 years Non-executive director of Geodynamics Limited (2003 to 2015) Special responsibilities Chair of Audit Committee Member of People & Remuneration Committee Interests in shares and options Ordinary shares – Silex Systems Limited Options over ordinary shares – Silex Systems Limited Nil Nil Nil Nil 10. Meetings The number of directors’ meetings held during the financial year and the number of meetings attended by each director are set out in the following table: director’s name Dr L M McIntyre Dr M P Goldsworthy Mr R A R Lee Mr A M Stock (held to date of retirement) Mr C D Wilks directors’ meetings audit Committee meetings People & Committee meetings Number Held Number attended Number Held Number attended Number Held Number attended 10 10 10 2 10 10 10 10 2 10 3 * 3 1 3 3 * 3 1 3 3 * 3 1 3 3 * 3 1 3 * Not a member of the relevant committee at the time the scheduled meetings were held 25 Silex Annual Report 2016 directors’ report 11. Remuneration Report Dear Shareholders, On behalf of the Board, I am pleased to present to you the FY2016 Silex Systems Limited Remuneration Report for which we seek your support at our Annual General Meeting in November. The details of the remuneration received by the Company’s Key Management Personnel (KMP) are prepared in accordance with accounting standards, legislative requirements and best practice corporate governance guidance. The following comments aim to provide greater insight into our remuneration policies and practices during what has been a difficult time for Silex and our shareholders. Challenging business conditions continue to be faced by the Company, which are largely attributable to the ongoing depressed state of the nuclear fuel markets in a post-Fukushima operating environment. These conditions continue to negatively impact the commercialisation program of our foundation technology – the SILEX laser-based uranium enrichment technology and ultimately our share price. Despite these difficult conditions, Silex continues to push forward with activities to support the licensees of our unique and potentially disruptive technologies – the SILEX technology and the Translucent cREO™ semiconductor technology. We have successfully implemented our major strategic review and strategy to significantly reduce our operational cash burn and devote our resources to the commercialisation of the SILEX technology. As a result of our restructure, significant changes have taken place throughout the Company since the announcement of our strategic review on 30 June 2014, including a 75% reduction in head count Company wide, a ~50% reduction in corporate headcount and the combining of various roles and responsibilities to streamline operations and reduce costs. Some difficult decisions have been made in recent years which impacted the Company’s KMP. From 1 January 2015, our CEO/MD agreed to a reduction of approximately 55% to Total Maximum Potential Remuneration, which included a reduction of 31% in Total Fixed Remuneration. No remuneration increases were awarded to KMP for the 3 years to 30 June 2016 and from 1 April 2016, our Board agreed to reduce its remuneration with the cessation of committee fees. For FY2017, no changes were made to the remuneration package of our CEO/MD. We awarded various members of our team salary increases – the retention of our significantly reduced team and their individual and collective expertise that benefits the Company being a key focus. A full review was completed of the remuneration package of our CFO/Company Secretary and an increase of 12.65% to Total Fixed Remuneration and a 25% increase to the maximum available short term incentive awarded. We remain cognisant of shareholder concern that any long-term equity based remuneration is linked to growth in shareholder value. Therefore, at this time, it has been determined that no long-term incentives will be granted. On behalf of the Board, I invite you to review the full report and thank you for your continued interest. I look forward to answering any questions you may have at our Annual General Meeting in November 2016. dr lisa mcintyre Chair, People & Remuneration Committee 26 Silex Annual Report 2016 directors’ report The Directors present the Remuneration Report for the year ended 30 June 2016, outlining key aspects of our remuneration policy and framework and remuneration awarded for the Company’s non-executive directors, executive directors and other executive key management personnel. The report contains the following sections: a) Directors and KMP disclosed in this report b) Remuneration governance c) Linking remuneration structure to company performance d) Voting and comments made at the Company’s 2015 Annual General Meeting e) Executive KMP remuneration structure f) g) Non-executive directors’ remuneration h) Directors’ and KMP remuneration i) Details of share-based compensation and bonuses j) Shares under option Link between FY2016 remuneration and performance a) directors and KmP disclosed in this report The 2016 Remuneration Report has been prepared in accordance with the requirements of section 300A of the Corporations Act 2001 and accounting standard requirements and applies to KMP of the Company. KMP are defined as those persons who have authority and responsibility for planning, directing and controlling the activities of the Company. Name Position Non-executive and executive directors Dr L M McIntyre Dr M P Goldsworthy Mr R A R Lee Mr A M Stock Mr C D Wilks Other executive KmP Ms J E Ducie Mr C R Murray Chair and Non-executive director CEO/Managing Director – Executive director Non-executive director Non-executive director (until 31 August 2015) Non-executive director CFO/Company Secretary CEO – Solar Systems (until 31 August 2015) 27 Silex Annual Report 2016 directors’ report b) remuneration governance board oversight The Silex Board is ultimately responsible for ensuring that the Company’s remuneration structure is equitable and aligned with the long-term interests of shareholders. The Board and its advisors are independent of Management when making decisions affecting employee remuneration. People & remuneration Committee structure The People & Remuneration Committee is a committee of the Board currently comprised of a majority of independent non- executive directors. Its role is to make recommendations to the Board regarding the Company’s remuneration policies and practices, including those applicable to the Company’s KMP. Members of the People & Remuneration Committee were as follows: Committee members Committee secretary Number of meetings in FY2016 Dr L M McIntyre – Chair Mr R A R Lee Mr A M Stock (until 31 August 2015) Mr C D Wilks Ms A N Scott 3 Other individuals who regularly attended meetings Dr M P Goldsworthy – CEO/MD The role of the People & Remuneration Committee is to: • Review and recommend to the Board the appropriate remuneration policies and practices that are competitive and reasonable for the Company and its specific application to KMP, as well as the general application to all employees; • Determine remuneration levels of the CEO/MD and other KMP; • Manage the incentive plans which apply to executive directors and senior executives (the executive team), including key performance indicators and performance hurdles; and • Review and make recommendations to the Board regarding the remuneration of non-executive directors. The role and responsibilities of the People & Remuneration Committee are set out in the People & Remuneration Committee Charter, which is available on the Company’s website at www.silex.com.au/Corporate-Governance. use of remuneration consultants The Company did not engage remuneration consultants during FY2016. The Company has previously engaged AON Hewitt to conduct a thorough review of KMP and Board remuneration and structure. The recommendations from that review were fully implemented during FY2015 and FY2016. The Company continues to access market data and industry remuneration surveys and reports on a regular basis. 28 Silex Annual Report 2016directors’ report c) linking remuneration structure to company performance Remuneration strategy, policy and framework In determining executive KMP remuneration, the Board’s policy is based on the principle of aligning remuneration outcomes with the successful delivery of strategy whilst ensuring our remuneration practices are designed to attract, motivate and retain highly qualified and specialised personnel. Regard for contemporary market practice, good governance and alignment to changing business circumstances is held at all times. The Company aims to reward executive KMP with a level and mix of remuneration commensurate with their position and responsibilities within the Company that is competitive within the market in which they were recruited. Executive KMP who have a greater ability to influence outcomes have a greater portion of their overall remuneration package ‘at risk’. Remuneration for executive KMP is reviewed annually and considers market data, insights into remuneration trends, the performance of the Company and the individual, and the broader economic and operating environment. This review is conducted in consultation with independent remuneration consultants where appropriate. The executive KMP remuneration framework has two components: • Total fixed remuneration; and • At-risk incentives. element Purpose Performance metrics Potential Value Total Fixed Remuneration (TFR) At Risk Incentives – Short-term Incentive (STI) Provide competitive market salary, including superannuation and non-monetary benefits. Reward executive’s performance, representative of their contribution to achievement of Company outcomes, as well as functional Key Performance Indicators (KPIs). Reference to role, market and experience. Positioned at median market rate. Rewards are generally based on a percentage of the executive’s Total Fixed Remuneration (TFR). Linked to key performance hurdles that may include financial metrics such as operating cash flow and non-financial measures, such as commercial deliverables, and other specific operational and strategic deliverables for the Company. Long-term Incentives (LTI) were not offered to the CEO/MD or CFO/Company Secretary in FY2016. At this time, it has been determined that no LTIs will be granted for FY2017. assessing performance and claw-back of remuneration The People & Remuneration Committee is responsible for assessing performance against KPIs and determining the incentive awards to be paid. To assist in this assessment, the Committee receives detailed reports on performance from management which are based on independently verifiable data such as financial measures, market information and data from independently run surveys. At all times the Board has the discretion to make a final determination based on share price performance or other factors. In the event of serious misconduct or a material misstatement in the Company’s financial statements the Board can cancel or defer performance-based remuneration and may also claw back performance-based remuneration paid in previous financial years. 29 Silex Annual Report 2016directors’ report d) Voting and comments made at the Company’s 2015 annual General meeting Silex Systems Limited received more than 98% of “yes” votes on its Remuneration Report for the 2015 financial year. e) executive KmP remuneration structure For FY2016, executive KMP remuneration packages included a mix of total fixed remuneration (TFR) and short-term at-risk incentives. total Fixed remuneration (tFr) TFR is comprised of base salary, superannuation and packaged benefits. TFR is reviewed annually, or on promotion. It is benchmarked against market data for comparable roles in companies in a similar industry and with similar market capitalisation. The Committee aims to position executives at or near the median, with flexibility to take into account capability, experience, and value to the organisation and performance of the individual. Effective from 1 January 2015, the TFR for the Silex CEO/MD was significantly reduced by mutual agreement. For FY2016, the TFR for all other KMP remained unchanged. Short-term incentives (Sti) Composition assessment CeO/managing director CFO/Company Secretary Awards may be delivered in cash or Restricted Silex Systems Limited ordinary shares subject to shareholder approval. Awards are currently paid in cash. A portion of the payment may also be delivered in Restricted Silex Systems Limited ordinary shares. CeO – Solar Systems (nb. no Fy2016 Sti issued) Awards were historically paid in cash. Award is subject to the achievement of agreed performance criteria comprising financial metrics and specific key strategic and commercial objectives.* Award is subject to the achievement of divisional and Company financial performance, supplemented by strategic and commercial measures specific to business unit deliverables.* Award was subject to the achievement of Solar Systems financial performance, supplemented by strategic and commercial measures specific to the Solar Systems business.* total maximum Opportunity at risk $200,000 Yes $80,000 Yes $160,000 Yes *For commercially sensitive reasons, short-term incentive targets for executive KMP are not published within this Remuneration Report, however the People & Remuneration Committee believe that all targets are set appropriately and align with shareholder expectations and execution of Company strategy. At all times the Board has the discretion to make a final determination based on share price performance or other factors. long-term incentive (lti) No long-term incentives were granted during FY2016 to the CEO/MD or CFO/Company Secretary. A LTI/Success Fee Bonus was offered to the CEO – Solar Systems in FY2014. This was not time-bound and remained an ongoing potential incentive throughout FY2015 and until the announcement of the cessation of the Solar Systems’ business operations on 30 July 2015. The maximum incentive opportunity was in-line with the objectives of the Board’s major strategic review and was tied to the financial close of a transaction for the Solar Systems business or assets and the value secured for Silex shareholders, after taking into account Silex’s investment to date. As a result of the announcement of the cessation of the operations and redundancy of the CEO, no long-term incentive was payable. At the time of writing, it has been determined that no long-term incentives will be granted to the CEO/MD or CFO/Company Secretary during FY2017. 30 Silex Annual Report 2016directors’ report f) link between Fy2016 remuneration and performance Fy2016 performance and impact on remuneration Throughout FY2016, the Company continued to implement significant strategic changes and respond to challenging operating conditions in the nuclear industry. The Company’s primary focus was on the continued development and commercialisation of the SILEX technology. In addition, the major strategic review implementation was completed resulting in the exclusive License and Assignment Agreement for Translucent’s proprietary cREO™ technology being signed on the 15 September 2015, and the transfer of the technology to IQE Plc during the year. As IQE will now be responsible for the completion of product development and commercialisation activities, the Translucent operations in Palo Alto, California ceased at the end of December 2015. The Solar Systems business also ceased operating during the year and various property, plant and equipment and technology assets sold to third parties. The STI performance criteria for FY2016 for the CEO/MD and CFO/Company Secretary were heavily focussed on the deliverables associated with the SILEX technology and the Company’s strategic review. Key performance criteria met included the licensing of the Translucent cREO™ technology, progress in the commercialisation of the SILEX technology, delivery of financial rigour and operational cost reductions and resolution of the Solar Systems business. The Board awarded the CEO/MD and the CFO/Company Secretary 70% and 85% respectively of the maximum STIs available. These incentives were paid in cash after satisfying the required service and performance conditions. The FY2015 STI and 25% of the maximum short-term inventive for FY2016 for the CFO/Company Secretary was cancelled and a retainer equal to the maximum STI opportunity put in place in November 2014. This was in light of the significant restructure that resulted from the major strategic review and the considerable absorption and expansion of duties following a 50% headcount reduction in corporate resources. This retainer was time bound and eligibility criteria deemed satisfied on 30 September 2015, with payment made in October 2015. Statutory performance indicators We aim to align KMP remuneration to our strategic and business objectives and the creation of shareholder wealth. The below table shows measures of the Company’s financial performance over the last five years as required by the Corporations Act 2001. However, as a pre-revenue company, the below measures are generally not the measures used in determining the variable amounts of remuneration to be awarded to KMPs. As a consequence, there is no direct correlation between the statutory key performance measures and the variable remuneration awarded. year ended 30 June 2012 2013 2014 2015 2016 ePS Cents (21.6) (0.1) (17.3) (21.1) (2.0) KmP Sti award $ Share price at 30 June $ 304,000 140,000 76,000 322,400 211,000 3.20 2.20 1.16 0.46 0.31 31 Silex Annual Report 2016directors’ report Contractual arrangements with executive KmPs Component Total Fixed Remuneration Contract duration Notice by the individual or Company Termination of employment (without cause) Termination of employment (with cause) or by the individual CeO/md $550,000* Ongoing Common Law Contract 6 months CFO/Company Secretary CeO - Solar Systems $288,500 Ongoing Common Law Contract 6 months $400,000 Contract terminated by redundancy 31 August 2015 6 months Partial payment for pro-rata STI may be applicable at the Board’s discretion Partial payment for pro-rata STI may be applicable at the Board’s discretion Partial payment for pro-rata STI may be applicable at the Board’s discretion STI/LTI not awarded STI/LTI not awarded STI/LTI not awarded *Total Fixed Remuneration reduced from $800,000 to $550,000 from 1 January 2015. g) Non-executive directors’ remuneration Non-executive directors receive a board fee. They do not receive performance-based pay or retirement allowances. The fees are exclusive of superannuation. With effect from 1 April 2016, all non-executive directors agreed to reduce their remuneration with the cessation of committee fees. The aggregate non-executive directors’ fees are reviewed periodically by the Board taking into account comparable roles and market data provided by an independent remuneration consultant. The non-executive director’s fees remain well within the limits of the shareholder approved aggregate directors fee pool maximum of $750,000, as approved by shareholders at the 2011 AGM and have in the aggregate significantly reduced from $465,905 in FY2014 to $304,331 in FY2016. The process of Board renewal continued during FY2016 with one director retiring from the Board. The Silex Board currently comprises three non- executive directors and an executive director. The current Board size is deemed appropriate in light of the current activities of the Company. The current fee structure is outlined below: Board Committee Chair 100,000 – member 80,000 – Additional fees may be payable to non-executive directors should they undertake specific consulting projects for the Company in the areas of their expertise. 32 Silex Annual Report 2016directors’ report h) directors’ and KmP remuneration The table below has been prepared in accordance with the requirements of the Corporations Act 2001 and relevant accounting regulations in Australia. This table details the remuneration for the Company’s KMP for the current and previous financial year. Fixed remuneration Variable remuneration Cash salary and fees* $ Non mone- tary benefits $ long service leave $ Post- employment benefits - super- annuation $ Name year executive directors Dr M P Goldsworthy 2016 2015 515,664 10,624 (659) 631,293 16,554 (1,189) Non-executive directors (Ned) Dr L M McIntyre Mr R A R Lee (from 1/7/2015) Mr C D Wilks Mr A M Stock (until 31/8/2015) 2016 2015 2016 2015 2016 2015 2016 2015 110,500 114,000 89,164 – 121,500 132,625 15,667 94,000 – – – – – – – – – – – – – – – – Other key management personnel and group executives 267,604 265,190 – 10,803 – 4,361 2016 2015 2016 2015 2016 Ms J E Ducie Mr C R Murray (until 31/8/2015) total executive directors and other KmP total Ned remuneration total KmP remuneration 352,368 14,626 829,455 23,597 2015 1,248,851 31,180 2016 2015 336,831 340,625 – – 2016 1,166,286 23,597 2015 1,589,476 31,180 682 9,008 3,854 – – 9,008 3,854 * Inclusive of movement in annual leave accruals. ** Other includes termination payments paid to Mr C R Murray. 46,187 12,973 (1,136) 18,688 229,284 – 37,012 – 102,400 83,504 229,284 211,000 34,908 34,983 10,498 10,830 8,471 – 11,543 12,599 1,488 8,930 29,908 29,983 Other** $ Cash bonus $ Options $ deferred rights $ total $ – 140,000 – 24,725 725,262 – 140,000 100,797 125,981 1,048,419 – – – – – – – – – – – – – – – – – – 71,000 80,000 – – – – – 33,566 – – – – – – – – – – – – – – – 120,998 124,830 97,635 – 133,043 178,790 17,155 102,930 2,970 2,962 – – 382,285 382,496 305,996 507,088 27,695 1,413,543 101,978 – 322,400 100,797 128,943 1,938,003 32,000 32,359 – – – – – 33,566 – – 368,831 406,550 115,504 229,284 211,000 – 27,695 1,782,374 134,337 – 322,400 134,363 128,943 2,344,553 33 Silex Annual Report 2016directors’ report The relative proportions of remuneration that are linked to performance and those that are fixed are as follows: Name Fixed remuneration at risk- Sti at risk - lti * 2016 2015 2016 2015 2016 2015 directors Dr L M McIntyre Dr M P Goldsworthy Mr R A R Lee Mr C D Wilks Mr A M Stock Other executive KmP Ms J E Ducie Mr C R Murray 100.0% 77.3% 100.0% 100.0% 100.0% 80.6% 100.0% 100.0% 65.0% – 81.2% 100.0% 78.3% 79.8% N/a 19.3% N/a N/a N/a 18.6% 0.0% N/A 13.4% – N/A N/A 20.9% 20.2% N/a 3.4% N/a N/a N/a 0.8% 0.0% N/A 21.6% – 18.8% N/A 0.8% 0.0% *This relates to options and deferred shares issued on a LTI basis with the percentages based on the value of amounts expensed during the year. i) details of share-based compensation and bonuses Options No grant of options affected remuneration in the current reporting period or will affect remuneration in a future reporting period. There were no options granted or any options exercised by any individual during FY2016 (or FY2015). Sti bonuses For each STI award for the year ended 30 June 2016 (payable in the form of a cash bonus), the percentage of the bonus awarded or forfeited is set out below: 2016 Dr M P Goldsworthy Ms J E Ducie * Ms J E Ducie total opportunity $ awarded % Forfeited % 200,000 20,000 60,000 70% 100% 85% 30% 0% 15% *This relates to a retention based bonus with eligibility criteria expiring 30 September 2015. The criteria were met and the bonus was paid in FY2016. 34 Silex Annual Report 2016 directors’ report lti deferred rights For each LTI award for the year ended 30 June 2016 (payable in the form of deferred rights), the percentage of the bonus awarded or forfeited is set out below: 2016 Dr M P Goldsworthy Ms J E Ducie awarded % Forfeited % Performance period 0% 0% 100% 100% 3 years ending 30/06/2016 3 years ending 30/06/2016 The bonuses were subject to performance criteria comprising Total Shareholder Return over a 3-year period ending 30 June 2016 and a share price hurdle of $5.40. lti cash incentive For each LTI award for the year ended 30 June 2016 (payable in the form of cash), the percentage of the bonuses awarded or forfeited is set out below: 2016 Mr C R Murray awarded % Forfeited % Performance period 0% 100% No set period The bonus was in relation to closing a transaction for the Solar Systems business or assets. equity instruments held by KmP The below table shows the number of ordinary shares in the Company that were held during the financial year by KMP of the Company, including by entities related to them: 2016 directors of Silex Systems limited Dr L M McIntyre Dr M P Goldsworthy Mr R A R Lee Mr C D Wilks Former directors* Mr A M Stock Other executive KmP Ms J E Ducie Former executive KmP* Mr C R Murray balance at the start of the year received during the year on the exercise of options received on vesting of rights to shares Other changes during the year balance at the end of the year 48,230 5,979,055 – 2,814,021 – 3,759 – – – – – – – – – – – – – – – – – – – – – – 48,230 5,979,055 – 2,814,021 N/A 3,759 N/A *This information relates to the period these individuals were Directors/KMP. 35 Silex Annual Report 2016 directors’ report The below table shows the number of options over ordinary shares in the Company that were held during the financial year by KMP of the Company, including by entities related to them: balance at the start of the year Granted during the year as compen- sation lapsed during the year Forfeited during the year exercised during the year balance at the end of the year Vested and exercisable at the end of the year unvested 2016 Name directors of Silex Systems limited Dr M P Goldsworthy 1,102,207 Mr C D Wilks 367,035 – – – – Other executive KmP Ms J E Ducie 100,000 – (40,000) – – – – 1,102,207 – 367,035 – – 1,102,207 367,035 – 60,000 60,000 – j) Shares under option Unissued ordinary shares of Silex Systems Limited under option at the date of this report are as follows: Number of options issue Price of shares Grant date expiry date 1,469,242 $2.04 8 December 2011 7 December 2016 No option holder has any right under the options to participate in any other share issue of the Company or any other entity. Share trading Policy The Silex Share Trading Policy applies to all staff including KMP. It prohibits staff from buying or selling Silex securities at times when they are in possession of inside information. In addition, KMP are only permitted to trade in Silex securities during certain open periods. The policy applies other restrictions with regard to hedging arrangements. KMP must not enter into any hedging arrangements. 36 Silex Annual Report 2016directors’ report 12. Indemnification and insurance of directors The Company has entered into agreements to indemnify the directors of the Company against all liabilities to persons (other than the Company or related body corporate) which arise out of the performance of their normal duties as directors or executive officers unless the liability relates to conduct involving lack of good faith. The Company has agreed to indemnify the directors and executive officers against all costs and expenses incurred in defending an action that falls within the scope of the indemnity. The Directors’ & Officers’ Liability Insurance provides cover against all costs and expenses involved in defending legal actions and any resulting payments arising from a liability to persons (other than the Company) incurred in their position as a director or executive officer unless the conduct involves a wilful breach of duty or an improper use of inside information or position to gain advantage. The insurance policy does not allow specific disclosure of the nature of the liabilities insured against or the premium paid under the policy. 13. Environmental regulation The parent entity is subject to the environmental and health and safety regulations applicable to tenants of the Lucas Heights Science and Technology Centre. The parent entity is also bound by the rules and regulations set out in the Australian Radiation Protection and Nuclear Safety Act, 1998, and is a licensee under the Act. Solar Systems was subject to a number of regulations including VIC Occupational Health and Safety Act 2004, VIC Occupational Health and Safety Regulations 2007, VIC Dangerous Goods Act 1985, VIC Dangerous Goods (Storage and Handling) Interim Regulations 2011. To the best of the Directors’ knowledge, all environmental and health and safety regulatory requirements have been met and there have been no claims made during the financial year. 14. Non-audit services The Company may decide to employ the auditor on assignments additional to their statutory audit duties where the auditor’s expertise and experience with the Company and/or the consolidated entity are important. Details of the amounts paid or payable to the auditor (PricewaterhouseCoopers) for non-audit services provided during the year are set out below. The Board of Directors has considered the position and, in accordance with the advice received from the Audit Committee, is satisfied that the provision of the non-audit services is compatible with the general standard of independence for auditors imposed by the Corporations Act 2001. The directors are satisfied that the provision of non-audit services by the auditor, as set out below, did not compromise the auditor independence requirements of the Corporations Act 2001 for the following reasons: • all non-audit services have been reviewed by the Audit Committee to ensure they do not impact the impartiality and objectivity of the auditor • none of the services undermine the general principles relating to auditor independence as set out in APES 110 Code of Ethics for Professional Accountants. 37 Silex Annual Report 2016directors’ report During the year the following fees were paid or payable for non-audit services provided by the auditor of the parent entity, its related practices and non-related audit firms: Other assurance services PricewaterhouseCoopers Australian firm Audit of government grants total remuneration for other assurance services Other services Corporate services total remuneration for other services total remuneration for non-audit services 2016 $ – – – – – 2015 $ 5,000 5,000 20,400 20,400 25,400 15. Auditors PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. 16. Auditor’s independence declaration A copy of the auditor’s independence declaration as required under section 307C of the Corporations Act 2001 is set out on page 39. This report is made in accordance with a resolution of the Directors. dr m P Goldsworthy CEO/MD Sydney, 22 September 2016 mr C d Wilks Director 38 Silex Annual Report 2016 directors’ report Auditor’s Independence Declaration As lead auditor for the audit of Silex Systems Limited for the year ended 30 June 2016, I declare that, to the best of my knowledge and belief, there have been: a) no contraventions of the auditor independence requirements of the Corporations Act 2001 in relation to the audit; and b) no contraventions of any applicable code of professional conduct in relation to the audit. This declaration is in respect of Silex Systems Limited and the entities it controlled during the period. Stephen Humphries Partner PricewaterhouseCoopers Sydney 22 September 2016 PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation 39 Silex Annual Report 2016Corporate Governance Statement Silex Systems Limited (the Company) and the Board are committed to achieving and demonstrating the highest standards of corporate governance. The Company has reviewed its corporate governance practices against the Corporate Governance Principles and Recommendations (3rd edition) published by the ASX Corporate Governance Council. The 2016 Corporate Governance Statement is dated as at 30 June 2016 and reflects the corporate governance practices in place throughout the 2016 financial year. The 2016 Corporate Governance Statement was approved by the Board on 22 September 2016 and lodged with the ASX Appendix 4G, on 22 September 2016. A description of the Company’s current corporate governance practices is set out in the Company’s Corporate Governance Statement which can be viewed at www.silex.com.au/Corporate-Governance. 40 Silex Annual Report 2016Concise Financial report 30 June 2016 CONteNtS Financial statements Consolidated income statement Consolidated statement of comprehensive income Consolidated balance sheet Consolidated statement of changes in equity Consolidated statement of cash flows Notes to the financial statements Directors’ declaration Independent auditor’s report to the members 42 43 44 45 46 47 51 52 relationship of the concise financial report to the full financial report The concise financial report is an extract from the full financial report for the year ended 30 June 2016. The financial statements and specific disclosures included in the concise financial report have been derived from the full financial report. The concise financial report cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of Silex Systems Limited and its subsidiaries as the full financial report. Further financial information can be obtained from the full financial report. The full financial report and auditor’s report will be sent to members on request, free of charge. Please call +61 2 9704 8888 and request a copy of the full financial report (or email enquiries@silex.com.au). Alternatively, you can access both the full financial report and the concise report via the internet on our website: www.silex.com.au. ABN 69 003 372 067 41 Consolidated income statement for the year ended 30 June 2016 revenue from continuing operations Other income Research and development materials Development expenditure Finance costs Depreciation and amortisation expense Employee benefits expense Consultants and professional fees Printing, postage, freight, stationery and communications Rent, utilities and property outgoings Net foreign exchange losses Other expenses from continuing activities (loss) before income tax expense Income tax expense Net (loss) from continuing operations Note 3 4 2016 $ 2015 $ 1,617,655 3,674,860 1,467,828 42,475 (60,107) (154,296) (2,550,261) – (55) (27,191) (349) (59,821) (3,091,636) (4,017,953) (951,041) (99,574) (433,766) (642,304) (117,893) (474,107) (143,418) – (429,193) (4,700,759) (535,605) (2,284,993) – – (4,700,759) (2,284,993) Net profit/(loss) from discontinued operations Net (loss) for the year 5 1,303,871 (3,396,888) (33,659,803) (35,944,796) Net (loss) is attributable to: Owners of Silex Systems Limited earnings per share for (loss) from continuing operations attributable to the ordinary equity holders of the company Basic earnings per share Diluted earnings per share earnings per share for (loss) attributable to the ordinary equity holders of the company Basic earnings per share Diluted earnings per share (3,396,888) (35,944,796) Cents Cents (2.8) (2.8) (2.0) (2.0) (1.3) (1.3) (21.1) (21.1) The above consolidated income statement should be read in conjunction with the accompanying notes. 42 Silex Annual Report 2016Consolidated statement of comprehensive income for the year ended 30 June 2016 Net (loss) for the year Other comprehensive income Items that may be reclassified to profit or loss: Changes in the fair value of available-for-sale financial assets Exchange differences on translation of foreign operations Other comprehensive income for the year, net of tax total comprehensive income for the year Attributable to: Owners of Silex Systems Limited total comprehensive income for the year Total comprehensive income for the period attributable to owners of Silex Systems Limited arises from: Continuing operations Discontinued operations 2016 $ 2015 $ (3,396,888) (35,944,796) (283,451) – (51,181) (334,632) 275,747 275,747 (3,731,520) (35,669,049) (3,731,520) (3,731,520) (35,669,049) (35,669,049) (4,700,759) 969,239 (3,731,520) (2,284,993) (33,384,056) (35,669,049) The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 43 Silex Annual Report 2016Consolidated balance sheet as at 30 June 2016 assets Current assets Cash and cash equivalents Held to maturity investments - term deposits Trade and other receivables Assets classified as held for sale Total current assets Non-current assets Available-for-sale financial assets Property, plant and equipment Deferred tax assets Intangible assets Total non-current assets total assets liabilities Current liabilities Trade and other payables Provisions Note 30 June 2016 $ 30 June 2015 $ 1,581,746 49,700,328 3,466,276 54,748,350 987,777 54,173,451 5,214,694 60,375,922 5 350,000 1,575,487 55,098,350 61,951,409 1,624,251 – 80,001 1,796 – 1,706,048 56,804,398 64,061 2,702 688 67,451 62,018,860 1,799,049 472,837 2,271,886 968,673 425,919 1,394,592 Liabilities associated with discontinued operations 5 678,379 3,057,022 Total current liabilities Non-current liabilities Provisions Total non-current liabilities total liabilities Net assets equity Contributed equity Reserves Accumulated losses total equity 2,950,265 4,451,614 104,728 104,728 3,054,993 53,749,405 113,110 113,110 4,564,724 57,454,136 231,752,170 231,753,076 9,989,496 10,296,433 (187,992,261) (184,595,373) 53,749,405 57,454,136 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 44 Silex Annual Report 2016Consolidated statement of changes in equity for the year ended 30 June 2016 Contributed equity $ reserves $ accumulated losses $ Non- controlling interests $ total $ total $ balance at 30 June 2014 231,671,231 9,882,811 (148,650,577) 92,903,465 (818,382) 92,085,083 Net (loss) for the year – – (35,944,796) (35,944,796) – (35,944,796) Other comprehensive income – 275,747 – 275,747 – 275,747 total comprehensive income for the year – 275,747 (35,944,796) (35,669,049) – (35,669,049) transactions with owners in their capacity as owners Transfer of non-controlling interest on derecognition Transaction costs from the issue of shares Employee shares and options - value of employee services Transfer from share based payments reserve Deferred tax recognised directly in equity – – – – 818,382 818,382 (3,228) – – (3,228) – (3,228) – 222,737 – 222,737 – 222,737 84,862 (84,862) – – – – 211 – – 211 – 211 81,845 137,875 – 219,720 818,382 1,038,102 balance at 30 June 2015 231,753,076 10,296,433 (184,595,373) 57,454,136 – 57,454,136 Net (loss) for the year – – (3,396,888) (3,396,888) – (3,396,888) Other comprehensive income – (334,632) – (334,632) – (334,632) total comprehensive income for the year – (334,632) (3,396,888) (3,731,520) – (3,731,520) transactions with owners in their capacity as owners Employee shares and options - value of employee services Deferred tax recognised directly in equity – 27,695 – 27,695 – 27,695 (906) – – (906) – (906) 27,695 – 26,789 – (906) 26,789 balance at 30 June 2016 231,752,170 9,989,496 (187,992,261) 53,749,405 – 53,749,405 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 45 Silex Annual Report 2016 Consolidated statement of cash flows for the year ended 30 June 2016 Cash flows from operating activities Receipts from customers and government grants (inclusive of GST) Payments to suppliers and employees (inclusive of GST) Interest received Interest paid Net cash (outflows) from operating activities Cash flows from investing activities 2016 $ 2015 $ 5,467,115 14,506,671 (13,835,072) (24,718,382) 1,942,298 (67) 2,284,445 (1,805) (6,425,726) (7,929,071) Proceeds from held to maturity investments - term deposits 4,473,123 6,582,588 Payments for property, plant and equipment Payments for intangibles Proceeds from sale of property, plant and equipment Net cash inflows from investing activities Cash flows from financing activities Transaction costs from issue of shares Net cash (outflows) from financing activities (42,608) - 2,586,838 7,017,353 (215,990) (651,570) 14,636 5,729,664 - - (3,228) (3,228) Net increase/(decrease) in cash held 591,627 (2,202,635) Cash and cash equivalents at the beginning of the financial year Effects of exchange rate changes on cash Cash and cash equivalents at end of the financial year * 987,777 2,342 1,581,746 3,178,811 11,601 987,777 *Held to maturity investments excluded from Cash and cash equivalents 49,700,328 54,173,451 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 46 Silex Annual Report 2016 Notes to the financial statements 30 June 2016 Note 1 Significant changes in the current accounting period The financial position and performance of the Company continued to be affected by the implementation of the outcomes of the strategic review announced by the Board on 30 June 2014 that has resulted in the return of the Company’s focus to the development of the Company’s foundation technology and core asset – the SILEX laser uranium enrichment technology. The resulting restructure has seen a number of significant changes in the year ended 30 June 2016, including the cessation of the Solar Systems business operations as announced on 30 July 2015. This resulted in the sale of the assets including the properties at Bridgewater and Mildura and the termination of the lease and exit of the manufacturing facility at Abbotsford. In July 2016, the Company completed the sale of the IP and associated manufacturing assets. A License and Assignment Agreement between Translucent Inc and IQE Plc was executed on the 15 September 2015. The Agreement provides for the completion of product development and commercialisation activities during the 30-month license period by IQE. As a result, the Translucent technology has been transferred to IQE’s facility in North Carolina and the Translucent facility in Palo Alto, California was vacated in December 2015. Silex announced on 2 May 2016 that it had signed a term sheet with GE-Hitachi Nuclear Energy (GEH) to provide a framework for the parties to negotiate a mutually acceptable restructure of GE-Hitachi Global Laser Enrichment LLC (GLE). This followed GEH’s notification that they were looking to exit GLE. Under the term sheet, Silex has agreed to reimburse GEH its pro-rata share of funding for GLE Wilmington operations for CY2016 whilst conducting a search to identify new investors for GLE and the commercialisation program. Note 2 Segment information Segment revenue and segment result information provided to the board of directors for the Silex segment, the one reportable segment for the year ended 30 June 2016 is contained in the consolidated income statement. Segment assets were $54,594,394 at 30 June 2016 compared to $59,794,515 at 30 June 2015. Segment liabilities were $2,376,614 at 30 June 2016 compared to $1,507,702 at 30 June 2015. (i) Segment result The Board of Directors assess the performance of the operating segment based on a result that excludes exchange gains and losses on intercompany loans which eliminate on consolidation. Solar Systems and Translucent have been disclosed as discontinued operations and not as reportable segments. A reconciliation of the segment result to Net (loss) from continuing operations is provided as follows. Segment result Net (loss) before income tax from continuing operations 2016 $ (4,700,759) (4,700,759) 2015 $ (2,284,993) (2,284,993) 47 Silex Annual Report 2016 Notes to the financial statements 30 June 2016 Note 3 Revenue From continuing operations Recoverable project costs from GLE Interest income From discontinued operations (note 5) License fees Recoverable project costs from IQE Sale of goods Services Interest income Note 4 Other income From continuing operations Research and development tax incentive Foreign currency exchange gains (net) Profit on sale of property, plant and equipment From discontinued operations (note 5) Research and development tax incentive Government grants Profit on sale of property, plant and equipment 2016 $ 2015 $ – 1,617,655 1,617,655 1,493,766 2,181,094 3,674,860 1,821,297 216,786 93,151 – 22,717 2,153,951 2016 $ 1,459,095 - 8,733 1,467,828 – – 132,924 35,168 14,921 183,013 2015 $ - 42,475 - 42,475 2,002,079 4,508,336 - 1,340,055 3,342,134 668,276 14,636 5,191,248 (i) Government grants Government solar project grants of $nil (2015: $602,603) were recognised as Other income by Solar Systems during the financial year. The Company has met the conditions of the grants and the income has been recognised. Export Market Development Grant income of $nil (2015: $65,673) was recognised as Other income during the financial year by Solar Systems. There are no unfulfilled conditions attached to these grants. (ii) research and development tax incentive Research and development tax incentive income of $3,461,174 (2015: $4,508,336) was recognised as Other income by the Company during the year. The Company has met the conditions of the tax incentive. 48 Silex Annual Report 2016 Notes to the financial statements 30 June 2016 Note 5 Discontinued operations and Assets held for sale In accordance with the continued implementation of the outcome of the Company’s major strategic review and resulting restructure, the Solar Systems and Translucent businesses have been disclosed as discontinued operations. On 30 July 2015, Silex announced a decision had been made to cease business operations at Solar Systems. During the year ended 30 June 2016, many of the assets were sold, including the properties and Bridgewater and Mildura, and the leased facility at Abbotsford was vacated. On 15 September 2015, Silex announced that Translucent had signed a License and Assignment Agreement with IQE Plc with the technology commercialisation program to be transferred to IQE. Under the terms of the License and Assignment Agreement, IQE was required to pay an initial License Fee of US$1.415 million and this was received in March 2016. IQE has 30 months in which to elect to acquire Translucent’s technology with the payment of a further US$5 million. As a result, these two former business segments, net of cash, held to maturity investments, some receivables and Available-for-sale financial assets (shares in IQE) are reported as held for sale. A summary of the results of the discontinued operations is provided below. Revenue (note 3) Other income (note 4) Expenses Profit/(loss) before income tax Income tax expense Profit/(loss) after income tax of the discontinued operations Net cash (outflows) from operating activities Net cash inflows/(outflows) from investing activities Net cash inflows/(outflows) from the discontinued operations Trade and other receivables Inventories Property, plant and equipment Intangible assets total assets of disposal group held for sale Trade and other payables Provisions total liabilities associated with discontinued operations 2016 $ 2,153,951 3,342,134 (4,192,214) 1,303,871 2015 $ 183,013 5,191,248 (39,034,064) (33,659,803) – – 1,303,871 (33,659,803) 2016 $ (2,114,844) 3,064,790 949,946 2016 $ – – 175,000 175,000 350,000 2016 $ (303,819) (374,560) (678,379) 2015 $ (6,237,983) (812,586) (7,050,569) 2015 $ 320,658 18,228 1,236,601 – 1,575,487 2015 $ (936,805) (2,120,217) (3,057,022) 49 Silex Annual Report 2016 Notes to the financial statements 30 June 2016 Note 6 Contingent liabilities and commitments in accordance with Purchase and Sale Agreement Term Sheet (i) Contingent liabilities In April 2016, Silex signed a Non-Binding Purchase and Sale Agreement (PSA) Term Sheet with GENE Holdings (GENE), GE-Hitachi Nuclear Energy Americas LLC (GEHA) and General Electric Company (GE). The Term Sheet sets out details of a proposed Purchase and Sale Agreement (PSA) whereby Silex may acquire the shares owned by GENE and GEHA together representing 76% of the issued capital of GE-Hitachi Global Laser Enrichment LLC (GLE). Whilst the Term Sheet is principally Non-Binding, there are certain Binding Obligations. Under the Term Sheet, Silex has a Binding Funding Obligation and is required to make certain reimbursement payments to the Sellers (GENE and GEHA). Expenses recorded in the current year amounted to $2,550,261. In addition, if a PSA is signed then Silex is required to make additional funding payments to GENE and GEHA The amount of this additional funding amounts (a contingent liability) is US$500,000 for the period to 30 June 2016 and a further US$500,000 for the 6 months to 31 December 2016 i.e. US$1m in total, in the event a PSA is executed. At the current point in time, the timing of any outflow of funds is uncertain and subject to Silex signing a PSA. (ii) Commitments in accordance with Purchase and Sale agreement term Sheet Under the Term Sheet, Silex is required to reimburse the Sellers for a further US$2,100,000 for expenditure for the 6 months to 31 December 2016. Note 7 Dividends No dividends were declared or paid during the year or in the prior year. Note 8 Events occurring after reporting date Between 30 June 2016 and 22 September 2016, the IQE Plc share price (LON: IQE) has increased considerably. Combined with movements in exchange rates the value of the shares (disclosed as Available-for-sale financial assets) has increased by approximately $1,160,000 since 30 June 2016. Gains or losses arising from changes in the fair value of shares classified as available-for-sale are recognised in other comprehensive income. The financial effects of the movements in fair value since 30 June 2016 will be recognised in the financial statements for the year ended 30 June 2017. The consolidated entity is not aware of any other matters or circumstances which are not otherwise dealt with in the financial statements that have significantly, or may significantly, affect the operations of the consolidated entity, the results of its operations or the state of the consolidated entity in subsequent years other than those referred to in this report. Note 9 Basis of preparation This concise financial report relates to the consolidated entity consisting of Silex Systems Limited and the entities it controlled at the end of, or during, the year ended 30 June 2016. The accounting policies have been consistently applied to all years presented, unless otherwise stated below. The financial statements in this report are presented in Australian dollars. 50 Silex Annual Report 2016directors’ declaration 30 June 2016 The directors declare that in their opinion, the concise financial report of the consolidated entity for the year ended 30 June 2016 as set out on pages 41 to 50 complies with Accounting Standard AASB 1039: Concise Financial Reports. The concise financial report is an extract from the full financial report for the year ended 30 June 2016. The financial statements and specific disclosures included in the concise financial report have been derived from the full financial report. The concise financial report cannot be expected to provide as full an understanding of the financial performance, financial position and financing and investing activities of the consolidated entity as the full financial report, which is available on request. This declaration is made in accordance with a resolution of the directors. dr m P Goldsworthy CEO/MD mr C d Wilks Director Sydney, 22 September 2016 51 Silex Annual Report 2016 independent auditor’s report to the members of Silex Systems limited report on the concise financial report We have audited the accompanying concise financial report of Silex Systems Limited (the company), which comprises the consolidated balance sheet as at 30 June 2016, the consolidated income statement, consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year ended on that date and related notes, derived from the audited financial report of the company for the year ended 30 June 2016 for Silex Systems Limited Group (the consolidated entity). The concise financial report does not contain all the disclosures required by the Australian Accounting Standards and accordingly, reading the concise financial report is not a substitute for reading the audited financial report. directors’ responsibility for the concise financial report The directors of the company are responsible for the preparation of the concise financial report in accordance with Accounting Standard AASB 1039 Concise Financial Reports, and the Corporations Act 2001, and for such internal control as the directors determine are necessary to enable the preparation of the concise financial report. auditor’s responsibility Our responsibility is to express an opinion on the concise financial report based on our audit procedures which were conducted in accordance with Auditing Standard ASA 810 Engagements to Report on Summary Financial Statements. We have conducted an independent audit, in accordance with Australian Auditing Standards, of the financial report of the consolidated entity for the year ended 30 June 2016. We expressed an unmodified audit opinion on that financial report in our report dated 22 September 2016. The Australian Auditing Standards require that we comply with relevant ethical requirements relating to audit engagements and plan and perform the audit to obtain reasonable assurance whether the financial report for the year is free from material misstatement. An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the concise financial report. The procedures selected depend on the auditor’s judgement, including the assessment of the risks of material misstatement of the concise financial report, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity’s preparation of the concise financial report in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Our procedures include testing that the information in the concise financial report is derived from, and is consistent with, the financial report for the year, and examination on a test basis, of audit evidence supporting the amounts and other disclosures which were not directly derived from the financial report for the year. These procedures have been undertaken to form an opinion whether, in all material respects, the concise financial report complies with AASB 1039 Concise Financial Reports. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinions. PricewaterhouseCoopers, ABN 52 780 433 757 Darling Park Tower 2, 201 Sussex Street, GPO BOX 2650, SYDNEY NSW 1171 T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation 52 Silex Annual Report 2016independent auditor’s report to the members of Silex Systems limited (continued) independence In conducting our audit, we have complied with the independence requirements of the Corporations Act 2001. We confirm that the independence declaration required by the Corporations Act 2001, which has been given to the directors of Silex Systems Limited would be in the same terms if given to the directors as at the date of this auditor’s report. auditor’s opinion In our opinion, the concise financial report of the consolidated entity for the year ended 30 June 2016 complies with Australian Accounting Standard AASB 1039 Concise Financial Reports. report on the remuneration report The following paragraphs are copied from our report on the remuneration report for the year ended 30 June 2016. We have audited the remuneration report included in pages 26 to 36 of the directors’ report for the year ended 30 June 2016. The directors of the company are responsible for the preparation and presentation of the remuneration report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the remuneration report, based on our audit conducted in accordance with Australian Auditing Standards. auditor’s opinion In our opinion, the remuneration report of Silex Systems Limited for the year ended 30 June 2016 complies with section 300A of the Corporations Act 2001. PricewaterhouseCoopers Stephen Humphries Partner Sydney 22 September 2016 53 Silex Annual Report 2016 Shareholders’ information 30 June 2016 1. Information relating to shareholders as at 12 September 2016 (a) distribution schedule 1-1,000 1,001-5,000 5,001-10,000 10,001-100,000 100,001 and over total number of holders of each class of security Voting rights - on a show of hands - on a poll Percentage of total holding held by the largest 20 holders Number of total holding less than a marketable parcel of shares Substantial shareholders Jardvan Pty Ltd Prudential Plc (M&G Group) 2,057 2,557 843 1,124 141 6,722 55.40% 2,767 Ordinary shares 29,801,030 12,786,077 54 Silex Annual Report 2016 Shareholders’ information 30 June 2016 (continued) (b) Names of twenty largest Holders as at 12 September 2016 Name Jardvan Pty Ltd HSBC Custody Nominees (Australia) Limited Majenta Holdings Pty Ltd Mr Paul Cozzi J P Morgan Nominees Australia Limited Polly Pty Ltd Citicorp Nominees Pty Limited National Nominees Limited Throvena Pty Ltd Hamlac Pty Ltd Mr Christopher David Wilks Felson Holdings Pty Ltd Quintal Pty Ltd Sporran Lean Pty Ltd Old Digger Pty Ltd Quadrangle Nominees Limited Mithena Holdings Pty Ltd Mr Xiangyang Wu Mr Luca Rotter + Ms Jane Louise Abbott Hillboi Nominees Pty Ltd Number of securities 29,801,030 20,511,723 Percentage held 17.48% 12.03% 5,703,923 4,800,000 4,319,093 4,073,863 3,529,036 3,079,351 2,978,203 2,525,937 2,405,070 2,251,000 2,002,952 1,650,000 1,145,000 847,245 817,139 685,655 655,000 651,295 3.35% 2.82% 2.53% 2.39% 2.07% 1.81% 1.75% 1.48% 1.41% 1.32% 1.17% 0.97% 0.67% 0.50% 0.48% 0.40% 0.38% 0.38% 94,432,515 55.40% 55 Silex Annual Report 2016Shareholders’ information 30 June 2016 (continued) 2. Interest of directors in shares as at 12 September 2016 Dr L M McIntyre Dr M P Goldsworthy Mr R A R Lee Mr C D Wilks Ordinary shares 48,230 5,979,055 – interest held Beneficially Personally/Beneficially N/A 2,814,021 Personally/Beneficially 3. Securities subject to voluntary escrow as at 12 September 2016 As at 12 September 2016, no securities were subject to voluntary escrow. 4. Unquoted equity securities as at 12 September 2016 Options issued to take up ordinary shares * * These are options to Dr M P Goldsworthy (1,102,207) and Mr C D Wilks (367,035). Number on issue Number of holders 1,469,242 2 56 Silex Annual Report 2016 Important Notice Forward Looking Statements and Business Risks: Some risk factors that could affect future results and commercial prospects include, but are not limited to: the outcome of the GLE restructure which Silex is participating in, results from the SILEX uranium enrichment engineering development program being conducted jointly by the Company and GLE; the demand for natural uranium and enriched uranium; the time taken to develop the SILEX technology; results from IQE’s commercialisation program and the demand for cREO™ products, the potential development of competing technologies; the potential for third party claims against the Company’s ownership of Intellectual Property; the potential impact of government regulations or policies in the USA, Australia or elsewhere; and the outcomes of various commercialisation strategies undertaken by the Company and/or its Licensees GLE and IQE. Silex Systems is a research and development Company whose primary asset is the SILEX laser uranium enrichment technology, originally developed at the Company’s technology facility in Sydney, Australia. The SILEX technology, licensed exclusively to GE-Hitachi Global Laser Enrichment LLC (GLE) in the USA, is currently in the engineering development stage and plans for commercial deployment remain distant and high risk. Silex also has an interest in a unique semiconductor technology known as ‘cREO™’ through its ownership of subsidiary Translucent Inc. The cREO™ technology is exclusively licensed to IQE Plc based in the UK. IQE is progressing the cREO™ technology towards commercial deployment in various advanced semiconductor products. The outcome of IQE’s commercialisation program remains high risk. The commercial potential of these two technologies is currently unknown. Accordingly, the statements in this report regarding the future of the SILEX technology, the cREO™ technology and any associated commercial prospects are forward looking and actual results could be materially different from those expressed or implied by such forward looking statements as a result of various risk factors. SIlEx SyStEmS lImItED ABN 69 003 372 067 Company Directory Directors Dr L M McIntyre – Chair Dr M P Goldsworthy – CEO/MD Mr R A R Lee Mr C D Wilks Audit Committee Mr R A R Lee – Chair Dr L M McIntyre Mr C D Wilks People & Remuneration Committee Dr L M McIntyre – Chair Mr R A R Lee Mr C D Wilks Company Secretary Ms J E Ducie Registered Office and Principal Place of Business Suite 8.01, Level 8 56 Clarence Street Sydney NSW 2000, Australia Stock Exchange Listed on the Australian Stock Exchange, Ticker: SLX Listed on the OTCQX International, Ticker: SILXY Postal address: PO Box 364, Sydney NSW 2001, Australia Auditors 📞 +61 2 9704 8888 📠 +61 2 9704 8851 ✉ 💻 www.silex.com.au investor.relations@silex.com.au Share Registry Computershare Registry Services Pty Limited Level 5, 115 Grenfell Street, Adelaide, South Australia 5000, Australia GPO Box 1903 Adelaide South Australia 5001, Australia 📞 Enquiries: Within Australia: 1300 556 161 Outside Australia: +61 8 8236 2300 ✉ web.queries@computershare.com.au 💻 www.computershare.com.au PricewaterhouseCoopers Solicitors Baker & McKenzie Bankers Australia and New Zealand Banking Group Limited American Depository Receipts (ADR) Information Silex Systems Limited’s ADRs may be purchased on the US OTCQX market. Details are as follows: Ratio: 1 ADR = 5 ordinary shares Symbol: SILXY CUSIP: 827046 10 3 9414F102 Exchange: OTCQX Country: Australia S i l e x A n n u a l R e p o r t 2 0 1 6 www.silex.com.au Annual Report 2016 

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