Chairman's statement

As foreshadowed in the FY2021/22 results and at the AGM, the current financial year has started slower than expected. This was due to several influences including: industry wide supply chain bottlenecks, especially in China, a global shortage of integrated circuits affecting customer order volumes and increasing pessimism over the state of the global economy. The flow on effects of factory closures in Asia which lead to delays in shipments of critical components has resulted in delayed sales of supercapacitors. Concerns about the ongoing war in Europe and a possible recession have also caused some customers to reduce or defer their purchase orders as they look to reduce their inventory levels and delay new product launches. The greatest falls were in the Asian region which are believed to be due to two main factors. First, some customers which saw a boom in demand during COVID are now seeing demand falling as customer demand flattens. It is currently unclear whether this is a short-term correction or if it will take longer for demand to recover. Second, several customers had placed larger and longer time frame orders during COVID while components were in critical shortage. Now that component availability is returning to pre-COVID levels, customers are reducing their inventory levels before reordering. Based on anecdotal evidence, we believe that the drop in our H1 sales is similar to that which our competitors and other component players in similar markets have experienced. To our knowledge, no significant business has been lost to a competitor.

Total revenue was A$1.61 million down 34% on the same period in the prior year (A$2.4 million). Total product sales for the half year were A$1.4 million down 40% on the same period in the prior year (A$2.6 million). The EBITDA loss for the six months ended 31 December 2022 was A$966k. This compared to an EBITDA loss of A$305k for the corresponding period last year. During the period, A$187k in royalty income was received (A$0 in the corresponding half year). Gross margin increased from 34% overall to 37%. Operating expenses increased by 10% due to increased patent filing costs and resumption of overseas travel. As at 31 December 2022, cash reserves were A$495k with no debt and before the Company utilised its existing line of credit.  

Despite the slower than expected start to the year, the Board remains optimistic about the short and long-term growth prospects of the Company. The order book is improving and at 31 December 2022 was 47% higher than at the start of the current financial year and 85% higher than its low point at the end of August 2022, with a significant portion of the increase coming from those customers whose sales in the first six months were less than expected.

Furthermore, the sales pipeline has increased by 30% to more than US$65 million compared to 12 months ago. The growth in the sales pipeline continues to be well spread across a number of different Internet of things "IoT") related market segments. At the same time, the Company achieved several new design wins in energy harvesting, smart meters and industrial products. The Board believes that demand for both non-cellular and cellular IoT devices will continue to grow rapidly. Based on past experience, these new design wins can take between six months and five years to move into mass production with an average being around two years.

During the first half, the Company launched three new product families: the Ioxus modules; the 5mm ultra-thin cylindrical supercapacitor and coin cell supercapacitors for Real Time Clock (RTC) applications. The Company has already made its first sales of Ioxus modules and coin cell supercapacitors. Over the next 12 months, we expect sales of these new products to grow substantially.

Simultaneously, as part of its stated strategy, the Company has continued to add new broadline and speciality distributors to broaden our sales access to different application and geographic markets.

Production at Seven Hills continues to improve. Reject rates of products made at Seven Hills  decreased by a further nine percentage points from the previous six months. Reject rates are expected to decrease further as production runs increases. The current output is exceeding customer demand and key performance metrics are tracking in line with our expectations. As expected at this stage of production, the Company is continuing to address small incremental improvements and is hiring additional staff for the Seven Hills facility. We expect to see steady improvement over the remainder of 2023. The Board is confident that target outputs and other key performance metrics will be reached as expected. The Company continues to make good progress in readying production for Continental and its design wins due to start in 2024. The commissioning of the fourth production line, the DMH line, is expected to be completed around the end of 2023, with production expected to start in the fourth quarter of 2023 or early 2024 as time and resources allow and subject to customer demand.

After several years of development, the Board expects several new products to be released in 2023. The first of these is the DMV 3V single cell supercapacitor which was launched in February 2023. The DMV is targeted at applications using 3V coin cell batteries and energy harvesting applications that do not use a battery at all. Several new patents are also expected to be filed covering new market applications. In addition to these activities, CAP-XX R&D continues to make progress in ways to reduce supercapacitor production costs, increase cell voltage and improve product performance through the use of new materials. The Company is continuing discussions with other companies regarding licencing and partnering opportunities.

Licensing remains an important revenue stream for CAP-XX and the Company continues to defend its intellectual property. CAP-XX continues to vigorously pursue its patent infringement action against Maxwell Technologies, now a wholly owned subsidiary of Tesla Inc. and other companies. Due to his case load, the judge in the Maxwell case has moved the trial date to 24^th July 2023.  The effect of this is that the Company's current level of legal expenses has greatly reduced while also delaying the receipt of any future settlement. The Board remains optimistic of the Company's prospects in this matter. However, while the Board had previously reported that it expected to secure litigation funding for the Maxwell case, the Board now believes that it is no longer able to secure such funding on acceptable terms to the Company. As such, the Board is reviewing options for how to continue funding this litigation alongside the Company ongoing cash requirements.

The Board is confident that the short-term fall in sales will be reversed over the next six months and the longer-term growth of sales for IoT devices and the new Seven Hills production lines will transform the Company's revenue position with a consequential benefit to cash flow and the cash position of the Company. Subject to the issues already discussed, the Board continues to strive for the Company to be EBITDA and cashflow positive in the next financial year.

Patrick Elliott

Chairman