Cap XX : Audited results for the year ended 30 June 2017

Business Review

Review of Operations and Activities

The royalties from Murata are continuing to grow, with the latest quarterly royalty payment received in August 2017 being 51% higher than the previous quarter and up 81% on the same quarter from the previous year. The Board is confident that the Murata royalties will continue to increase over the next twelve months, especially with the broadening of the Murata license which was agreed to in April 2016. In the past twelve months, AVX also commenced quarterly royalty payments and paid their first anniversary licence payment.

This progress with royalties is a further endorsement of our strategy to develop substantial and recurring income from our intellectual property, along with income from sales of small supercapacitors, large supercapacitors and energy storage modules incorporating our supercapacitor cells. Several other licence agreements are being negotiated.

During the year, CAP-XX continued to invest significant resources in redesigning products and processes to reduce manufacturing costs, to improve product performance and introduce new products. Further, an investment in operational headcount was made to strengthen the current team and to accelerate key projects. We expect that the majority of the benefits from this will be realised in the 2018 financial year.

Business Environment

The Board believes that CAP-XX's technology provides a competitive advantage over other supercapacitor manufacturers, such as Maxwell Technologies, Ioxus, Nippon Chemicon Corporation and other Chinese and Korean competitors. The Directors further believe that other manufacturers are unable to match the CAP-XX technology for thinness, power density, energy density and reliability. Many competitors manufacture higher-capacity, large package devices and focus on applications where the combination of thinness, energy density and power density is not an issue. In the future, as new products are introduced by CAP-XX, the Company will offer other very significant points of difference with its competition.

As reported last year, Internet of Things (IoT) applications, one of the fastest growing segments of the electronics market, provide one of the greatest opportunities for CAP-XX's products. Driven by customer requests, manufacturers are constantly adding to the functions and applications available on IoT-enabled devices. This means that power management continues to be an increasingly important consideration. The other important factor is size, as devices have become smaller whilst their electrical power demands have increased. The Company was successful in winning new business from a range of markets, including our first high volume order for a wearable technology product utilising our Thinlineproduct.

Historically, CAP-XX has faced competition in various markets from cheaper cylindrical supercapacitors where our thin form factor, high power and long life are not valued as highly as lower initial cost. To counter-act this, the Company released a range of cylindrical cells. To date, several large volume opportunities are being evaluated by existing customers that are currently utilising cheaper cylindrical cells. In addition, our customers' markets are constantly evolving as new products and technologies threaten the incumbents. In this environment CAP-XX needs to always remain flexible to changing business conditions.

Automotive applications such as truckStart, Stop-Start systems, regenerative energy capture or KERS (Kinetic Energy Recovery Systems), distributed power, hybrid electric vehicles and electric vehicles also present very attractive opportunities for supercapacitors. A number of CAP-XX's competitors are active in these markets, but the Board believes that we have significant advantages over the competition in certain applications upon which CAP-XX has focused its efforts. During the year, numerous automotive OEMs and automotive Tier-1/Tier-2 suppliers have purchased CAP-XX's products for evaluation; however because of the significant resources that each project requires, we have taken the decision to focus our resources on just a small number of key automotive projects. Progress during the year with these projects has been very pleasing. Three new automotive products were designed to the customer's specifications, manufactured, tested and evaluation units were delivered to customers including all the necessary electronic circuitry. These products include a 48V system to work with lithium ion batteries in hybrid vehicles; a 12v system for stop-start; vehicle acceleration and regenerative braking; and a 12V system for stop-start and support for the vehicle electronics. However, as previously highlighted, automotive markets have historically been slow to adopt new technology and this still remains a risk today. The Company has also recently commenced two projects involving the development of large supercapacitors for automotive defence applications.

Opportunities

CAP-XX is continuing to refine the products that it offers for the IoT, portable electronics and other markets for our traditional small supercapacitors and our Thinlinesupercapacitors. The Thinlinerange of supercapacitors, which are just 0.6mm thick, were developed to address the space-constrained needs of the IoT and during the year we achieved our first design win for a large volume Thinlinewearable product. The Company is actively dealing with many other similar applications, where the feedback has been very positive and the potential sales opportunities are very large. All of these markets are forecast to be very high volume opportunities.

As already noted, CAP-XX is concentrating on a small number of automotive opportunities for passenger vehicles and heavy vehicles. To further increase our likelihood of success, CAP-XX is looking to partner with Automotive Tier-1/Tier-2 suppliers through either a new licence agreement or a joint venture to supply the automotive markets. The Board believes that such partnerships will be beneficial for all parties involved.

We expect royalty sales from Murata and AVX to continue to grow significantly in the coming years, as more consumer applications adopt supercapacitor technology.

A significant additional benefit of the Murata and AVX licencing agreements is that they validate CAP-XX's technology leadership in the field of supercapacitors and energy storage, and the potential for supercapacitors as a mainstream consumer electronics technology. The Murata and AVX product line and sales activities are also increasing our exposure to markets and customers that were previously beyond our reach. Association with Murata and AVX is also helping CAP-XX gain recognition, win acceptance for our supercapacitors, and reduce misconceptions about the price and performance of supercapacitors. It is also important that Murata's and AVX's strategy is to offer product ranges targeted at certain end markets. As such, Murata and AVX will not meet the product type or size requirements of all markets and all applications, leaving room for CAP-XX to supply these markets directly using products made by its contract manufacturers.

Strategies for Growth

The Company is exploring opportunities in several new markets to leverage its strong intellectual property and engineering expertise through new license agreements, joint ventures and collaborative R&D partnerships. Given the increasing levels of market interest in CAP-XX's technology and our high performance supercapacitors, the Company believes that the IoT and automotive markets in particular offer significant opportunities for growth.

The Company continues to engage in discussions aimed at securing business with a number of global OEMs. We are strengthening relationships with these organisations and have regular engineering meetings with their design teams and manufacturing groups or contract manufacturers. We are unable to comment on specific clients, but are pleased with overall progress and are confident that the available market for supercapacitors is increasing as manufacturers become familiar with the technology.

The Company will continue to monitor new opportunities to increase the product offering, both through the current distributors and direct to customers. These offerings may take the form of complementary energy storage devices and modules.

Research and Development

CAP-XX's R&D efforts are focused on a mix of short, medium and long-term opportunities, covering further cost reductions and improved product performance. CAP-XX has a research facility in Sydney, Australia, where a team of 19 engineers and scientists work to maintain CAP-XX's leading technology position in electrodes, separators and electrolyte materials and their assembly into supercapacitor devices. During the year significant progress was made in a number of key areas including: increasing the peak voltage of our supercapacitor cells; reducing the resistance of our cells; improving the life of our cells; reducing the cost per cell and developing new electronics to optimise the performance of our modules. We have also signed numerous collaboration agreements with several leading Research and Aerospace institutions, whilst our Scientific Advisory Board provides the Company with clear direction on commercially relevant technologies for our ongoing R&D programme.

The markets in which the Company operates are competitive and are characterised by rapid technological change. CAP-XX has a strong competitive position in prismatic supercapacitors for all of its target markets, with its capability to produce supercapacitors with a high energy density and power density in a small conveniently sized flat package. CAP-XX's devices are also lightweight, work over a broad temperature range and have an operating lifetime measured in years.

The Company's success depends on its ability to protect and prevent any infringements of its intellectual property. To protect this important asset, the Company has considerable intellectual property embodied in its patents covering the design, manufacture and use of its high performance supercapacitors. The CAP-XX patent portfolio currently consists of 18 patent families with 45 granted national patents with an additional 12 applications pending in various jurisdictions. The Company's intellectual property strategy has been to build company value by focusing on opportunities to capture market share and exclude competition with an IP portfolio capable of generating licensing revenue. The Directors believe that comprehensive embodiments and interlocking patent groups, combined with a 'quick to file, quick to abandon' policy, have given the Company a strong and focused IP portfolio.

Outlook

The major short-term focus for CAP-XX is to drive the adoption of the Company's intellectual property and products, both large and small, into key target markets through future licence deals; joint ventures and direct product sales. Although much has been achieved in the past, the Company expects to see additional progress over the next twelve months and beyond.