SILEX SYSTEMS LIMITED — Interim / Quarterly Report 2018

Feb 20, 2018

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ASX: SLX OTCQX: SILXY
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Silex Systems Limited ABN 69 003 372 067

Appendix 4D ASX Half-year information – 31 December 2017

Lodged with the ASX under Listing Rule 4.2A

This information should be read in conjunction with the 30 June 2017 Annual Report and the full financial report for the year ending 30 June 2017.

Contents Page Results for announcement to the market 2 Half-year financial report 5

1

Silex Systems Limited half-year ended 31 December 2017 (Previous corresponding period: half-year ended 31 December 2016)

Results for announcement to the market

	31 December 2017 $	30 June 2017 $	Movement $	Movement %
Cash and cash equivalents and Held to maturity investments	37,010,540	42,678,156	(5,667,616)	13.3%	
	Half-year ended 31 December 2017 $	Half-year ended 31 December 2016 $	Movement $	Movement %
Revenue from continuing operations Revenue from discontinued operations	533,904 63,908	727,121 230,947	(193,217) (167,039)	26.6% 72.3%	 
Revenue from ordinary activities	597,812	958,068	(360,256)	37.6%	
Earnings before interest, tax, depreciation, amortisation and impairment from continuing operations (EBITDA)	(5,950,793)	(5,390,067)	(560,726)	10.4%	
Net loss from continuing operations after tax attributable to members Net (loss)/profit from discontinued operations after tax attributable to members	(5,436,686) (23,635)	(4,675,637) 91,095	(761,049) (114,730)	16.3% N/A	
Net loss from ordinary activities after tax attributable to members	(5,460,321)	(4,584,542)	(875,779)	19.1%	
Net loss for the period attributable to members	(5,460,321)	(4,584,542)	(875,779)	19.1%	

No dividends have been paid or proposed during the reporting period

Overview

Silex Systems is a research and development company whose primary asset is the SILEX laser uranium enrichment technology. Silex’s main activity is the development and commercialisation program being undertaken on the SILEX technology in conjunction with exclusive licensee, GE-Hitachi Global Laser Enrichment LLC (GLE). During the half-year ended 31 December 2017:

• Silex continued its efforts to restructure licensee GLE. On 1 September 2017, Silex announced that it had reached agreement with GE-Hitachi Nuclear Energy (GEH) to amend and extend the Term Sheet originally announced on 2 May 2016 to allow the parties additional time to work towards a mutually acceptable restructure of GLE. The amended Term Sheet, which will remain in force until either execution of a Membership Interest Purchase Agreement (MIPA) or the termination of negotiations, contemplates Silex acquiring all of GEH’s 76% interest in GLE, subject to the satisfactory finalisation of transaction documentation and obtaining the necessary US Government approvals;

• Silex worked diligently with GEH on the MIPA, ancillary transaction documentation and US Government filings during the halfyear and whilst challenges remain, execution of a binding agreement is being targeted in Q1, 2018;

2

Results for announcement to the market (continued)

Silex Systems Limited

• The SILEX technology commercialisation project continues to make steady progress at the Wilmington Test Loop facility and at the Lucas Heights laser development facility;

• Silex contributed 76% of the funding of GLE’s Wilmington, North Carolina operations in addition to funding Silex’s laser development activities at its Lucas Heights facility south of Sydney; and

• Key activities in relation to the Paducah DOE tails re-enrichment opportunity were undertaken in conjunction with GLE, including discussions with various corporate and government stakeholders.

The SILEX Technology Commercialisation Program

The primary focus of the Company is to successfully commercialise our core asset, the SILEX laser uranium enrichment technology in collaboration with exclusive licensee GLE. Key to the execution of the SILEX technology commercialisation program is increasing Silex’s involvement with GLE – potentially as a majority shareholder, and increasing our presence in the US, the largest target market for deployment of the SILEX technology.

The announcement by GLE parent company, GE-Hitachi (GEH) in April 2016 of its intention to exit the enterprise and the subsequent signing of a Term Sheet between Silex and GEH for the acquisition of GEH’s 76% equity interest, has led to an extensive effort by Silex to restructure GLE. Silex continues to meet its obligation in accordance with the Term Sheet (as amended and extended) to reimburse GEH for their pro-rata share of funding for the Wilmington operation. This funding is in addition to the funding of the development program for commercial-scale laser systems being conducted at the Company’s Sydney facility.

The completion of a successful restructure of GLE remains fundamental to our strategy and Silex and GEH continue to work on the formal transaction documentation that may result in the sale of GEH’s 76% stake in GLE to Silex. On 28 November 2017, Silex USA LLC was formed and subject to satisfactory finalisation of transaction documentation and the receipt of US Government approvals, Silex USA LLC will acquire GEH’s 76% interest in GLE.

The commercialisation program activities involving engineering scale-up and economic validation are also advancing at a steady pace with opportunities to optimise the remaining scale-up and validation activities being reviewed. In parallel, activities to support planning and implementation of GLE’s Paducah project continue to progress.

The commercialisation program for the SILEX technology continues to be affected by the Fukushima event in 2011 and the slowdown in the nuclear power industry. The suspension of operations of the majority of the Japanese nuclear power plant fleet continues and various policy decisions in other nuclear generating countries may lead to a reduction in nuclear generation capacity in the coming years. Several actions have recently been taken by producers of nuclear fuel to address the current market challenges. Most notably in Q4, 2017, the two largest uranium producers announced temporary reductions in uranium production to better align output with lower demand. The effect of these reductions is expected to assist in the acceleration of consumption of uranium stockpiles currently overhanging the market, and to help balance supply and demand in the uranium market over the next few years.

This half-year report should be read in conjunction with the Operational Update released in conjunction with this report and recent ASX announcements.

Explanation of the net loss from ordinary activities after tax attributable to members

The net loss from ordinary activities of $5.5m increased by $0.9m compared to the previous corresponding period. The net loss is comprised of the loss from continuing operations attributable to members of $5.4m (an increase of $0.8m) and the loss from discontinued operations of $0.02m attributable to members (compared to a profit of $0.09m in the prior corresponding period).

The increase in the net loss from ordinary activities of $0.9m reflects the Company’s continued investment in the technology and commercialisation activities for the SILEX technology. This includes the activities related to the GLE restructure and the obligation to reimburse GEH for their pro-rata share of funding for the GLE Wilmington operations.

3

Results for announcement to the market (continued)

Silex Systems Limited

Cash and cash equivalents & Held to maturity investments

Our cash balance as at 31 December 2017 was $37.0m, a net decrease of $5.7m during the half-year primarily due to our ongoing commitment to the SILEX technology commercialisation program in Sydney and in Wilmington, including our obligation to reimburse GEH for their pro-rata share of GLE funding in support of the GLE restructure. During the 6 months to 31 December 2017, Silex reimbursed GEH $3.1m ($2.2m for the half-year ended 31 December 2016).

Net cash outflows from operating activities for the half-year to 31 December 2017 were $5.6m compared to $4.7m for the half-year ended 31 December 2016. The increased outflows were mainly due to a $0.6m increase in payments to suppliers and employees in the current half-year. Trade and other payables increased by $0.6m in the prior period which contributed to the lower outflows in the prior period.

Receipts during the current period included $0.8m interest (compared to $0.9m in the half-year ended 31 December 2016).

Revenue from ordinary activities

There was a reduction of $0.4m in revenue from ordinary activities during the half-year. Revenue from continuing operations (Interest income) decreased from $0.7m in the previous corresponding period to $0.5m in the current period as a result of lower average cash/term deposit holdings and lower interest rates in the current period. Revenue from discontinued operations reduced by $0.2m to the corresponding prior period, primarily due to a reduction in recoverable project costs from IQE Plc (in accordance with the License and Assignment Agreement with IQE signed in September 2015).

Earnings before interest, tax, depreciation, amortisation and impairment from continuing operations (EBITDA)

EBITDA from continuing operations for the half–year ended 31 December 2017 was a loss of $6.0m. This comprises a loss from continuing operations of $5.4m adjusted for net interest income of $0.5m and depreciation and amortisation of $0.02m.

Continuing Operations - Silex Systems

The loss from continuing operations increased by $0.8m to $5.4m compared to the previous corresponding period. Revenue reduced by $0.2m which was due to a $0.2m reduction in Interest income. Other income increased by $0.1m compared to the previous corresponding period as a result of an increase of $0.1m in Research and development tax incentive income. Total expenses increased by $0.6m. This was mainly due to a $0.4m increase in Consultants and professional fees as a result of the GLE restructure, a $0.2m increase in Employee benefits expense, a $0.2m increase in Research and development (R&D) materials and a $0.1m increase in net foreign exchange losses. Employee benefits expense and R&D materials increased as a result of increased R&D activities at Lucas Heights. Partly offsetting these increases, was a decrease of $0.3m in Development expenditure (expenditure reimbursable to GEH) mainly due to the stronger AUD (relative to the USD) during the half-year.

Explanation of dividends

No dividends have been paid or proposed during the reporting period.

4

Silex Systems Limited Half-year financial report 31 December 2017

Contents
Directors’ report	6
Auditor’s independence declaration	8
Consolidated income statement	9
Consolidated statement of comprehensive income	10
Consolidated balance sheet	11
Consolidated statement of changes in equity	12
Consolidated cash flow statement	13
Notes to the consolidated financial statements	14
Directors’ declaration	19
Independent auditor’s review report to the members	20

This interim financial report does not include all the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the annual report for the year ended 30 June 2017, the full financial report for the year ending 30 June 2017 and any public announcements made by Silex Systems Limited during the interim reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001 .

Silex Systems Limited is a company limited by shares, incorporated and domiciled in Australia. Its registered office and principal place of business is Suite 8.01, Level 8, 56 Clarence Street Sydney NSW 2000.

5

Silex Systems Limited 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 half-year ended 31 December 2017.

1. Directors

The following persons were directors of Silex Systems Limited during the whole of the half-year and up to the date of this report:

Dr L M McIntyre – Chair Dr M P Goldsworthy – CEO / Managing Director Mr R A R Lee Mr C D Wilks

2. Dividend

No dividend payment has been recommended or declared by the Board.

3. Review of operations and activities

The Consolidated income statement on page 9 of this report sets out the main revenue and expense items for the half-year ended 31 December 2017 with comparatives for the half-year ended 31 December 2016. A summary is shown below:

Revenue from continuing operations (Loss) before tax Income tax expense Net (loss) from continuing operations Net (loss)/profit from discontinued operations Net (loss) for the half-year (Loss) is attributable to: Owners of Silex Systems Limited	6 months ended 31 December 2017 6 months ended 31 December 2016 $ $
	533,904 727,121
	(5,436,686) (4,675,637) - -
	(5,436,686) (4,675,637)
	(23,635) 91,095
	(5,460,321) (4,584,542)
	(5,460,321) (4,584,542)

6

Silex Systems Limited Directors’ report (continued)

Overall, the Company incurred a loss attributable to owners of Silex Systems Limited for the half-year ended 31 December 2017 of $5.5m (loss of $4.6m for the previous corresponding period).

The result for the half-year period was impacted by:

• Revenue and Other Income from continuing operations reduced by $0.1m. Interest income decreased by $0.2m as average cash/held to maturity investment balances reduced. There was also a reduction in interest rates on the invested funds. Partly offsetting this, Research and development (R&D) tax incentive income increased by $0.1m as a result of higher R&D expenditure.

• Expenses from continuing operations increased by $0.6m. This was mainly due to a $0.4m increase in Consultants and professional fees, a $0.2m increase in Employee benefits expense, a $0.2m increase in Research and development materials and a $0.1m increase in net foreign exchange losses. Consultants and professional fees increased as a result of the work involved in the restructure of GLE. Employee benefits expense and R&D materials increased as a result of increased R&D activities at Lucas Heights. Partly offsetting these increases, Development expenditure decreased by $0.3m mainly due the stronger AUD (relative to the USD) during the current period.

• The result from discontinued operations was a loss of $0.02m in the current period compared to a $0.1m profit in the previous corresponding period. The profit in the prior period was mainly attributable to a $0.1m profit on sale of assets.

The total cash balance (including held to maturity investments) as at 31 December 2017 was $37.0m. Net cash outflows from operating activities for the current period were $5.6m compared to $4.7m in the prior corresponding period. The increased outflow was mainly due to a $0.6m increase in payments to suppliers and employees in the current half-year. Payments to suppliers in the previous corresponding period were lower as a result of a $0.6m increase in Trade and other payables in the prior corresponding period. In addition, Interest received reduced by $0.1m in the current period as average cash/held to maturity investment balances reduced. There was also a reduction in interest rates on the invested funds. Receipts from customers and government grants also reduced by $0.1m and this was due to lower receipts from IQE Plc.

The value of Available-for-sale financial assets (shares in IQE Plc) increased by $4.9m during the half-year as the IQE share price increased significantly.

4. 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 8.

This report is made in accordance with a resolution of the directors.

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Dr M P Goldsworthy Managing Director

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Dr L M McIntyre Chair

Sydney, 21 February 2018

7

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Auditor’s Independence Declaration

As lead auditor for the review of Silex Systems Limited for the half year ended 31 December 2017, 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 review; and b) no contraventions of any applicable code of professional conduct in relation to the review.

This declaration is in respect of Silex Systems Limited and the entities it controlled during the period.

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David Ronald Partner PricewaterhouseCoopers

Sydney 21 February 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

Liability limited by a scheme approved under Professional Standards Legislation

8

Silex Systems Limited Consolidated income statement for the half-year ended 31 December 2017

Notes 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 ordinary activities (Loss) before income tax expense Income tax expense Net (loss) from continuing operations Net (loss)/profit from discontinued operations 4 Net (loss) for the half-year (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	6 months 6 months ended Ended 31 December 2017 31 December 2016 $ $
	533,904 727,121 535,878 455,100 (213,310) (46,960) (2,820,109) (3,136,425) (3) (9) (19,794) (12,682) (2,032,629) (1,846,354) (824,293) (375,677) (52,996) (47,490) (210,004) (201,007) (96,706) (2,832) (236,624) (188,422)
	(5,436,686) (4,675,637) - -
	(5,436,686) (4,675,637)
	(23,635) 91,095
	(5,460,321) (4,584,542)
	(5,460,321) (4,584,542)
	Cents Cents
	(3.2) (2.7) (3.2) (2.7) (3.2) (2.7) (3.2) (2.7)

The above consolidated income statement should be read in conjunction with the accompanying notes.

9

Silex Systems Limited Consolidated statement of comprehensive income for the half-year ended 31 December 2017

Net (loss) for the half-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 half-year, net of tax Total comprehensive income for the half-year Attributable to: Owners of Silex Systems Limited Total comprehensive income for the half-year Total comprehensive income for the period attributable to owners of Silex Systems Limited arises from: Continuing operations Discontinued operations	6 months ended 6 months ended 31 December 2017 31 December 2016 $ $
	(5,460,321) (4,584,542) 5,002,600 1,630,857 (117,465) 72,506
	4,885,135 1,703,363
	(575,186) (2,881,179)
	(575,186) (2,881,179)
	(575,186) (2,881,179)
	(5,436,686) (4,675,637) 4,861,500 1,794,458
	(575,186) (2,881,179)

The above consolidated statement of comprehensive income should be read in conjunction with the accompanying notes.

10

Silex Systems Limited Consolidated balance sheet as at 31 December 2017

Note ASSETS Current assets Cash and cash equivalents Held to maturity investments - term deposits Trade and other receivables 2 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 3 Reserves Accumulated losses Total equity	31 December 2017 30 June 2017 $ $
	2,708,703 1,876,319 34,301,837 40,801,837 2,021,881 1,842,593
	39,032,421 44,520,749
	12,175,681 7,284,502 108,100 82,996
	12,283,781 7,367,498
	51,316,202 51,888,247
	1,853,228 1,846,984 631,676 632,103
	2,484,904 2,479,087
	129,273 116,892
	129,273 116,892
	2,614,177 2,595,979
	48,702,025 49,292,268
	231,750,374 231,750,374 20,523,164 15,653,086 (203,571,513) (198,111,192)
	48,702,025 49,292,268

The above consolidated balance sheet should be read in conjunction with the accompanying notes.

11

Silex Systems Limited Consolidated statement of changes in equity for the half-year ended 31 December 2017

Balance at 30 June 2016 Net (loss) for the half-year Other comprehensive income Total comprehensive income for the half-year Transactions with owners in their capacity as owners Deferred tax recognised directly in equity Balance at 31 December 2016 Balance at 30 June 2017 Net (loss) for the half-year Other comprehensive income Total comprehensive income for the half-year Transactions with owners in their capacity as owners Transactions with non-controlling interests Balance at 31 December 2017	Attributable to owners of Silex Systems Limited
	Contributed equity Reserves Accumulated losses Total $ $ $ $
	231,752,170 9,989,496 (187,992,261) 53,749,405
	- - (4,584,542) (4,584,542)
	- 1,703,363 - 1,703,363
	- 1,703,363 (4,584,542) (2,881,179)
	(406) - - (406)
	(406) - - (406)
	231,751,764 11,692,859 (192,576,803) 50,867,820
	231,750,374 15,653,086 (198,111,192) 49,292,268
	- - (5,460,321) (5,460,321)
	- 4,885,135 - 4,885,135
	- 4,885,135 (5,460,321) (575,186)
	- (15,057) - (15,057)
	- (15,057) - (15,057)
	231,750,374 20,523,164 (203,571,513) 48,702,025

The above consolidated statement of changes in equity should be read in conjunction with the accompanying notes.

12

Silex Systems Limited Consolidated cash flow statement for the half-year ended 31 December 2017

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 Payments for property, plant and equipment Proceeds from sale of property, plant and equipment Proceeds from sale of intangible assets Proceeds from maturity of held to maturity assets - term deposits Net cash inflows from investing activities Cash flows from financing activities Net cash (outflows) from financing activities Net increase in cash and cash equivalents Cash and cash equivalents at the beginning of the half-year Effects of exchange rate changes on cash Cash and cash equivalents at end of half-year Held to maturity investments excluded from Cash and cash equivalents	6 months ended 31 December 2017 6 months ended 31 December 2016 $ $
	38,666 146,690 (6,445,451) (5,808,806) 801,288 918,508 (3) (9)
	(5,605,500) (4,743,617)
	(15,057) - (45,349) (7,754) - 289,100 - 175,000 6,500,000 5,900,000
	6,439,594 6,356,346
	- -
	834,094 1,612,729 1,876,319 1,581,746 (1,710) 1,091
	2,708,703 3,195,566
	34,301,837 43,800,328

The above consolidated cash flow statement should be read in conjunction with the accompanying notes.

13

Silex Systems Limited Notes to the consolidated financial statements 31 December 2017

Note 1 Segment information

(a) Description of segments

Management has determined that there is one operating segment based on the reports reviewed by Management and the Board of Directors to make strategic decisions. This segment is Silex and this relates to the operations of the parent which is based in New South Wales.

Translucent and Solar Systems have been disclosed as discontinued operations in note 4 and not as reportable segments.

(b) Segment information provided to the board of directors

Segment revenue and segment result information provided to the Board of Directors for the Silex segment, the one reportable segment, for the half-year ended 31 December 2017 is contained in the consolidated income statement.

The Board of Directors assesses the performance of the operating segment based on a result that excludes exchange gains and losses on intercompany loans which eliminate on consolidation. The segment result reconciles to the Net (loss) from continuing operations.

Silex segment assets were $39,017,992 at 31 December 2017 compared to $44,468,260 at 30 June 2017. Unallocated assets at 31 December 2017 include Available-for-sale financial assets (shares in IQE Plc) of $12,175,681 ($7,284,502 at 30 June 2017). Silex segment liabilities were $2,614,177 at 31 December 2017 compared to $2,595,979 at 30 June 2017.

Assets which eliminate on consolidation such as investments in controlled entities and intercompany receivables are excluded from segment assets.

Note 2 Trade and other receivables Trade debtors Other receivables Accrued income Prepayments Note 3 Contributed equity (a) Share capital Ordinary shares, fully paid	31 December 2017 30 June 2017 $ $ 41,471 23,114 11,093 17,342 1,870,382 1,601,888 98,935 200,249 2,021,881 1,842,593 31/12/2017 30/06/2017 31/12/2017 30/06/2017 Shares Shares $ $
	170,467,339 170,467,339 231,750,374 231,750,374

(b) Movements in ordinary share capital

Date Details	Number of shares	$
30/06/2017 Opening balance 31/12/2017 Closing balance	170,467,339 170,467,339	231,750,374
		231,750,374

14

Silex Systems Limited Notes to the consolidated financial statements 31 December 2017 (continued)

Note 4 Discontinued operations

In accordance with the Company’s 2014 major strategic review and resulting restructure, the Translucent and Solar Systems businesses have been disclosed as discontinued operations.

On 30 July 2015, Silex announced a decision had been made to cease business operations at Solar Systems. On 15 September 2015, Silex announced that Translucent had signed a License and Assignment Agreement with IQE Plc with the technology commercialisation program subsequently transferred to IQE in late 2015.

A summary of the results of the discontinued operations is provided below:

Revenue Other income Expenses (Loss)/profit before tax Income tax expense (Loss)/profit after income tax of the discontinued operations Net cash (outflows) from operating activities Net cash inflows from investing activities Net cash (outflows)/inflows from the discontinued operations Note 5 Net tangible asset backing Net tangible asset backing per ordinary security	31 December 2017 $	6 months 6 months ended Ended 31 December 31 December 2017 2016 $ $
		63,908 230,947 - 154,000 (87,543) (293,852)
		(23,635) 91,095 - -
		(23,635) 91,095
		6 months 6 months ended Ended 31 December 31 December 2017 2016 $ $
		(32,662) (381,726) - 464,000
		(32,662) 82,274
		30 June 2017 31 December 2016 $ $
	28.6 cents	28.9 cents 29.8 cents

15

Silex Systems Limited Notes to the consolidated financial statements 31 December 2017 (continued)

Note 6 Events occurring after reporting date

Between 31 December 2017 and the date of this report, the IQE Plc share price (LON: IQE) has decreased. Combined with movements in exchange rates, the value of the shares (disclosed as Available-for-sale financial assets) has decreased by approximately $1.8m since 31 December 2017. 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 31 December 2017 will be recognised in the financial statements for the year ended 30 June 2018.

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 the Operational Update released to the ASX at the same time as this document.

Note 7 Contingent assets and liabilities

As announced on 1 September 2017, Silex and GE-Hitachi Nuclear Energy (GEH) reached agreement to amend and extend the Term Sheet originally announced on 2 May 2016 to allow the parties additional time to work towards a mutually acceptable restructure of GEHitachi Global Laser Enrichment LLC (GLE), the exclusive Licensee of the SILEX technology.

The amended Term Sheet, which will remain in force until either execution of a Membership Interest Purchase Agreement (MIPA) or the termination of negotiations, contemplates Silex acquiring all of GEH’s 76% interest in GLE subject to the satisfactory finalisation of transaction documentation. The acquisition will also be conditional on obtaining the necessary US Government approvals. Silex and GEH continue to work diligently on the MIPA, ancillary transaction documentation and the US Government filings.

Whilst the Term Sheet and extensions are principally Non-Binding, there are certain Binding Obligations. Silex has a Binding Funding Agreement Obligation and is required to make certain reimbursements to the Sellers (GENE and GEHA, and together GEH). Expenses recorded in the half-year amounted to $2,820,109. Furthermore, under the Term Sheet, Silex is required to continue to reimburse the Sellers for a further US$450,000 per month until completion of the transaction or the termination of negotiations.

In addition, if a binding MIPA is signed, then Silex and any of its assignees are required to make an additional funding payment to GEH. As per the Term Sheet signed in April 2016 and as amended and extended, in the event that a binding MIPA is executed, the maximum amount of additional funding payable by Silex (a contingent liability) is US$1,125,000. At the current point in time, the timing of any outflow of funds is uncertain and subject to Silex signing a binding MIPA.

The consolidated entity is not aware of any contingent assets. This situation has not changed since the last annual reporting date.

16

Silex Systems Limited Notes to the consolidated financial statements 31 December 2017 (continued)

Note 8 Fair value measurement

Derivatives

Foreign exchange contracts are used to manage foreign exchange risk. The Company may enter into forward exchange contracts which are economic hedges for foreign currencies to be traded at a future date but do not satisfy the requirements for hedge accounting. These contracts are fair valued by comparing the contracted foreign exchange rate to the current market foreign exchange rate for a contract with the same remaining period to maturity. Any changes in fair values are taken to the income statement immediately.

The Company’s policy is to hedge a proportion of its anticipated cash flows in USD. The Board monitors the Company’s hedging strategy on a continuing basis. At 31 December 2017, the Company held forward exchange contracts totalling US$1,125,000 (30 June 2017: US$1,500,000) to purchase USD with contractual maturity dates up to March 2018 (30 June 2017: up to September 2017) as part of its strategy to minimise the financial effects of foreign currency fluctuations. The fair value of derivative contracts outstanding at 31 December 2017 totals $61,600 (30 June 2017: $56,684) and is recorded in Current liabilities – trade and other payables.

Note 9 Basis of preparation of the half-year financial report

This condensed consolidated interim financial report for the half-year reporting period ended 31 December 2017 has been prepared in accordance with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Act 2001.

This condensed consolidated interim financial report does not include all the notes of the type normally included in an annual financial report. Accordingly, this report is to be read in conjunction with the annual report for the year ended 30 June 2017, the full financial report for the year ended 30 June 2017 and any public announcements made by Silex Systems Limited during the interim reporting period in accordance with the continuous disclosure requirements of the Corporations Act 2001.

The accounting policies adopted are consistent with those of the previous financial year and corresponding interim reporting period except as set out below.

New standards and interpretations not yet adopted

Certain new accounting standards and interpretations have been published that are not mandatory for the current reporting period and have not been early adopted by the Company. The Company’s assessment of the impact of these new standards and interpretations is set out below:

AASB 9 Financial Instruments

AASB 9 addresses the classification, measurement and derecognition of financial assets and financial liabilities and introduces new rules for hedge accounting and a new impairment model for financial assets. The standard will give the Company the option to either value its shares in IQE at fair value through profit or loss or by making an irrevocable election at initial recognition to present subsequent changes in fair value in other comprehensive income.

If the Company elects to value at fair value through other comprehensive income:

• the classification will change from Available-for-sale financial assets to Fair value through other comprehensive income in the balance sheet.

• if the shares are sold, under the new standard the impact will never be reclassified to profit and loss.

• • impairments under the new standard would go through other comprehensive income.

The new hedge rules will generally make it easier to apply hedge accounting going forward as the standard applies a more principlesbased approach. As a general rule, more hedge relationships might be eligible for hedge accounting, as the standard introduces a more principles-based approach. The Company is in the process of assessing whether its own hedging arrangements would be affected by the new rules.

The new impairment model requires the recognition of impairment provisions based on expected credit losses (ECL) rather than only incurred credit losses as is the case under AASB 139. If the group were to adopt the new impairment rules from 1 July 2017, it would have a negligible impact on net trade receivables as the balance at 30 June 2017 and 31 December 2017 are each below $100,000.

The new standard also introduces expanded disclosure requirements and changes in presentation. These are expected to change the nature of the group’s disclosures about its financial instruments particularly in the year of adoption of the new standard.

The new rules must be applied for financial years commencing on or after 1 January 2018.

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Silex Systems Limited Notes to the consolidated financial statements 31 December 2017 (continued)

AASB 15 Revenue from Contracts with Customers

The new standard is based on the principal that revenue is recognised when control of a good or service transfers to a customer – so the notion of control replaces the existing notion of risks and rewards. Management is currently assessing the impact of the new rules. As revenue for the current period consists mainly of interest income, which is not covered by the new standard, it is not expected that early adoption would have a significant impact on the results for the period ended 31 December 2017. The new standard is mandatory for financial years commencing on or after 1 January 2018.

AASB 16 Leases

The new standard will result in almost all leases being recognized on the balance sheet, as the distinction between operating and finance leases is removed. Under the new standard, an asset (the right to use the leased item) and a financial liability to pay rentals are recognized. The only exceptions are short-term and low-value leases.

The standard will affect primarily the accounting for the group’s operating leases. As at the reporting date, the group has non-cancellable operating lease commitments of $761,251 over the next 3 years. However, the Company has not yet determined to what extent these commitments will result in the recognition of an asset and a lease liability for future payments and how this will affect the group’s profit and classification of cash flows.

A small amount of the commitments may be covered by the exception for short-term and low-value leases and some commitments may relate to arrangements that will not qualify under AASB 16. The new standard is applicable for financial years commencing on or after 1 January 2019. At this stage, the group does not intend to adopt the standard before its effective date.

There are no other standards that are not yet effective and that would be expected to have a material impact on the entity in the current or future reporting periods and on foreseeable future transactions.

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, licensed exclusively to GE-Hitachi Global Laser Enrichment LLC (GLE) in the USA, is currently in the engineering development stage and plans for commercial deployment remain speculative and uncertain.

Silex also has an interest in a unique semiconductor technology known as ‘cREO™’ through its ownership of subsidiary Translucent Inc. The cREO™ technology is exclusively licensed to IQE Plc based in the UK. IQE is progressing the cREO™ technology towards commercial deployment in various advanced semiconductor products. The outcome of IQE’s commercialisation program also remains subject to technology and market risks.

The commercial potential of these two technologies is currently unknown. Accordingly, the statements in this announcement 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 outcome of the GLE restructure; results from the SILEX uranium enrichment engineering development program being conducted jointly by Silex and GLE; the demand for natural uranium and enriched uranium; the time taken to develop the SILEX technology; 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 demand for cREO™ products; and the outcomes of various commercialisation strategies undertaken by the Company and/or its Licensees GLE and IQE.

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Silex Systems Limited Directors’ declaration

In the directors’ opinion:

• (a) the financial statements and notes set out on pages 9 to 18 are in accordance with the Corporations Act 2001 , including:

• (i) complying with Accounting Standards, the Corporations Regulations 2001 and other mandatory professional reporting requirements; and

• (ii) giving a true and fair view of the consolidated entity’s financial position as at 31 December 2017 and of its performance for the half-year ended on that date: and

(b) there are reasonable grounds to believe that Silex Systems Limited will be able to pay its debts as and when they become due and payable.

This declaration is made in accordance with a resolution of the directors.

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Dr M P Goldsworthy Managing Director

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Dr L M McIntyre Chair

Sydney 21 February 2018

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Independent auditor’s review report to the members of Silex Systems Limited

Report on the Half-Year Financial Report

We have reviewed the accompanying half-year financial report of Silex Systems Limited (the Company), which comprises the consolidated balance sheet as at 31 December 2017, the consolidated income statement and consolidated statement of comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the half-year ended on that date, selected explanatory notes and the directors’ declaration for Silex Systems Limited. The consolidated entity comprises the Company and the entities it controlled during that half-year.

Directors’ responsibility for the half-year financial report

The directors of the Company are responsible for the preparation of the half-year financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001 and for such internal control as the directors determine is necessary to enable the preparation of the half-year financial report that is free from material misstatement whether due to fraud or error.

Auditor’s responsibility

Our responsibility is to express a conclusion on the half-year financial report based on our review. We conducted our review in accordance with Australian Auditing Standard on Review Engagements ASRE 2410 Review of a Financial Report Performed by the Independent Auditor of the Entity , in order to state whether, on the basis of the procedures described, we have become aware of any matter that makes us believe that the half-year financial report is not in accordance with the Corporations Act 2001 including giving a true and fair view of the consolidated entity’s financial position as at 31 December 2017 and its performance for the half-year ended on that date; and complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001 . As the auditor of Silex Systems Limited, ASRE 2410 requires that we comply with the ethical requirements relevant to the audit of the annual financial report.

A review of a half-year financial report consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Australian Auditing Standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Independence

In conducting our review, we have complied with the independence requirements of the Corporations Act 2001 .

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

Liability limited by a scheme approved under Professional Standards Legislation.

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Independent auditor’s review report to the members of Silex Systems Limited (continued)

Conclusion

Based on our review, which is not an audit, we have not become aware of any matter that makes us believe that the half-year financial report of Silex Systems Limited is not in accordance with the Corporations Act 2001 including:

1. giving a true and fair view of the consolidated entity’s financial position as at 31 December 2017 and of its performance for the halfyear ended on that date;

2. complying with Accounting Standard AASB 134 Interim Financial Reporting and the Corporations Regulations 2001.

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PricewaterhouseCoopers

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David Ronald Partner

Sydney 21 February 2018

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