Peter R. Lewis AM CEO 13 December 2018

Hydrix Limited (ASX:HYD) Q2 FY19 Market Update: December 2018

A positive finish to 2018, and a solid outlook for 2019

Dear Shareholder, As 2018 draws to a close, I’d like to reflect on several important milestones that we have achieved during the year.

Highlights include:

• On track to meet or exceed all our stated company milestones for 1H FY19; • Secured an additional $2 million of new and follow-on project work since our market

update of 25 October 2018. This brings the potential total contract value of projects currently underway to over $22 million, representing an increase of 10% over the previous guidance that was provided in October 2018;

• Completed the integration of Hydrix as well as the successful rebranding of the whole Group to Hydrix, with a new ASX listing code: ‘HYD’; and

• Raised $2.8m in August 2018 and completed a restructuring and a reduction of the Group’s loan facilities.

A key milestone has been the consolidation of the Panorama Synergy business with Hydrix which we completed in early November. The Group’s rebranding as Hydrix has now been completed with enhancements to the website to encompass a range of new features including investor information and recent ASX releases.

As part of this consolidation, we are also in the process of refreshing our brand identity which will be launched in February 2019 with additional website updates expected during CY19.

Hydrix was originally established in 2002 to provide design services to Hewlett Packard’s Melbourne-based calculator division. Hydrix’s skills in developing solutions to complex problems for small hand-held devices, like calculators, were quickly sought out by local medical technology companies who were also seeking solutions to complex problems.

Hydrix has expanded its reputation for developing practical engineering solutions that satisfy increasingly complex medical regulations, particularly in high end USA FDA Class III medical devices. Hydrix now possesses a globally recognised skill set relating to the design and manufacturing of implantable and wearable devices including cardiac assist systems, which are in high global demand.

We recognised that the know-how from the many safety-critical products designed by the company was readily transferable to other industries including Mining and Defence which require similar levels of design rigour. A strong focus on these industries over the last year has seen steadily increasing demand for our safety systems design capability.

With 200+ sophisticated and innovative projects delivered since our foundation, Hydrix’s sixty-plus engineers and designers have combined to create a unique set of product development skills. Ranging across software, electronics, mechanical design, regulatory consulting, systems engineering and industrial design, our project teams come together to work with our clients to create unique, often world-first products – supporting our clients along the entire development journey from ‘idea to manufacture’.

With our focus on fast growing global markets including medical, defence and mining, we continue to grow our capacity and capability to service the increasing opportunities in these sectors. Since the Hydrix acquisition we have increased our engineering and design team by more than 25%, both locally and internationally, many with advanced qualifications including PhDs and Masters degrees. As our core markets continue to grow over the next 3-5 years, along with the demand for our services, we will continue to seek out the best designers and engineers globally to further expand our in-house capability.

Trading Update We have had a successful 1H FY19, with continued revenue growth, and reduced costs. We have achieved ongoing success in our target markets of Medical Technology, Critical Systems & Defence, and Consumer and Industrial.

Our core product and technology development services continue to deliver strong revenue growth, with sustained quarter-on-quarter increases since the start of the calendar year. We continue to expand our margins on new design projects, taking advantage of international client price expectations as well as seeking growth in local fee rates.

We expect to meet or exceed all stated Company milestones for 1H FY 19 which include:

1H FY 19 Target milestones and achievements

• Minimum 15% revenue growth compared to 2H FY18; o Expect revenue in 1H FY19 to increase by up to

40% on 2H FY18 o This would mean 1H FY19 revenue would be

broadly equivalent to the full year FY18 revenue of $5.7 million

• 15% increase in engineering services capacity o Increased the team by 25% to over 60 professional designers and engineers

• Secure three new significant and high-dollar value projects o Secured four significant, high-dollar value projects during the period including Rex

Bionics, Calon Cardio, Gyder Surgical, a smart water meter project, in addition to follow-on stages of work for substantial projects including Memphasys, Queensland Brain Institute and others

• Achieve a 20% reduction in cash used in operating activities in the December quarter against the September quarter. o Expect that we will achieve this milestone

We are also encouraged by the continued growth of our international business with 50% of our anticipated FY19 revenue expected to come from overseas customers.

Since our last market update dated 25 October 2018, we have secured an additional $2 million worth of new and follow-on project work, including: • A greater than $1 million project to design and supply digital water meters for initial field

trials for a major Australian water utility. Successful trial outcomes may lead to a follow-on project in late 2019 to design and supply a significant volume of the smart meter.

• An initial $75,000 fact-finding workshop in the UK with Calon Cardio who have retained

Hydrix to develop their next generation Ventricular Assist Device (VAD). The total program is expected to have a value of approximately A$5 million over a period of 18-24 months leading to a first-in-human trial of the device.

Hydrix is helping Rex Bionics develop a next generation power assisted robotic exoskeleton

Image: Rex Bionics

These project wins are incremental to existing operating projects, bringing the potential total contracted value of projects underway to more than $22 million, 10% above the previous guidance provided in October 2018 We are pleased to report that the Hydrix business continues to deliver solid growth and we anticipate achieving or exceeding all targets. Importantly, the aggregate potential value of contracts underway has continued to grow as we invest in global sales and marketing efforts. Overall, we are maintaining a strong focus on driving the business towards positive operating cash flow. Note: The aggregate potential contract value of both new and existing projects is subject to the Company and its customers meeting various milestones over the next 12-24 months.

Strategy Update

The Hydrix re-brand is a significant milestone for the group as we continue our “Buy, Build, Invest” strategy across our core Medical Technology (‘Medtech’), Critical Systems & Defence, and Consumer & Industrial markets. The Hydrix name has established significant brand recognition developed over 16 years in these markets. We expect the Hydrix brand to resonate well in the market as we continue our campaign to expand the business through growth of our technology consulting and product development services, strategic investments, acquisitions and leveraging our unique Intellectual Property (IP) Technology consulting and product development services

Our design services business, now in its 16th year of operation, is mature, stable and well regarded both locally and internationally. Our plan is to grow smarter, annuity revenue by adding higher margin services such as manufacturing and regulatory. These are expected to provide us with the opportunity to seek royalties as well as other higher value fees.

Hydrix continues to secure high value design and engineering projects in accordance with our strategic market focus. As noted in our September Quarterly Update, follow-on stages of work have been won for the following projects: • Assistive hip replacement technology • Safety tracking devices for mining industry

personnel • Technology for the treatment of Alzheimer’s

disease • Locomotive wireless communications system • Collision avoidance technology for mining trucks • Next generation IVF assistance technology

Hip replacement surgical guidance technology being developed for Gyder Surgical

Market growth: MedTech

An initiative for the 2018 calendar year was the growth of our Northern hemisphere presence through the appointment of US-based project management and business development expertise to better support international Medtech clients on a more localised basis, now implemented.

Our focus on high-end MedTech continues, with a particular emphasis on personalised and home healthcare solutions in the cardiac, neurological, ophthalmic, dental and hearing markets. More broadly, the overall home healthcare market is forecast to exceed USD$510bn by 2025. We are well positioned to secure additional business in a number of large and fast-growing healthcare markets.

Research by Evaluate MedTech Consensus indicates the MedTech market will achieve sales of USD$595 billion by 2024, growing at 5.6% CAGR per year from 2017. Neurology is again forecast to be the fastest growing device area along with cardiac and invitro diagnostics.

Worldwide Research & Development (‘R&D’) spend on MedTech continues to accelerate and is forecast to hit USD$40bn by 2024 at a 4.5% CAGR over the period. Companies such as Hydrix continue to benefit from the global R&D outsourcing trend which in 2018 accounted for USD$13bn pa.

Hydrix is now a global leader in cardiac technology development (Left Ventricular Assist Devices / “VADs”) with three concurrent VAD design projects underway, several projects completed and a robust pipeline in active negotiations in early 2019. Most pleasing is that all are international projects, spread across Europe and the USA where much of our MedTech pipeline of business exists.

Chronic heart failure is a leading cause of death in the developed world and is estimated to impact over 20 million people at any one time, with a five-year mortality rate of over 50%. The direct and indirect cost of heart failure in the US alone was estimated at USD$39.2 billion in 2010.

Credible estimates for the number of VAD devices required globally are between 260,000 and 650,000 per annum. Hydrix has strategically developed its Class III device development capabilities to address VAD market opportunities and beyond, positioning us as a global leader in the development and commercialisation of heart focussed technologies.

“We selected Hydrix after undertaking a global search for an appropriate development partner.

We concluded that the Hydrix team was the best fit for Calon in terms of VAD controller development experience, user experience, and innovation capabilities, in combination with their collaborative approach.”

Stuart McConchie, CEO Calon Cardio (previously COO Jarvik Heart, CEO Heartware)

Market growth: Critical Systems, Defence, Mining Hydrix continues to pursue opportunities in the defence industry, particularly around the design and development of critical systems – i.e. those systems that enable people and infrastructure to stay safe.

We have been invited to participate in a number of defence consortia to tender for certain government contracts. The defence industry typically has long lead times, given the large dollar value contracts funded by the tax payer, so we expect to be updated on project status in early 2019. Overall the Australian government intends to spend $250bn over the next 10 years on outsourced engineering services.

Opportunities also exist in other large critical systems markets including rail and utilities, and these are being actively pursued. With around $100bn being earmarked for Australian rail projects over the next 10 years, Hydrix’s design capabilities are expected to be in demand.

In the mining sector, we are building momentum, having undertaken a number of smaller innovation projects, while building awareness though account development.

Technology innovation projects in sectors improve process, improve operator compliance

Strategic Investments and Acquisitions

During the past six months we have analysed several potential acquisitions and continue to actively assess further opportunities. Hydrix continues to seek accretive acquisition targets, to either vertically integrate into the Hydrix business or add to a growing stable of IP.

In parallel with the above, we continue to mature our spectroscopy technology, exploring third-party spectroscopy collaboration applications across medical, defence and agricultural markets and will update the market as these opportunities mature.

As we secure projects, we continue to fill our pipeline with new leads and opportunities both locally and internationally, resulting in a deal pipeline of in excess of $50 million. I am personally very excited by what the future holds and look forward to a period of continued growth during CY19 through the implementation of several strategic initiatives. I would like to take this opportunity to thank you for your ongoing support and wish you and your families the very best for the festive season and beyond. Sincerely Peter R. Lewis AM

Chief Executive Officer