Silex Systems Ltd
Annual Report 2018

Plain-text annual report

S I L E X A N N U A L R E P O R T 2 0 1 8 2 0 1 8 ANNUAL REPORT IMPORTANT NOTICE FORWARD LOOKING STATEMENTS AND BUSINESS RISKS: Silex Systems Limited (Silex) 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, which has been licensed exclusively since 2006 to GE-Hitachi Global Laser Enrichment LLC (GLE) in the USA, has reached an advanced stage of development. However, in view of the continuing depressed market conditions leading to the Company’s 12 June 2018 announcement to withdraw from the GLE restructure, plans for commercial deployment are now highly speculative and extremely uncertain. Silex also has an interest in a unique semiconductor technology known as ‘cREO™’ through its ownership of subsidiary Translucent Inc. The cREO™ technology developed by Translucent has been acquired by 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 also remains subject to technology and market risks. 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. Risk factors that could affect future results and commercial prospects include, but are not limited to: the final outcome of the GLE restructure; the future of the SILEX uranium enrichment engineering development program (in particular whether this program will be continued in any way); the market demand for natural uranium and enriched uranium; the potential development of competing technologies; the potential for third party claims against the Company’s ownership of Intellectual Property; the potential impact of prevailing laws or government regulations or policies in the USA, Australia or elsewhere; results from IQE’s commercialisation program and the market demand for cREO™ products; and the outcomes of various strategies undertaken by the Company. SILEX SYSTEMS LIMITED ABN 69 003 372 067 CONTENTS CHAIR’S REPORT CEO’S REPORT TECHNOLOGY OVERVIEW DIRECTORS’ REPORT CORPORATE GOVERNANCE STATEMENT CONCISE FINANCIAL REPORT INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS SHAREHOLDERS’ INFORMATION COMPANY DIRECTORY 2 4 6 12 32 33 44 47 49 1 SILEX ANNUAL REPORT 2018CHAIR’S REPORT “The Board’s current focus is on supporting management in the evaluation of various options to preserve the value created by the GLE and Silex teams in the US over the last decade.” 2 Dear Fellow Shareholders, The year ended 30 June 2018 was another very challenging year for Silex. We continue to face difficult headwinds as we seek to protect and secure a pathway to commercialise our core asset, the SILEX laser-based uranium enrichment technology. In early 2016, the Company embarked on a restructure of the exclusive Licensee for the SILEX technology, GE-Hitachi Global Laser Enrichment LLC (GLE), as a result of the decision by majority shareholder, GE-Hitachi Nuclear Energy (GEH) to exit GLE due to changing business priorities and difficult market conditions. The restructure of GLE was pursued by Silex and other stakeholders in the midst of a depressed market for nuclear fuel, which ultimately handicapped efforts to secure new investors for GLE. The combination of the lack of new investors, and the persisting negative state of the global nuclear fuel markets, triggered the Silex Board’s decision to withdraw from the GLE restructure, as announced to the ASX in June this year. The Board’s current focus is on supporting management in the evaluation of various options to preserve the value created by the GLE and Silex teams in the US over the last decade. To this end, we have been actively involved in a strategic assessment of a number of possible paths which would lead to the preservation of the SILEX technology in the hope that the development program can be ramped up again if and when market conditions improve. In the event this is not achievable, we have also considered the option of suspending all activities in the US and repatriating the technology back to Australia. At the time of writing, a viable path forward for the technology in the US had not been resolved. Despite the difficulties encountered over the last few years, the Board remains committed to the view that nuclear power remains a proven and reliable source of carbon-free base-load power generation, and that the third-generation SILEX enrichment technology has significant potential as a key component of the global nuclear fuel cycle once it recovers in the future. With respect to Silex subsidiary Translucent Inc’s cREO™ semiconductor material technology, we were very pleased with IQE’s decision in March this year to purchase the technology, in accordance with the 2015 License and Assignment Agreement signed between Translucent and IQE. A payment of US$5 million was received in September 2018 (in IQE shares) for the purchase of the technology and with the commencement of minimum royalty payments to follow from FY2020, we are excited that the cREO™ technology may enter some fast-growing semiconductor device markets in the future. IQE remains committed to the commercialisation of the cREO™ technology and continue to invest significantly in the development of the first products that will utilise the cREO™ technology. IQE believes that an optimal route to cREO™ commercialisation should occur within a 2 to 3-year timeframe. SILEX ANNUAL REPORT 2018CORPORATE GOVERNANCE As noted above, the Board has been highly involved in the Company’s efforts to restructure GLE and to find a path forward for the SILEX technology with or without GLE. Given the difficult market conditions faced by the Company, we maintain a strong focus on evolving our strategic direction and on timely execution of strategic plans. This, combined with vigilant attention to risk analysis and oversight, continue to be priority items on our Board agendas. We also remain cognisant of the need to have a diverse, experienced and competent mix of directors on the Board with complementary skills and industry knowledge to meet the Company’s evolving needs. As we implement plans to rationalise and consolidate our operations in the face of a difficult market environment, the People & Remuneration Committee has made some tough decisions with respect to the remuneration of the Company’s KMP. Once again, no remuneration increases were awarded in FY2018 for our CEO/MD, CFO/Company Secretary or our Board. This is a disappointing outcome in view of the extraordinary dedication and time contributed to the Company’s activities by our Management and Board over the past few years. In an effort to contain KMP remuneration, we also did not issue our CEO/MD or CFO/ Company Secretary a Short-Term or Long-Term Incentive for FY2018. Further details on our remuneration can be found in the Directors Report. Finally, it is important to note that as we embark on the strategic challenges that face us in the year ahead, the Company’s balance sheet remains in a strong position with net assets of $47 million, including $32 million in cash, IQE shares of $9 million and a $7 million receivable from IQE as at 30 June 2018. Our greatest asset has always been our committed and talented team. I would like to thank our CEO Dr Michael Goldsworthy, our CFO Julie Ducie, the Silex team, and my fellow directors for their unwavering dedication to the Company during challenging and uncertain times. I would also like to thank you, my fellow shareholders for your patience and ongoing support for Silex. I look forward to updating you again at our Annual General Meeting in November. Dr Lisa McIntyre Chair 3 October 2018 3 SILEX ANNUAL REPORT 2018 CEO’S REPORT “We intend to continue to promote the merits of the SILEX technology, in the hope that at some point in the future we can ramp-up the development program again and participate in the forecasted recovery of the global nuclear fuel market.” 4 Dear Shareholders, In early 2016, the Company embarked on a restructure of the exclusive Licensee of the SILEX laser-based uranium enrichment technology, GE-Hitachi Global Laser Enrichment LLC (GLE). The restructure was necessitated by the decision of GE-Hitachi Nuclear Energy (GEH) to exit GLE due to changing business priorities and difficult market conditions. Initially our focus was on recruiting new investors to take GLE forward with Silex potentially holding a small minority interest. Given the difficulties in finding new investors in a risk-averse market, in August 2017 Silex amended a Term Sheet it had previously signed with GEH with a view to acquiring all of GEH’s 76% interest in GLE. A key objective in this restructure was to enable the Company to create new opportunities by becoming more directly involved in the SILEX technology commercialisation program and in GLE’s business development path. In particular, the Company places considerable value in the Paducah commercial plant opportunity, underpinned by a 2016 agreement signed between the US Department of Energy (DOE) and GLE for the re-enrichment of hundreds of thousands of tons of tails inventories using the SILEX technology. Despite reaching an advanced stage in negotiations with GEH and discussions with other stakeholders with regard to the GLE restructure, the Board decided that there remained too many risks associated with GLE’s business case, and that the investment in GLE and the ongoing expenditure that this would entail would not be in the best interests of shareholders. Accordingly, we announced on 12 June 2018 that we had terminated the Term Sheet with GEH with regard to Silex potentially acquiring GEH’s 76% interest in GLE. The overarching factor which contributed to the decision to withdraw from the restructure of exclusive Licensee GLE, was the continuing negative state of the global nuclear fuel markets, which have deteriorated steadily since the Fukushima event in 2011. We continue to assess various options to preserve value created in the SILEX technology over the last decade with key stakeholders including the shareholders of GLE and the governments of Australia and the US. We intend to continue to promote the merits of the SILEX technology, in the hope that at some point in the future we can ramp-up the development program again and participate in the forecasted recovery of the global nuclear fuel market. Accordingly, the focus of our strategy going forward will involve: • Preserving value and optionality for the future commercialisation of the SILEX technology; • Maintaining our profile in the US, which remains the best target market for eventual deployment of the SILEX technology; • Retaining our core expertise in the SILEX technology at a reduced level; and • Focusing on effective cost management to ensure the most efficient use of cash reserves. SILEX ANNUAL REPORT 2018In view of the depressed state of the nuclear fuel markets, any preservation plan will necessarily involve either a significant reduction in US-based activities, or a cessation of all US-based activities and repatriation of the SILEX technology to Australia. Until the future of the technology in the US is resolved, we anticipate that the SILEX Amended and Restated Technology Commercialisation and License Agreement signed in 2013 between GLE and Silex, and the agreement signed in 2016 between the US Department of Energy and GLE for the Paducah opportunity, will both remain in force. Numerous challenges and risks continue to be faced by the Company as we look to implement a revised strategy for the SILEX technology. Ultimately, the future of the technology and likelihood of success in the remaining commercialisation program is intrinsically tied to a recovery in the global markets for natural and enriched uranium. Meanwhile, a positive outcome was achieved during the year with respect to Silex subsidiary Translucent Inc’s semiconductor material technology known as ‘crystalline Rare Earth Oxides’ (cREO™). In March 2018, the global leader in the design and manufacture of advanced semiconductor wafer products, IQE Plc (AIM: IQE) elected to purchase the cREO™ technology. The election was made in accordance with the 2015 License and Assignment Agreement between Translucent and IQE and as a result, US$5 million worth of IQE shares was received in September 2018. In addition, a perpetual royalty of between 3% and 6% will be payable to Translucent on the sale of any IQE products that utilise the cREO™ technology. IQE continues to devote significant resources to the commercialisation of this unique technology and while timelines to market are uncertain and subject to change, IQE believes that an optimal route to cREO™ commercialisation should occur within a 2 to 3-year timeframe. We look forward to providing a further update on our two technologies at the Annual General Meeting in November. Dr Michael Goldsworthy CEO/Managing Director 5 SILEX ANNUAL REPORT 2018THE SILEX LASER ENRICHMENT TECHNOLOGY BACKGROUND TO THE SILEX TECHNOLOGY The SILEX technology was invented by Silex Systems scientists Dr Michael Goldsworthy and Dr Horst Struve in the mid 1990’s at Lucas Heights, Sydney. 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. The Company signed a Technology Commercialisation and License Agreement with General Electric Company (GE) in 2006 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 GE-Hitachi Global Laser Enrichment LLC (GLE), However from early 2016, Silex, in conjunction with GLE’s shareholders GE-Hitachi (GEH) and Cameco, have been pursuing a restructure of GLE after GEH announced its intention to exit GLE due to changing business priorities and difficult market conditions. As a result of the Company’s announcement on 12 June 2018 to withdraw from the GLE restructure and terminate the Term Sheet with GEH with regard to Silex potentially acquiring GEH’s 76% interest in GLE, the outcome of the GLE restructure and therefore the future of GLE and the prospects for commercialisation of the SILEX technology in the US remain highly uncertain. Until the future of the technology commercialisation program in the US is resolved, we anticipate that the SILEX Amended and Restated Technology Commercialisation and License Agreement signed in 2013 between GLE and Silex will remain in force. URANIUM ENRICHMENT Naturally occurring uranium is dominated by two isotopes, U235 and U238. Nuclear energy is produced by the splitting (or ‘fission’) of the U235 atoms. Natural uranium is made up of ~0.7% of the ‘active’ U235 isotope with the balance (~99.3%) made up of the U238 isotope. Uranium enrichment is the process of concentrating or enriching the U235 isotope up to ~5% for use 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 approximately 5% of the total cost of the electricity generated at current prices. TECHNOLOGY OVERVIEW 6 SILEX ANNUAL REPORT 2018Uranium Production Refinining & Conversion Enrichment SILEX/GLE Other Fuel Fabrication Electricity Power Distribution Power Plant The Separation of Isotopes by Laser EXcitation (SILEX) process is the only third generation laser enrichment technology at an advanced stage of development today. It is able to effectively enrich uranium through highly selective laser excitation of the 235UF6 isotopic molecule. 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. URANIUM ENRICHMENT TECHNOLOGY GASEOUS DIFFUSION CENTRIFUGE LASER EXCITATION 1st generation technology 2nd generation technology 3rd generation technology ß = 1.004 High cost Obsolete ß ~ 1.25 Lower cost ß ~ 2 - 201 Most cost effective Current technology In commercialisation phase 1. ß is the process efficiency (Classified number) THE NUCLEAR FUEL PRODUCTION THE SILEX TECHNOLOGY The SILEX technology can be utilised in 2 steps of the Nuclear Fuel Cycle to produce: 1. natural grade uranium via re-enrichment of tails inventories; and 2. enriched uranium for use as fuel in nuclear power reactors. The SILEX technology is a unique laser-based process that has the potential to economically separate uranium isotopes as well as commercially valuable isotopes of several other elements. It has a number of advantages over other uranium enrichment processes including: • Inherently higher efficiency resulting in lower costs; • Smaller environmental footprint than centrifuge and diffusion plants; • Greater flexibility in producing advanced fuels for next generation small modular reactors (SMR’s); and • Anticipated to have the lowest capital costs of all enrichment technologies. 7 SILEX ANNUAL REPORT 2018THE SILEX TECHNOLOGY LICENSE AGREEMENT WITH GLE Silex’s existing license agreement with GLE (the Amended and Restated Technology Commercialisation and License Agreement) signed in 2013, is an exclusive worldwide license for exploitation of the SILEX technology. The agreement provides for a perpetual royalty and further milestone payments if the SILEX technology is commercialised by GLE. In the event that commercialisation activities cease in the US, it is likely that the Amended and Restated Technology Commercialisation and License Agreement will be terminated. Therefore, the future of the commercialisation program for the SILEX technology and the timing for any potential milestone payments and royalties under the License Agreement is highly uncertain. GLE RESTRUCTURE In early 2016 the Company embarked on a restructure of GLE, necessitated by the decision of majority shareholder, GEH to exit GLE due to changing business priorities and difficult market conditions. In 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. An extensive search for new investors to take GLE forward with Silex potentially holding a small minority interest was conducted. Given the difficulties in finding new investors in a risk-averse market, in August 2017, Silex amended the Term Sheet it had previously signed with GEH with a view to acquiring all of GEH’s 76% interest in GLE. Despite being at an advanced stage in negotiations with GEH and discussions with other stakeholders with regard to the GLE restructure, the Board decided that there remained too many risks associated with GLE’s business case, and that the investment in GLE and the ongoing expenditure that this would entail would not be in the best interests of shareholders. Accordingly, the Company announced on 12 June 2018 that it had terminated the Term Sheet with GEH with regard to Silex potentially acquiring GEH’s 76% interest in GLE. A key objective in the GLE restructure was to enable the Company to create new opportunities by becoming more directly involved in the SILEX technology commercialisation program and in GLE’s business development path. In particular, the Company places considerable value in the Paducah, Kentucky commercial plant opportunity, which remains underpinned by a 2016 Agreement signed between the US Department of Energy (DOE) and GLE for the re-enrichment of hundreds of thousands of tons of tails inventories using the SILEX technology. The Company continues to assess various options to preserve value created in GLE over the last decade, including the Test Loop demonstration facility and associated intellectual property based in Wilmington, North Carolina. However, in view of the depressed state of the global nuclear fuel markets, any preservation plan will necessarily involve either a significant reduction in US-based activities, or a cessation 8 of all US-based activities and repatriation of the SILEX technology to Australia. Whilst the outcome of the GLE restructure remains uncertain, technology development activities continue on a reduced scale at our Lucas Heights facility. MARKET OUTLOOK – NUCLEAR POWER AND FUEL The key driver of the value of the nuclear fuel market is the demand for fuel by nuclear power generators. Nuclear is the largest source of carbon-free power in the US, the European Union, and in several other advanced economies and has been proven as a robust base-load electrical generation platform. Despite the advantages of nuclear power, the nuclear industry has experienced a steady decline since the Fukushima disaster in 2011 and challenging market conditions continue to impact the nuclear fuel markets. In addition to the continued disruption to the Japanese nuclear industry, with only 9 out of around 40 operable reactors restarted, the impact has also been felt in several countries in Western Europe, Asia and the US, where the share of nuclear power generation is set to decrease under current government policies and/or economic pressures. As a result, demand for enrichment and uranium remains low and prices continue to be depressed. Despite this, there are currently more new nuclear power plants under construction globally than has been seen in the last 20 years. Several countries including China, India, Russia and the UAE are undertaking significant expansion of their nuclear energy programs. However, the accessibility of the fuel markets for these countries are generally less accessible. In addition, there is the potential for commercialisation of next- generation small modular reactors (SMRs) – which may offer significant advantages over large conventional nuclear power reactors. SMRs have the potential to be cheaper and simpler to construct, and to compete effectively with distributed generation such as renewables. There are currently numerous SMR development programs advancing around the world. Whilst challenges remain in the short to medium-term for the nuclear power industry and its fuel markets, a more positive outlook remains for the long-term, driven by the merits of nuclear power as a clean and efficient emissions-free source of base load electricity becoming better understood around the world. SILEX ANNUAL REPORT 2018WORLD NUCLEAR REACTOR POPULATION 453 335 (74%) 152 (34%) 55 (12%) Operating Reactors Reactors Under Construction Planned Reactors Proposed Reactors* USA France Japan China Russia South Korea India Other * Other Proposed Reactors include 16 proposed in Saudi Arabia, 11 in Ukraine, 10 in the U.A.E and 8 in Turkey and South Africa Source: World Nuclear Association September 2018 THE cREO™ SEMICONDUCTOR TECHNOLOGY BACKGROUND TO THE cREO™ TECHNOLOGY Silex subsidiary Translucent Inc developed a novel set of semiconductor materials known as ‘crystalline Rare Earth Oxides’ (cREO™) for application to the manufacturing of next generation semiconductor devices used in wireless communications, power electronics and other advanced semiconductor industries. The cREO™ technology was the subject of an exclusive Option, License and Assignment Agreement signed between Translucent and UK-based IQE Plc (AIM: IQE) in September 2015. IQE is the global leader in the design and manufacture of advanced semiconductor wafer products used in many of today’s advanced semiconductor devices, such as smart phones and optical technologies. In March 2018, IQE elected to purchase the cREO™ technology. The election was made in accordance with the 2015 Agreement and as a result, a payment of US$5 million was received from IQE in September 2018 (in IQE shares). In addition, a perpetual royalty of between 3% and 6% will be payable to Translucent on the sale of any IQE products that utilise the cREO™ technology, with minimum annual royalties starting at US$400,000 due to commence being paid in FY2020. IQE’S DEVELOPMENT OF cREO™ The cREO™ technology was successfully transferred in late 2015 to IQE’s Greensboro, North Carolina manufacturing facility for the completion of product development and commercialisation activities. IQE have reported very good progress with the development and demonstration of the cREO™ technology for the integration of advanced high- performance compound semiconductor materials on silicon wafers. Product trials and preliminary qualification activities within the IQE group and with select commercial partners continue. In addition, IQE continue to expand the intellectual property portfolio acquired from Translucent for the cREO™ technology, with the filing of numerous patents providing protection in additional applications. This will help strengthen IQE’s competitive advantage as it takes the cREO™ technology to market. IQE’s initial product development and commercialisation focus for the cREO™ technology has been on applications for wireless communications devices (principally targeting next generation smart phones) and power electronics devices (for example, as commonly found in today’s solar inverters and electric vehicles). IQE regards the cREO™ technology as an enabling technology that would allow IQE to make a step change for the integration of various compound semiconductor devices with large scale silicon wafer-based production techniques. This has the potential to significantly lower the cost of production of next generation devices such as wireless chips. IQE is committed to the potential of the cREO™ technology and continue to spend significant amounts on the development of cREO™ and other complementary materials technologies. Whilst the timelines to commercialisation are uncertain and subject to change, IQE believes that an optimal route to cREO™ commercialisation should occur within a 2 to 3-year timeframe. 9 SILEX ANNUAL REPORT 201810 SILEX ANNUAL REPORT 2018CONCISE FINANCIAL REPORT for the year ended 30 June 2018 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 2018. 1. DIRECTORS 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 2. PRINCIPAL ACTIVITIES Silex is primarily focused on the development of the SILEX laser uranium enrichment technology as the next generation technology for the global uranium enrichment industry. The development and commercialisation program has been undertaken jointly by Silex at its Lucas Heights facility and in Wilmington, North Carolina by GE-Hitachi Global Laser Enrichment LLC (GLE), the exclusive licensee of the SILEX technology since 2006. After the Company’s June 2018 announcement regarding its withdrawal from the restructure of GLE, the future of this program is currently uncertain. 3. DIVIDEND No dividend payments were made during the year. No dividend has been recommended or declared by the Board. 12 SILEX ANNUAL REPORT 2018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 from discontinued operations Net (loss) for the year Net (loss) is attributable to: Owners of Silex Systems Limited 2018 $ 2017 $ 1,060,295 1,627,281 (4,579,381) (10,257,843) – – (4,579,381) (10,257,843) – 138,912 (4,579,381) (10,118,931) (4,579,381) (10,118,931) Key information about the consolidated operations, results and financial position Comments on the operations and the results of those operations are set out below: Despite concerted efforts to restructure licensee GLE, on 12 June 2018 Silex announced that it had terminated the Term Sheet with GE-Hitachi Nuclear Energy (GEH) with regard to Silex potentially acquiring GEH’s 76% interest in GLE. The overarching factor which contributed to the decision to terminate the Term Sheet is the current negative state of the global nuclear fuel markets. As a result of termination of the Term Sheet, Silex’s funding obligations for GLE’s operations (approximately $0.6m per month) ceased and development activities at GLE’s Wilmington Test Loop facility were suspended. The assessment of various options to preserve value created in the SILEX technology over the last decade, including the Test Loop demonstration facility and associated intellectual property based in Wilmington, North Carolina, continue to be explored with the shareholders of GLE, together with the governments of Australia and the US. However, in view of the depressed state of the global nuclear fuel markets, any preservation plan will necessarily involve either a significant reduction in US-based activities, or a cessation of all US-based activities and repatriation of the SILEX technology to Australia. The Company is also reducing the scale of its technology development activities at its Lucas Heights facility and reducing operational cash burn in FY2019. A number of staff have recently been made redundant and the Company will consolidate its operations with the relocation of the small corporate office from Sydney city to the Lucas Heights facility in October 2018. In March 2018, the global leader in the design and manufacture of advanced semiconductor wafer products, IQE Plc (AIM: IQE) elected to purchase Silex subsidiary Translucent Inc’s semiconductor material technology known as ‘Rare Earth Oxides’ (cREO™). The cREO™ technology has numerous potential applications in the manufacture of next generation devices in the semiconductor, digital communications and power electronics industries. The election was made in accordance with the 2015 License and Assignment Agreement between Translucent and IQE and as a result, US$5 million worth of IQE shares was received in September 2018. In addition, a perpetual royalty of between 3% and 6% will be payable to Translucent on the sale of any IQE products that utilise the cREO™ technology, with minimum annual royalties starting at US$400,000 due to commence being paid in FY2020. 13 SILEX ANNUAL REPORT 2018DIRECTORS’ REPORT Financial review A summary of our consolidated income statement is set out below: 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 from discontinued operations Net (loss) for the year 2018 $ 1,060,295 7,552,662 (382,999) (5,799,314) (3,866,174) (2,066,401) (419,164) (658,286) 2017 $ 1,627,281 940,847 (207,498) (6,668,102) (3,818,168) (1,081,456) (395,751) (654,996) – – (4,579,381) (10,257,843) – 138,912 (4,579,381) (10,118,931) The net loss from ordinary activities was $4.6m compared to $10.1m in the prior year. The net loss is comprised of the loss from continuing operations of $4.6m (a decrease of $5.7m compared to the prior year) and the profit from discontinued operations of $nil (compared to a profit of $0.1m in the prior year). The decrease in net loss from ordinary activities is mainly due to the $6.4m income from the sale of Translucent’s cREO™ technology. 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 and Translucent The loss from continuing operations decreased by $5.7m to $4.6m, largely as a result of the reclassification of Translucent as a continuing operation following the election by IQE to acquire Translucent’s cREO™ technology in March 2018 and the potential perpetual royalty stream that may be received in the future. With respect to the Silex Systems segment, the result was a $10.6m loss in the current year compared to a $10.2m loss in the prior year. Of note was the increase in Consultants and professional fees of $0.7m largely as a result of the work undertaken with respect to the GLE restructure. The Translucent segment result was a $6.1m profit in the current year compared to a $0.05m loss in the prior year. The current year result included $6.4m profit on sale of assets to IQE Plc following IQE’s exercise of the option to acquire Translucent’s cREO™ technology in March 2018. 14 SILEX ANNUAL REPORT 2018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 2018 $ 30 June 2017 $ 49,668,457 119,178 49,787,635 44,520,749 7,367,498 51,888,247 2,588,070 118,501 2,706,571 2,479,087 116,892 2,595,979 47,081,064 49,292,268 47,081,064 49,292,268 As at 30 June 2018, total assets were $49.8m. Significant assets are cash holdings of $31.9m (cash and term deposits), and Available-for-sale financial assets of $9.4m. Total liabilities were $2.7m and included trade and other payables of $1.9m. 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 2018 Cents 2017 Cents (2.7) (2.7) (2.7) (2.7) (6.0) (6.0) (5.9) (5.9) 15 SILEX ANNUAL REPORT 2018DIRECTORS’ REPORT 6. SIGNIFICANT CHANGES IN STATE OF AFFAIRS On 12 June 2018, Silex announced that it had decided to withdraw from the acquisition of a majority stake in GE-Hitachi Global Laser Enrichment LLC (GLE), the exclusive Licensee of the SILEX technology. The Board decided that there remained too many risks associated with GLE’s business case and that an investment in GLE and the ongoing expenditure that this would entail would not be in the best interests of shareholders. The announcement followed the termination of the Term Sheet to acquire GE- Hitachi’s 76% interest in GLE on 11 June 2018 and the cessation of Silex’s funding obligations for GLE’s operations. The financial position and performance of the Company was favourably impacted by IQE Plc’s decision to exercise its option to purchase Translucent’s cREO™ technology in March 2018 for US$5 million. In accordance with the License and Assignment Agreement, a perpetual royalty will also be payable to Translucent on the sale of IQE products that utilise Translucent’s cREO™ technology. Minimum annual royalties starting at US$400,000 are due to commence being paid in FY2020. As a result, the Translucent operation has been reclassified as a continuing operation (and as a reportable segment) with the prior year amounts reclassified. 7. MATTERS SUBSEQUENT TO THE END OF THE FINANCIAL YEAR Following the announcement regarding the Company’s termination of the Term Sheet with GEH on the 12 June 2018, a number of operational decisions were made in July 2018 to rationalise activities and reduce anticipated operational cash burn from FY2019 onwards. Actions taken to date include a headcount reduction of more than 40% at our Lucas Heights facility, and the planned consolidation of our operations with the relocation of our small corporate office to the Lucas Heights facility in October 2018. The one-off expenses associated with these initial restructuring decisions is expected to be approximately $180,000. Between 30 June 2018 and the date of this report, the IQE Plc share price (AIM: IQE) has decreased significantly. Combined with movements in exchange rates, the value of the shares held at 30 June 2018 (disclosed as Available-for-sale financial assets) has decreased by approximately $1,630,000 since 30 June 2018. 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 2018 will be recognised in the financial statements for the year ended 30 June 2019. In September 2018, the group received US$5 million worth of shares in IQE from the sale of its cREO™ technology. Since receiving the shares, the IQE share price has fallen. Combined with movements in exchange rates from 30 June 2018, the value of this tranche of shares has decreased by approximately $480,000 compared to the value of the receivable at 30 June 2018. Consistent with the comments above, it is expected that the gains or losses arising from changes in the fair value of the shares will be recognised in other comprehensive income in the financial statements for the year ended 30 June 2019. 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 Directors’ Report. 16 SILEX ANNUAL REPORT 2018DIRECTORS’ REPORT 8. LIKELY DEVELOPMENTS AND EXPECTED RESULTS OF OPERATIONS Overview The primary focus of Silex is the development of the SILEX laser uranium enrichment technology as the next generation technology for the global uranium enrichment industry. The development and commercialisation program has been undertaken jointly by Silex at its Lucas Heights facility and in Wilmington, North Carolina by GE-Hitachi Global Laser Enrichment LLC (GLE), the exclusive Licensee of the SILEX technology from 2006. GLE has been undergoing a restructure since 2016 involving Silex potentially acquiring all of GEH’s 76% interest. However, it was announced on 12 June 2018, that the Term Sheet with GEH concerning this restructure was terminated and that Silex had withdrawn from the GLE restructure. The overarching factor which contributed to the decision to withdraw from the restructure of exclusive Licensee GLE, was the continuing negative state of the global nuclear fuel markets, which have deteriorated steadily since the Fukushima event in 2011. As a result of the termination of the Term Sheet, changes have been made to the commercialisation program for the SILEX technology with the suspension of development activities in the US and a reduction of the development program at the Company’s Lucas Heights facility. The assessment of various options to preserve value created in licensee GLE over the last decade, including the Test Loop demonstration facility and associated intellectual property based in Wilmington, North Carolina, continues. In the event that activities cease in the US, it is likely that the Amended and Restated Technology Commercialisation and License Agreement, signed in 2013 with GLE will be terminated. Therefore, the future of the commercialisation program for the SILEX technology and value and timing of any potential milestone payments and royalties under the License Agreement is highly uncertain. Subsequent to 30 June 2018, several operational decisions have been made by the Company to rationalise operations. These include more than a 40% headcount reduction at our Lucas Heights facility, and the planned consolidation of our operations with the relocation of our small corporate office to the Lucas Heights facility in October 2018. Further possible restructuring actions are currently under consideration. The global leader in the design and manufacture of advanced semiconductor wafer products, IQE Plc elected to purchase Silex subsidiary Translucent Inc’s semiconductor cREO™ technology in March 2018. As a result, a payment of US$5 million was received in September 2018 (in IQE shares). The cREO™ technology has numerous potential applications in the manufacture of next generation devices in the semiconductor, digital communications and power electronics industries. IQE is committed to the potential of the cREO™ technology and continue to spend significant amounts on the development of cREO™ and other complementary materials technologies. Whilst the timelines to commercialisation are uncertain and subject to change, IQE believes that an optimal route to cREO™ commercialisation should occur within a 2 to 3-year timeframe. A perpetual royalty of between 3% and 6% will be payable to Translucent on the sale of any IQE products that utilise the cREO™ technology, with minimum annual royalties starting at US$400,000 due to commence being paid in FY2020. Business strategies and future prospects The SILEX Technology The SILEX technology represents a unique third-generation laser-based solution for production of two key components of nuclear power reactor fuel: • natural grade uranium via re-enrichment of tails inventories (i.e. GLE’s Paducah opportunity); and • enriched uranium for use as fuel in today’s conventional nuclear power reactors – in the form of low enriched uranium (LEU), as well as customised fuel for the next generation fleet of small modular reactors (SMR’s) – in the form of high assay LEU. 17 SILEX ANNUAL REPORT 2018DIRECTORS’ REPORT We continue to assess various options to preserve the SILEX technology and value created in GLE in the US over the last decade. However, in view of the depressed state of the nuclear fuel markets, any preservation plan will necessarily involve either a significant reduction in US-based activities, or a cessation of all US-based activities and repatriation of the SILEX technology to Australia. Until the future of the technology in the US is resolved, we anticipate that the SILEX Amended and Restated Technology Commercialisation and License Agreement signed in 2013 between GLE and Silex, and the agreement signed in 2016 between the US Department of Energy and GLE for the Paducah opportunity, will both remain in force. We intend to continue to promote the merits of the SILEX technology, and we are hopeful of maintaining a position in the US in order to be able to ramp-up the development program again and participate in the forecasted recovery of the global nuclear fuel market in the years ahead. Accordingly, the focus of our strategy going forward will involve: • Preserving value and optionality for the future commercialisation of the SILEX technology; • Maintaining our profile in the US, which remains the best target market for eventual deployment of the SILEX technology; • Retaining our core expertise in the SILEX technology at a reduced level; and • Focusing on effective cost management to ensure the most efficient use of cash reserves. Numerous challenges and risks continue to be faced by the Company as we look to implement a revised strategy for the SILEX technology. Ultimately, the future of the technology and likelihood of success in the remaining commercialisation program is intrinsically tied to a recovery in the global markets for natural and enriched uranium. Status of Nuclear Fuel Markets The market for global nuclear fuel has deteriorated steadily since the Fukushima event in 2011 and this was the overarching factor that led to the Company’s termination of the Term Sheet with GEH for the potential acquisition of GEH’s 76% interest in GLE. In addition to the continued disruption to the Japanese nuclear industry, with only 9 out of around 40 operable reactors restarted, the impact has also been felt in several countries in Western Europe, Asia and the US, where the share of nuclear power generation is set to decrease under current government policies and/or economic pressures. As a result, demand for enrichment and uranium remains low and prices continue to be depressed. Despite this, there are currently more new nuclear power plants under construction globally than has been seen in the last 20 years with 55 reactors currently under construction. Leading this effort are several countries including China, India, Russia and the UAE who are undertaking significant expansion of their nuclear energy programs. Therefore, looking to the medium term and beyond, demand for nuclear fuel and specifically demand for uranium and enriched uranium is anticipated to recover. This will be supported not only by the 55 reactors currently under construction but a further 152 reactors that are planned, most with approvals, funding or commitments in place. The cREO™ Technology In March 2018, IQE Plc (AIM: IQE) elected to purchase the cREO™ technology, in accordance with the 2015 License and Assignment Agreement signed between Translucent and IQE. A payment of US$5 million was received in September 2018 (in IQE shares) and the commencement of minimum royalty payments to follow from FY2020. IQE remain committed to the commercialisation of the cREO™ technology and continue to invest significantly in the development of the first products that will utilise the cREO™ technology for launch into the global market for advanced semiconductor wafer products. IQE believes that an optimal route to cREO™ commercialisation should occur within a 2 to 3-year timeframe. Outlook The Company’s future prospects and results will remain largely dependent on the outcomes of the commercialisation programs for the SILEX and cREO™ technologies; the future of GLE and the Paducah opportunity; availability of funding for the remaining commercialisation programs; and a recovery in the markets for both uranium and enrichment services. 18 SILEX ANNUAL REPORT 2018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 Independent non-executive director for six years and Chair for four years. Extensive experience as a Company Director. Other current directorship roles include icare NSW, HCF, Studiosity Pty Ltd, the University of Sydney and the NSW Generations Fund Advisory Board. Executive career in strategy, commercialisation and performance support as a senior partner of global strategy firm L.E.K. Consulting for 20 years. Other current listed company directorships None Former listed company directorships in last 3 years Non-executive director of Cover-More Group Limited from November 2013 to April 2017 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-six 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 Nil Mr Christopher Wilks BComm, FAICD. Non-executive director Experience and expertise Other current listed company directorships Non-executive director for thirty years. Finance director and CFO of Sonic Healthcare Limited. Various other directorships 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 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 Nil 19 SILEX ANNUAL REPORT 2018 DIRECTORS’ REPORT Mr Robert Lee BSc, MBA, GAICD. Independent non-executive director Experience and expertise Independent non-executive director for three years. 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 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 C D Wilks Directors’ Meetings Audit Committee Meetings People & Renumeration Committee Meetings Number Held Number Attended Number Held Number Attended Number Held Number Attended 16 16 16 16 16 16 15 15 2 * 2 2 2 * 2 2 2 * 2 2 2 * 2 2 * Not a member of the relevant committee at the time the scheduled meetings were held. 20 SILEX ANNUAL REPORT 2018DIRECTORS’ REPORT 11. REMUNERATION REPORT Dear Fellow Shareholders, On behalf of the Board and as Chair of the Company’s People and Remuneration Committee, I am pleased to present to you the FY2018 Silex Systems Limited Remuneration Report, for which we seek your support at our Annual General Meeting in November 2018. 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 the Committee’s remuneration decisions with respect to FY2018 and our remuneration policies and practices generally. The year ended 30 June 2018 was another very challenging year for Silex and we have sought to rationalise our operations in light of the strategic challenges that face us now and in the years ahead. We have again made some difficult decisions with respect to the remuneration of the Company’s KMP. No remuneration increases were awarded for FY2018 or FY2019 year for our CEO/MD, CFO/Company Secretary or our Board. This is a disappointing but necessary outcome and does not reflect the extraordinary dedication and time contributed to the Company’s activities by our Management and Board over the past few years. We also sought to contain KMP remuneration and therefore did not issue our CEO/MD or CFO/Company Secretary a Short-Term or Long-Term Incentive for FY2018. Being mindful of the difficulties faced by the Company, my fellow Directors and I also continue to not receive fees for Committee participation or for the extraordinary time contributed to the Company’s activities. I would also like to take this opportunity to thank our CEO and CFO, my fellow Directors, and our whole team for the tremendous efforts they have made throughout the past year. As we look to FY2019, we have taken another step with the suspension of all incentive plans until the Company secures a clear path forward for its ongoing operations. We have planned a full review of executive and Board roles and remuneration within the Company and will potentially adjust in accordance with the anticipated reduced activity level of the Company. On behalf of the Board, I invite you to review the full report and thank you for your continued support during these difficult times. I look forward to answering any questions you may have at our Annual General Meeting in November 2018. Dr Lisa McIntyre Chair, People & Remuneration Committee 21 SILEX ANNUAL REPORT 2018 DIRECTORS’ REPORT The Directors present the Remuneration Report for the year ended 30 June 2018, 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 at the Company’s 2017 Annual General Meeting e) Executive KMP remuneration structure f) g) Contractual arrangements with executive KMPs h) Non-executive directors’ remuneration i) Directors’ and KMP remuneration j) Details of share-based compensation and bonuses Link between FY2018 remuneration and performance a) Directors and KMP disclosed in this report The 2018 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 C D Wilks Other executive KMP Ms J E Ducie b) Remuneration governance Board oversight Chair and Non-executive director CEO/Managing Director – Executive director Non-executive director Non-executive director CFO/Company Secretary 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. 22 SILEX ANNUAL REPORT 2018DIRECTORS’ REPORT 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 FY2018 Dr L M McIntyre – Chair Mr R A R Lee Mr C D Wilks Ms J E Ducie 2 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 CFO/Company Secretary; • 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 FY2018. In the past, the Company has engaged AON Hewitt to conduct a thorough review of KMP and Board remuneration and structure. The recommendations from the most recent 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. 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. High regard for contemporary market practice, good governance and alignment to changing business circumstances is maintained 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. 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. 23 SILEX ANNUAL REPORT 2018DIRECTORS’ REPORT For FY2018, executive KMP remuneration comprised Total fixed remuneration (TFR) only. At-risk Short-term incentive (STIs) and Long-term incentives (LTIs) were not offered to the CEO/MD or CFO/Company Secretary. At this time, it has also been determined that no incentives will be granted until further notice. Element Purpose Performance Metrics Potential Value Total Fixed Remuneration (TFR) Provide competitive market salary, including superannuation and non- monetary benefits. Reference to role, market and experience. Positioned at median market rate. 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 all senior management. 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 unlikely 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. d) Voting at the Company’s 2017 Annual General Meeting Silex Systems Limited received more than 98% of “yes” votes on its Remuneration Report for the 2017 financial year. e) Executive KMP remuneration structure For FY2018, executive KMP remuneration packages comprised total fixed remuneration (TFR) only. 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. For FY2018, the TFR for our CEO/MD and CFO/Company Secretary remained unchanged. No STIs or LTIs were granted during FY2018 to the CEO/MD or CFO/Company Secretary. For FY2019, all incentive plans have been suspended until the Company secures a clear path forward for its ongoing operations. A full review of the executive KMP roles and renumeration has been planned in light of the anticipated reduced activity level of the Company. 24 SILEX ANNUAL REPORT 2018DIRECTORS’ REPORT f) Link between FY2018 remuneration and performance FY2018 performance and impact on remuneration The Company continued to face significant challenges throughout FY2018 and as a result sought to contain KMP remuneration. Given the ongoing uncertainty, it was deemed appropriate to not issue our CEO/MD and CFO/Company Secretary with a STI or LTI for FY2018. This was mutually agreed by the Board and the Company’s KMP and does not reflect on the performance or commitment of our KMP to the execution of the Company’s strategy. 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 2014 2015 2016 2017 2018 EPS Cents (17.3) (21.1) (2.0) (5.9) (2.7) Total STI awards to KMP $ Share price at 30 June $ 76,000 322,400 211,000 12,500 N/A 1.16 0.46 0.31 0.37 0.20 g) Contractual arrangements with executive KMPs Component Total Fixed Remuneration CEO/MD $550,000 CFO/Company Secretary $325,000 Contract duration Ongoing Common Law Contract Ongoing Common Law Contract Notice by the individual or Company 6 months 6 months Termination of employment (without cause) Partial payment for pro-rata STI may be applicable at Board discretion. Partial payment for pro-rata STI may be applicable at the Board’s discretion Payment of Long Service Leave accrued prior to 31 December 2014 at pre-1 January 2015 TFR of $800,000. Long Service Leave accrued after 1 January 2015 will be payable as per statutory entitlements. Termination of employment (with cause) or by the individual STI/LTI not awarded STI/LTI not awarded Termination of employment due to redundancy Potential ex-gratia payment at Board discretion pending review of final outcomes Potential ex-gratia payment to partially reflect forfeited STI for FY2017, FY2018 and FY2019 25 SILEX ANNUAL REPORT 2018 DIRECTORS’ REPORT h) 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. In FY2018, all non-executive directors agreed to continue to not receive committee fees (payment of committee fees suspended from 1 April 2016). The aggregate non-executive directors’ fees are reviewed periodically by the Board taking into account comparable roles and market data. 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. The Silex Board currently comprises three non- executive directors and an executive director. A full review of the Board size and composition has been planned in light of the anticipated reduced activity level 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. However, in light of the challenges facing the Company, all non-executive directors waived their right to receive additional consulting fees for additional services performed during the year. 26 SILEX ANNUAL REPORT 2018DIRECTORS’ REPORT i) 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- monetary benefits* $ Annual and Long service leave** $ Post- employment benefits – super- annuation $ Cash bonus* $ Total $ Name Year Executive directors Dr M P Goldsworthy 2018 2017 Non-executive directors (NED) Dr L M McIntyre Mr R A R Lee Mr C D Wilks 2018 2017 2018 2017 2018 2017 521,206 505,987 100,000 100,000 80,000 80,000 80,000 85,416 Other key management personnel Ms J E Ducie Total executive directors and other KMP Total NED remuneration Total KMP remuneration 2018 2017 2018 2017 2018 2017 2018 2017 302,551 295,084 823,757 801,071 260,000 265,416 1,083,757 1,066,487 7,222 10,264 55,829 4,527 21,249 34,916 – – – – – – – – 7,222 10,264 – – 7,222 10,264 – – – – – – (1,067) 16,123 54,762 20,650 – – 54,762 20,650 9,500 9,500 7,600 7,600 7,600 8,115 22,449 29,916 43,698 64,832 24,700 25,215 68,398 90,047 – – – – – – – – – 12,500 – 12,500 – – – 605,506 555,694 109,500 109,500 87,600 87,600 87,600 93,531 323,933 353,623 929,439 909,317 284,700 290,631 1,214,139 12,500 1,199,948 * Short-term benefits as per Corporations Regulations 2M 3.03(1) Item 6. ** Other long-term benefits as per Corporations Regulations 2M 3.03(1) Item 8; Amount for M P Goldsworthy for 2018 includes a correction to the Long Service Leave accrual to reflect the preservation of his pre-1 January 2015 Long Service Leave entitlement at his pre-1 January 2015 TFR of $800,000. In the event Long Service Leave is taken in the ordinary course of business, payment for leave will be as per statutory requirements. 27 SILEX ANNUAL REPORT 2018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 * 2018 2017 2018 2017 2018 2017 Directors Dr L M McIntyre Dr M P Goldsworthy Mr R A R Lee Mr C D Wilks Other Executive KMP Ms J E Ducie 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% N/A N/A N/A N/A N/A – N/A N/A N/A N/A N/A N/A 100.0% 96.5% N/A 3.5% N/A N/A N/A N/A N/A N/A j) 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 FY2018 (or FY2017). STI bonuses No STI’s were issued for the year ended 30 June 2018. LTI deferred rights and cash incentives No LTI’s were in place for the year ended 30 June 2018. 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: 2018 Name 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 Directors of Silex Systems Limited Dr L M McIntyre Dr M P Goldsworthy Mr R A R Lee Mr C D Wilks Other Executive KMP Ms J E Ducie 48,230 5,979,055 – 2,814,021 3,759 – – – – – – – – – – – – – – – 48,230 5,979,055 – 2,814,021 3,759 No options over ordinary shares in the Company were held by KMP of the Company at any time during the year ended 30 June 2018, including by entities related to them. 28 SILEX ANNUAL REPORT 2018 DIRECTORS’ REPORT Shares under option There were no unissued ordinary shares of Silex Systems Limited under option at the date of this report. Securities Trading Policy The Silex Securities 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, staff are only permitted to trade in Silex securities during certain open periods. The Silex Securities Trading Policy is available on the Company’s website at www.silex.com.au/Corporate-Governance. 12. COMPANY SECRETARY Ms J E Ducie BBus, CA, GAICD 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. 13. 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. 14. 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. 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. 15. 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 on the following page. 29 SILEX ANNUAL REPORT 2018DIRECTORS’ REPORT 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. 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 Total remuneration for other assurance services Other services Seminars and training courses Total remuneration for other services Total remuneration for non-audit services 2018 $ 2017 $ – – 450 450 450 – – 582 582 582 16. AUDITORS PricewaterhouseCoopers continues in office in accordance with section 327 of the Corporations Act 2001. 17. 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 31. This report is made in accordance with a resolution of the Directors. Dr M P Goldsworthy CEO/MD Sydney, 28 September 2018 Mr C D Wilks Director 30 SILEX ANNUAL REPORT 2018 DIRECTORS’ REPORT AUDITOR’S INDEPENDENCE DECLARATION As lead auditor for the audit of Silex Systems Limited for the year ended 30 June 2018, 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. David Ronald Partner PricewaterhouseCoopers Sydney 28 September 2018 PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo NSW 2000 GPO BOX 2650, SYDNEY NSW 2001 T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T +61 2 9659 2476, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation 31 SILEX ANNUAL REPORT 2018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 2018 Corporate Governance Statement is dated as at 30 June 2018 and reflects the corporate governance practices in place throughout the 2018 financial year. The 2018 Corporate Governance Statement was approved by the Board and lodged with the ASX Appendix 4G, on 28 September 2018. 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. 32 SILEX ANNUAL REPORT 2018CONCISE FINANCIAL REPORT for the year ended 30 June 2018 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 Shareholders’ information 34 35 36 37 38 39 43 44 47 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 2018. 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. SILEX SYSTEMS LIMITED & ITS SUBSIDIARIES ABN 69 003 372 067 CONSOLIDATED INCOME STATEMENT for the year ended 30 June 2018 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 Net profit from discontinued operations Net (loss) for the year 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 Note 3 4 2018 $ 1,060,295 7,552,662 (382,999) (5,799,314) (8) (40,650) (3,866,174) (2,066,401) (80,977) (419,164) – (536,651) 2017 $ 1,627,281 940,847 (207,498) (6,668,102) (11) (27,349) (3,818,168) (1,081,456) (74,377) (395,751) (155,223) (398,036) (4,579,381) (10,257,843) – – (4,579,381) (10,257,843) 5 – 138,912 (4,579,381) (10,118,931) (4,579,381) (10,118,931) Cents Cents (2.7) (2.7) (2.7) (2.7) (6.0) (6.0) (5.9) (5.9) The above consolidated income statement should be read in conjunction with the accompanying notes. 34 SILEX ANNUAL REPORT 2018CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME for the year ended 30 June 2018 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 2018 $ 2017 $ (4,579,381) (10,118,931) 1,799,643 583,591 2,383,234 (2,196,147) 5,716,932 (53,342) 5,663,590 (4,455,341) (2,196,147) (2,196,147) (4,455,341) (4,455,341) (2,196,147) (4,594,253) – 138,912 (2,196,147) (4,455,341) The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes. 35 SILEX ANNUAL REPORT 2018 CONSOLIDATED BALANCE SHEET as at 30 June 2018 Assets Current assets Cash and cash equivalents Held to maturity investments – term deposits Trade and other receivables Available-for-sale financial assets Total current assets Non-current assets Available-for-sale financial assets Property, plant and equipment Total non-current assets Total assets Liabilities Current liabilities Trade and other payables Provisions Total current liabilities Non-current liabilities Provisions Total non-current liabilities Total liabilities Net assets Equity Contributed equity Reserves Accumulated losses Total equity 30 June 2018 $ 30 June 2017 $ 2,002,145 29,851,837 8,452,352 9,362,123 1,876,319 40,801,837 1,842,593 – 49,668,457 44,520,749 – 119,178 119,178 49,787,635 7,284,502 82,996 7,367,498 51,888,247 1,892,751 695,319 2,588,070 118,501 118,501 2,706,571 47,081,064 1,846,984 632,103 2,479,087 116,892 116,892 2,595,979 49,292,268 231,750,374 231,750,374 18,021,263 15,653,086 (202,690,573) (198,111,192) 47,081,064 49,292,268 The above consolidated balance sheet should be read in conjunction with the accompanying notes. 36 SILEX ANNUAL REPORT 2018CONSOLIDATED STATEMENT OF CHANGES IN EQUITY for the year ended 30 June 2018 Attributable to owners of Silex Systems Limited Contributed equity $ Reserves $ Accumulated losses $ Total $ Balance at 30 June 2016 231,752,170 9,989,496 (187,992,261) 53,749,405 Net (loss) for the year Other comprehensive income Total comprehensive income for the year – – – – (10,118,931) 5,663,590 – (10,118,931) 5,663,590 5,663,590 (10,118,931) (4,455,341) Transactions with owners in their capacity as owners Deferred tax recognised directly in equity (1,796) (1,796) – – – – (1,796) (1,796) Balance at 30 June 2017 231,750,374 15,653,086 (198,111,192) 49,292,268 Net (loss) for the year Other comprehensive income Total comprehensive income for the year – – – – (4,579,381) 2,383,234 – (4,579,381) 2,383,234 2,383,234 (4,579,381) (2,196,147) Transactions with owners in their capacity as owners Transactions with non- controlling interests – – (15,057) (15,057) – – (15,057) (15,057) Balance at 30 June 2018 231,750,374 18,021,263 (202,690,573) 47,081,064 The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes. 37 SILEX ANNUAL REPORT 2018 CONSOLIDATED STATEMENT OF CASH FLOWS for the year ended 30 June 2018 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 Payment for additional interest in subsidiary Proceeds from held to maturity investments – term deposits Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Proceeds from sale of intangibles Net cash inflows from investing activities Cash flows from financing activities Net cash (outflows) from financing activities Note 2018 $ 2017 $ 997,280 2,672,348 (12,960,108) (13,157,109) 1,225,488 1,449,905 (8) (11) (10,737,348) (9,034,867) (15,057) – 10,950,000 8,898,491 (76,036) – – (31,906) 289,100 175,000 10,858,907 9,330,685 – – Net increase in cash and cash equivalents 121,559 295,818 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* 1,876,319 4,267 2,002,145 1,581,746 (1,245) 1,876,319 Cash-flows of discontinued operations 5 *Held to maturity investments excluded from Cash and cash equivalents 29,851,837 40,801,837 The above consolidated statement of cash flows should be read in conjunction with the accompanying notes. 38 SILEX ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS 30 June 2018 NOTE 1 SIGNIFICANT CHANGES IN THE CURRENT ACCOUNTING PERIOD On 12 June 2018, Silex announced that it had decided to withdraw from the acquisition of a majority stake in GE-Hitachi Global Laser Enrichment LLC (GLE), the exclusive Licensee of the SILEX technology. The Board decided that there remained too many risks associated with GLE’s business case and that an investment in GLE and the ongoing expenditure that this would entail would not be in the best interests of shareholders. The announcement followed the termination of the Term Sheet to acquire GE- Hitachi’s 76% interest in GLE on 11 June 2018 and the cessation of Silex’s funding obligations for GLE’s operations. The financial position and performance of the Company was favourably impacted by IQE Plc’s decision to exercise its option to purchase Translucent’s cREO™ technology in March 2018 for US$5 million. In accordance with the License and Assignment Agreement, a perpetual royalty will also be payable to Translucent on the sale of IQE products that utilise Translucent’s cREO™ technology. Minimum annual royalties starting at US$400,000 are also due to commence being paid in FY2020. As a result, the Translucent operation has been reclassified as a continuing operation (and as a reportable segment) with the prior year amounts reclassified. NOTE 2 SEGMENT INFORMATION 2018 Total segment revenue Inter-segment revenue Revenue from external customers Silex Systems $ Translucent $ 1,055,452 (84,000) 971,452 960,976 (872,133) 88,843 Total $ 2,016,428 (956,133) 1,060,295 Segment result (10,630,713) 6,051,332 (4,579,381) Total segment assets 33,552,475 16,235,160 49,787,635 Total segment liabilities 2,351,235 355,336 2,706,571 2017 Total segment revenue Inter-segment revenue Revenue from external customers 1,449,646 (84,000) 1,365,646 1,080,744 (819,109) 261,635 2,530,390 (903,109) 1,627,281 Segment result (10,211,489) (46,354) (10,257,843) Total segment assets 44,468,260 7,419,987 51,888,247 Total segment liabilities 2,595,079 – 2,595,079 39 SILEX ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS 30 June 2018 (i) Segment result The Board of Directors assess the performance of the operating segments based on results that excludes exchange gains and losses on intercompany loans which eliminate on consolidation. Solar Systems has been disclosed as a discontinued operation and not as a reportable segment. 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 NOTE 3 REVENUE From continuing operations Interest income License fees Recoverable project costs from IQE From discontinued operations (note 5) Interest income NOTE 4 OTHER INCOME From continuing operations Research and development tax incentive Profit on sale of intellectual property – sale of cREO™ technology Profit on sale of property, plant and equipment – sale of cREO™ technology Foreign currency exchange gains (net) From discontinued operations (note 5) Research and development tax incentive Profit on sale of property, plant and equipment . 40 2018 $ 2017 $ (4,579,381) (4,579,381) (10,257,843) (10,257,843) 2018 $ 2017 $ 971,452 1,365,646 – 88,843 131,148 130,487 1,060,295 1,627,281 – – 3,751 3,751 2018 $ 1,060,878 6,301,408 128,600 61,776 2017 $ 940,847 – – – 7,552,662 940,847 – – – 41,058 114,000 155,058 SILEX ANNUAL REPORT 2018 NOTES TO THE FINANCIAL STATEMENTS 30 June 2018 NOTE 5 DISCONTINUED OPERATIONS In accordance with the Company’s 2014 major strategic review and resulting restructure, the Solar Systems business was disclosed as a discontinued operation. On 30 July 2015, Silex announced a decision had been made to cease business operations at Solar Systems. During the year ended 30 June 2017, the residual assets held for sale were sold. A.C.N. 142 019 583 Pty Ltd and A.C.N. 137 638 021 Pty Ltd (together formerly known as the Solar Systems business) as well as Silex Solar Pty Ltd were deregistered on 24 January 2018. A summary of the results of the discontinued operations is provided below. Revenue (note 3) Other income (note 4) Expenses Profit before income tax Income tax expense Profit after income tax of the discontinued operations Net cash inflows from operating activities Net cash inflows from investing activities Net cash inflows from the discontinued operations NOTE 6 DIVIDENDS No dividends were declared or paid during the year or in the prior year. 2018 $ – – – – – – 2018 $ – – – 2017 $ 3,751 155,058 (19,897) 138,912 – 138,912 2017 $ 1,553,428 464,000 2,017,428 41 SILEX ANNUAL REPORT 2018NOTES TO THE FINANCIAL STATEMENTS 30 June 2018 NOTE 7 EVENTS OCCURRING AFTER REPORTING DATE Following the announcement regarding the Company’s termination of the Term Sheet with GEH on 12 June 2018, a number of operational decisions were made in July 2018 to rationalise activities and reduce anticipated operational cash burn from FY2019 onwards. Actions taken to date include a headcount reduction of more than 40% at our Lucas Heights facility, and the planned consolidation of our operations with the relocation of our small corporate office to the Lucas Heights facility in October 2018. The one-off expenses associated with these initial restructuring decisions is expected to be approximately $180,000. Between 30 June 2018 and the date of this report, the IQE Plc share price (AIM: IQE) has decreased significantly. Combined with movements in exchange rates, the value of the shares held at 30 June 2018 (disclosed as Available-for-sale financial assets) has decreased by approximately $1,630,000 since 30 June 2018. 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 2018 will be recognised in the financial statements for the year ended 30 June 2019. In September 2018, the group received US$5 million worth of shares in IQE from the sale of its cREO™ technology. Since receiving the shares, the IQE share price has fallen. Combined with movements in exchange rates from 30 June 2018, the value of this tranche of shares has decreased by approximately $480,000 compared to the value of the receivable at 30 June 2018. Consistent with the comments above, it is expected that the gains or losses arising from changes in the fair value of the shares will be recognised in other comprehensive income in the financial statements for the year ended 30 June 2019. 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 8 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 2018. 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. 42 SILEX ANNUAL REPORT 2018DIRECTORS’ DECLARATION 30 June 2018 The directors declare that in their opinion, the concise financial report of the consolidated entity for the year ended 30 June 2018 as set out on pages 33 to 42 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 2018. 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 Sydney, 28 September 2018 Mr C D Wilks Director 43 SILEX ANNUAL REPORT 2018 INDEPENDENT AUDITOR’S REPORT to the members of Silex Systems Limited REPORT ON THE CONCISE FINANCIAL REPORT Our opinion In our opinion, the accompanying concise financial report of Silex Systems Limited (the Company) and its controlled entities (together the Group) for the year ended 30 June 2018 complies with Australian Accounting Standard AASB 1039 Concise Financial Reports. What we have audited The Group concise financial report derived from the financial report of the Group for the year ended 30 June 2018 comprises: • the consolidated balance sheet as at 30 June 2018 • the consolidated income statement for the year then ended • the consolidated statement of comprehensive income for the year then ended • the consolidated statement of changes in equity for the year then ended • the consolidated statement of cash flows for the year then ended • the related notes Basis for opinion We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s responsibilities for the audit of the concise financial report section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. Independence We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the concise financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code. PricewaterhouseCoopers, ABN 52 780 433 757 One International Towers Sydney, Watermans Quay, Barangaroo NSW 2000, GPO BOX 2650, SYDNEY NSW 2001 T +61 2 8266 0000, F +61 2 8266 9999, www.pwc.com.au Level 11, 1PSQ, 169 Macquarie Street, Parramatta NSW 2150, PO Box 1155 Parramatta NSW 2124 T +61 2 9659 2476, F +61 2 8266 9999, www.pwc.com.au Liability limited by a scheme approved under Professional Standards Legislation 44 SILEX ANNUAL REPORT 2018INDEPENDENT AUDITOR’S REPORT to the members of Silex Systems Limited Concise financial report The concise financial report does not contain all the disclosures required by the Australian Accounting Standards in the preparation of the financial report. Reading the concise financial report and the auditor’s report thereon, therefore, is not a substitute for reading the financial report and the auditor’s report thereon The financial report and our report thereon We expressed an unmodified audit opinion on the financial report in our report dated 28 September 2018. That report also includes: • The communication of key audit matters. Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. Responsibilities of the directors for the concise financial report The directors 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 is necessary to enable the preparation of the concise financial report. Auditor’s responsibilities for the audit of the concise financial report Our responsibility is to express an opinion on whether the concise financial report, complies in all material respects, with AASB 1039 Concise Financial Reports based on our procedures which were conducted in accordance with Auditing Standard ASA 810 Engagements to Report on Summary Financial Statements. 45 SILEX ANNUAL REPORT 2018INDEPENDENT AUDITOR’S REPORT to the members of Silex Systems Limited REPORT ON THE REMUNERATION REPORT The following paragraphs are copies from our report on the remuneration report of Silex Systems Limited for the year ended 30 June 2018. Our opinion on the remuneration report We have audited the remuneration report included in pages 21 to 29 of the directors’ report for the year ended 30 June 2018. In our opinion, the remuneration report of Silex Systems Limited for the year ended 30 June 2018 complies with section 300A of the Corporations Act 2001. Responsibilities 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. PricewaterhouseCoopers David Ronald Partner Sydney 28 September 2018 46 SILEX ANNUAL REPORT 2018SHAREHOLDERS’ INFORMATION 30 June 2018 1. INFORMATION RELATING TO SHAREHOLDERS AS AT 21 SEPTEMBER 2018 (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 Mr Paul Cozzi 1,887 2,181 704 1,013 199 5,984 47.75% 2,991 Ordinary shares 29,801,030 9,580,000 47 SILEX ANNUAL REPORT 2018 SHAREHOLDERS’ INFORMATION 30 June 2018 (b) Names of Twenty Largest Holders as at 21 September 2018 Name Jardvan Pty Ltd Mr Paul Cozzi Majenta Holdings Pty Ltd Hillboi Nominees Pty Ltd Throvena Pty Ltd Polly Pty Ltd National Nominees Limited Hamlac Pty Ltd Mr Christopher David Wilks HSBC Custody Nominees (Australia) Limited Felson Holdings Pty Ltd Quintal Pty Ltd Sporran Lean Pty Ltd RPM Super Pty Ltd Citicorp Nominees Pty Limited Mr Luca Rotter + Ms Jane Louise Abbott Mr Xiangyang Wu Mr Nobuo Maeda J P Morgan Nominees Australia Limited Mr Timothy Guy Lyons + Mrs Heather Mary Lyons Number of securities 29,801,030 Percentage held 17.48% 9,580,000 5,703,923 4,229,295 2,978,203 4,073,863 2,697,342 2,525,937 2,405,070 2,292,133 2,251,000 2,002,952 1,809,999 1,500,000 1,322,511 1,312,274 1,302,771 1,250,000 1,216,792 1,150,000 5.62% 3.35% 2.48% 1.75% 2.39% 1.58% 1.48% 1.41% 1.34% 1.32% 1.17% 1.06% 0.88% 0.78% 0.77% 0.76% 0.73% 0.71% 0.67% 81,405,095 47.75% 2. INTEREST OF DIRECTORS IN SHARES AS AT 21 SEPTEMBER 2018 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 21 SEPTEMBER 2018 As at 21 September 2018, no securities were subject to voluntary escrow. 4. UNQUOTED EQUITY SECURITIES AS AT 21 SEPTEMBER 2018 There were no unquoted equity securities at 21 September 2018. 48 SILEX ANNUAL REPORT 2018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 STOCK EXCHANGE Listed on the Australian Stock Exchange, Ticker: SLX Suite 8.01, Level 8 56 Clarence Street Sydney NSW 2000, Australia 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 8 www.silex.com.au 

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