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Phoslock Water Solutions Limited (ASX:PHK) 2010 Annual Report

This has been a significant year for many reasons. Phoslock has made major progress in raising its sales, maintaining a low cost base and expanding its areas of operations with a major move towards profitability. At the same time it has seen its shares trading at an all time low with no apparent justification. However investor confidence has remained high as shown by the post close of year capital raising.
 
Company Performance
Revenues increased by approx 80% compared with last year and there has been a 20% reduction in operational costs. While raw material costs are continuing to rise the margins have been generally maintained. Furthermore, the sales pipeline is being increased while at the same time prospects are being converted into actual sales.
 
The continued success in Europe has resulted in a larger forward sales pipeline with the long term results from monitoring showing the efficacy of the product. We are now operating in 12 different markets in Europe with continued high level of interest. The European Framework Directive is a major driver for eutrophication control and bioversity maintenance.
 
Our relationships with the technical centres such as the IDN centre in northern Germany has shown the value of using recognised regionalised expertise to both promote and investigate the use of the product. We will continue to use this strategy as we move into new markets albeit with local market variations on implementation.
 
The numbers of large applications has increased but each of these requires a long lead time and demonstration operations. We are presently working with clients on 9 major applications each in excess of 1,000 tonnes and some potentially as large as 10,000 tonnes.
 
The logistics of such operations are significant and we are engaging with our partners in each case to ensure that this can be achieved. The additional needs for financing these activities through establishing and maintaining an increased inventory will be a welcome challenge for the Board and shareholders.
 
China, North America and the South America have emerged in this last year as major potential new markets. Relationships with technical and advisory organisations have been established in each market.
 
We have successfully met the environmental requirements for applications in China and we are working to register the product for use in drinking water bodies in the USA. Applications in private water bodies in the USA do not have the same level of restrictions and these are our first targets. The mature market for lake and waterbody remediation with the increased awareness of eutrophication problems raises both opportunities and a need for caution in proceeding. The selection of well credentialed companies in the USA to work with will provide a sound basis for proceeding.
 
Canadahas given the approvals necessary to enable more and larger applications to take place to control eutrophication. We expect this market to expand rapidly in the coming years.
 
Re-treatment of water bodies is now occurring following the recognition of the benefi ts of Phoslock applications. These are occurring as a result of the initial caution about dosing is recognised and with a re-assessment of the phosphorus sources in the system. We are now seeing the repeat applications which deal with the additional P (phosphorus) inputs from natural or pollution sources. There are considerably fewer barriers to the second applications. This is a welcome sign of the acceptance and base revenue projects going forward.
 
Aquaculture has re-emerged as a potentially major market after some unsuccessful initial forays in this market. The future for Phoslock is going to mean an even greater focus on sales and marketing. We will announce some new initiatives in this area in the near future.
 
New Products
Your directors have recognised the need for further products in the area of water treatment. We have examined a number of opportunities for expanding our operations with companies and will continue to look for synergistic technologies.
 
In the short term, market reviews have shown that in addition to the existing product there is a major demand for new products for filtration of treated waters to remove phosphorus and for collection and recycling of phosphorus.
 
The issues of eutrophication as shown by major algal blooms in China, USA and Canada are becoming high priority for all governments. In some cases treatment of water bodies is being deferred until P source controls can be put in place.
 
We have been working with the University of Queensland to develop new products that will meet these criteria for capture and recycling which we expect to have been tested and in the marketplace by this time next year.
 
Our initial surveys indicate a fast potential uptake of these products in wastewater treatment, agricultural industries and manufacturing.
 
Communication
While operational cost containment is a major focus of the Board, the need to have a good communication, sales and marketing strategy will require a significant investment. The upgraded web site and the need for a dedicated page for the USA have resulted in the new image.
 
However we recognise that this is not enough in keeping investors and the market informed.

It is the Board’s intention that shareholder communications will markedly improve in the coming year with improved outputs from a specialist team of professionals.
 
Share Issues
The directors were encouraged by the shareholder support for the share issue in early September albeit at the lowest price of share issue to date.
 
This has been a successful turnaround year for Phoslock but the Board recognises that there are still major challenges to bring the company to profitability. We thank the shareholders for their understanding but recognise that the Company and Board will need to significantly outperform in this coming year to maintain their support. We believe the fundamentals of the technology linked with the new products being developed provide the basis for an improved outcome for the coming year.
 
Dr David Garman
Chairman
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