Legal Battles and Share Suspension Cloud Phoslock’s Recovery Prospects
Phoslock Environmental Technologies reported a widening cashflow deficit and disappointing sales in the December 2024 quarter, while legal challenges and share suspension continue to cloud its outlook.
- Cashflow deficit increased to $576,000 in December quarter
- Sales plummeted to 32 tonnes, down sharply from 1,237 tonnes in 2023
- Ongoing legal investigations and class actions driving significant legal costs
- R&D resumed in China with promising new lanthanum modified bentonite products
- Shares remain suspended pending release of financial statements
Financial Performance and Cashflow
Phoslock Environmental Technologies Limited (ASX: PET) disclosed a worsening cashflow deficit of $576,000 for the December 2024 quarter, up from $357,000 in the prior quarter. This increase was primarily driven by a steep decline in customer receipts, which halved to $487,000 from $940,000 in September. Operating cash outflows remained elevated at $1.1 million, although slightly improved due to reduced legal expenses.
Despite the deficit, the company maintained a robust cash position of $7.9 million at quarter-end, supported by a $509,000 foreign exchange gain linked to the weakening Australian dollar against the US dollar. This cash buffer provides an estimated 14 quarters of funding at current operating cash burn rates, offering some runway for the company to navigate its challenges.
Sales and Market Dynamics
Sales volumes remained dismal, with only 32 tonnes sold during the quarter, predominantly in European markets. This brought total sales for 2024 to 227 tonnes, a dramatic fall from 1,237 tonnes sold in 2023. The previous year’s figures had been bolstered by a large 903-tonne shipment to Brazilian distributor Hydro Science and 334 tonnes across other markets.
Inventory levels remain high, with 2,384 tonnes on hand at the end of December, including significant stockpiles in China (1,443 tonnes) and Belgium (582 tonnes). The company is banking on a rebound in sales, citing early 2025 orders such as a pending 105-tonne purchase by Hydro Science and 45 tonnes already sold in Europe.
Research & Development and Product Innovation
Phoslock has resumed research and development activities in China after a five-year pause, focusing on three new lanthanum modified bentonite (LMB) products. Notably, one new product promises comparable efficacy to Phoslock at a significantly reduced production cost, while the other two offer enhanced efficacy at similar costs. A pilot plant is operational, with samples dispatched globally and patent applications underway. This innovation drive could be pivotal in revitalising the company’s competitive edge.
Corporate and Legal Challenges
The company’s shares remain suspended on the ASX, pending the release of financial statements for the half and full year ending June and December 2024. Meanwhile, Phoslock faces ongoing investigations by the Australian Federal Police into alleged past misconduct by former officers, although no new correspondence was reported this quarter.
Additionally, two separate class actions are progressing, led by law firms Levitt Robinson and the Banton Group, targeting historical events. The Levitt Robinson case is in the document discovery phase, while the Banton Group has filed claims against the company, former officers, and auditor KPMG. These legal proceedings are generating materially significant legal fees, further straining the company’s finances.
Outlook and Market Positioning
Phoslock’s appointment of The Orion Companies as exclusive US distributors signals a strategic push to boost sales in North America. The company expects a sharp increase in sales volumes in the March 2025 quarter, contingent on pending orders and market uptake of its new products. However, the shadow of legal uncertainties and the prolonged share suspension continue to weigh heavily on investor confidence.
Bottom Line?
Phoslock’s upcoming financial disclosures and legal developments will be critical in determining whether its innovation and market strategies can reverse its recent decline.
Questions in the middle?
- Will Phoslock’s new lanthanum modified bentonite products gain sufficient market traction to drive sales recovery?
- How will ongoing legal proceedings and associated costs impact the company’s financial stability and investor sentiment?
- When will the ASX lift the suspension on Phoslock shares, and how might this affect liquidity and valuation?