PHOSLOCK ENVIRONMENTAL TECHNOLOGIES LIMITED — Annual Report 2017

Aug 24, 2017

Phoslock Water Solutions Limited and Controlled Entities

A.B.N. 88 099 555 290

APPENDIX 4E PRELIMINARY FINAL REPORT FOR THE YEAR ENDED 30 JUNE 2017

Previous Corresponding Reporting Period

1 July 2015 to 30 June 2016

Results for announcement to the market:

Revenues from ordinary activities up 92% to Earnings(loss) before depreciation, amortisation, tax and interest (EBITDA) up 10% to Loss from ordinary activities after tax attributable to members (NPAT) improved 21% to Net Loss for the period attributable to members improved 20% to	$A'000
	4,227 (1,542) (1,823) (1,834)

Brief explanation of any figures reported above necessay to enable the figures to be understood.

Detailed discussion on Results contained in Director's Report

The company does not propose to pay any dividends for the year ended 30 June 2017

Details of entities over which control has been gained or lost.

Phoslock (Changxing) Water Solutions Ltd was incorporated on 17 November, 2016. Phoslock Beijing Ecological Engineering Techology Co., Ltd was incorporated on 6 June, 2017

Annual Meeting

The annual meeting will be held as follows: Place: Westin Hotel, Sydney Date: Thursday 23th November, 2017 Time: 10.00am

Approximate date the annual report will be available: 10th October, 2017

NTA Backing	Current	Previous
	Period	Period
Net tangible asset backing per ordinary share (cents per share)	0.47	0.18

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Mr Robert Schuitema Company Secretary Dated this 25th day of August 2017

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Phoslock Water Solutions Limited and Controlled Entities

A.B.N. 88 099 555 290

CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290 CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

I N D E X

	PAGE
Director's Report	4
Auditors' Independence Declaration	9
Consolidated Statement of Profit or Loss And Other Comprehensive
Income	10
Consolidated Statement of Financial Position	11
Consolidated Statement of Changes in Equity	12
Consolidated Statement of Cash Flows	13
Notes to the Consolidated Financial Statements	14
Director's Declaration	36
Independent Auditor's Report	37

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290 DIRECTOR'S REPORT

Your directors present their report on the Company and its controlled entities (“the consolidated entity” or "group") for the financial year ended 30th June, 2017.

Directors

The names of directors in office at anytime during the year or since the end of the year are:

Mr Laurence Freedman AM Mr Robert Schuitema The Hon. Pam Allan Mr Zhigang Zhang (appointed 13 June, 2017)

Directors have been in office since the start of the financial year to the date of this report unless otherwise stated.

Company Secretary

Mr Robert Schuitema – Chartered Accountant, Bachelor of Commerce & Administration, Member of NZ Investment Analysts.

Operating and Financial Review

Principal Activities

The principal activities of the consolidated entity during the financial year was the sale and marketing of the patented product "Phoslock" to a range of existing and new customers in over 20 countries. The completion of the Changxing manufacturing facility will allow the company to control the manufacturing of Phoslock and other water treatment products. The formation of Phoslock Beijing in June 2017 will significantly broaden the business base to include design, engineering and project implimentation services for lake, river and canal projects.

Operating Results

The consolidated loss of the consolidated entity after providing for income tax and non-controlling interests amounted to ($1,822,613) (2016:($2,313,899). Revenue increased by 93% to $4,227,307 (2016; $2,196,242). Earnings before Interest, Tax & Depreciation for 2017 was ($1,542,207) versus ($1,396,655) for 2016.

The break-down of the group operating performance was:

The break-down of the group operating performance was:
FY2016-17	Revenue	Operating Performance
International Operations	$4,019,887	$242,337
China Operations	$207,419	(1,107,339)
	------------------	------------------
	$4,227,306	(865,002)
Finance Charges		(225,222)
Depreciation		(56,678)
Corporate Charges		(675,711)
		------------------
Loss after Tax		(1,822,613)
The financial performance of the Group for FY2017 was a significant improvement over FY2016 with revenue 92% higher. Net loss for the year was 21% lower than FY2016. The FY2017
accounts reflect a large investment in the Chinese business which by financial year end had produced the Phoslock Beijing sales, marketing and project implementation team with several
Operating expenses excluding option expenses and depreciation and amortisation, and finance cost		for the year were $3,250,069 (2016:$2,286,985) an increase of $963,084. The major
expense increases were employee expenses, occupancy costs and general administration expeses related to the Shanghai sales & marketing office and setting up of the Changxing
manufacturing operation. Total employment costs of PWS senior executives (excluding Chinese executives) plus PWS board increase by $79,000 in FY2017.

The net assets of the consolidated entity was $1,935,669 as of 30 June 2017, a significant improvement on the net assets of $648,342 as of 30 June 2016. The increase in net assets is mainly as a result of a placement to senior Chinese water industry executives, conversion of $0.65 million Convertible Notes into PHK shares, and conversion of unlisted Options.

Dividends Paid or Recommended

No dividends have been paid or declared for payment in relation to the financial year ended 30 June 2017 (2016:$Nil).

Review of Operations

Revenues recorded for the year of $4,227,307 represented a 92% increase over the prior year. The major sales areas were Brazil, North America, Europe and Australia along with access to Australian Government research and development tax concessions. PWS has been manufacturing in China for a number of years but its sales of Phoslock products has been limited, as it has not found the right sales partner. After significant due diligence, PWS signed a transformational agreement in early May, 2017 with BHZQ Environmental Engineering Technology Company Limited. BHZQ is 70% owned by Beijing Enterprises Water Group (BEWG), a Hong Kong listed company with an A$9 billion market capitalisation. BEWG is the largest water treatment company in Asia and of the top ten water companies in the world.

Phoslock Beijing Engineering Environmental Technology Company Limited (100% PWS) was formed with the assistance of senior Chinese water executives. Phoslock Beijing has acquired a team of experienced engineers and project implementation experts that can undertake end-to-end design, engineering, project site works, application and maintenance of water remediation in rivers, canals, wetlands and lakes across China using PWS traditional material (Phoslock) and a range of other remediation products (zeolites, bacteria and other products). . The Phoslock Beijing office is now fully functional with 15 professional employees. This is a transformation of the Group’s current business and allows the Group to undertake a broader array of projects, including services, materials and construction. On 25 July, 2017 the PWS Board advised shareholders that forecast sales for FY 2017-18 were $18.5 million, up 460% on the previous corresponding period. These forecasts are based on current orders and projects under negotiation or in a very advanced stage. The forecast sales will come from a combination of materials, including traditional Phoslock, zeolites and new bacteria products as well as additional in-house engineering services. PWS’s International business (excluding China) recorded sales of $4.0 million, 100% higher than FY2016-17.

66% of sales came via the Company's Brazilian licensee. HidroScience participated as a member of a consortium to undertake work on the restoration of Pampulha lake. The Pampulha lake contract is forecast to be completed by early 2018. Further in lake work may be required to maintain Pampulha Lake's water quality. 16% of sales came from the European/UK region, where 66 lake projects have been completed since early 2007. application results. A number of case studies and video clips can be seen on www.phoslock.com.au. Phoslock Europe is currently preparing for a very busy FY2017-18 with projects in excess of $1.5 million expected to be completed by April 2018.

Continued progress was made during the year in the development of the Phoslock business in North America, in both Canada and the United States. Sales for FY2016-17 were 10% of total group sales. Our US licensee, SePRO Corporation, has dedicated significant resources to establish Phoslock in this market since taking over the license in 2011. Two projects totalling $1.0 million are being finalised for application/sale in the first half of FY2017-18, with two Large projects (each in the $2-4 million range) under consideration.

The construction of a wholly owned and operated manufacturing facility in China has been under consideration for some time. With increasing sales over the last 18 months, the criteria set by the PWS Board for a PWS operated plant was met. After an extensive evaluation of industrial parks within 150 kilometre radius of Shanghai, Changxing was selected. The Changxing Economic Development Board has provided a range of rebates and tax incentives covering the first five years of operations. A number of the incentives are linked to sales revenue from the manufacturing facility. The total value of incentives that could be paid to PWS Changxing over the first five years is approx $1.4 million including $350,000 in the first year of operation. None of these benefits have been included in the FY2017-18 financial accounts.

The manufacturing facility will have an initial production capacity of 15,000 tons per annum of Phoslock products, and can be expanded to 45,000 tons per annum with the addition of extra equipment. The manufacturing facitiy is 6,000 square metres and has significant room for the Phoslock operation, manufacturing and blending of other materials and storage areas for raw materials and inventories.The new factory operates under strict EPA requirments including no discharge of water and air pollutants. All waste water is treated in-house in a state of the art waste water treatment facility.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290 DIRECTOR'S REPORT

Financial Position

The net assets of the consolidated entity was $1,935,670 as of 30 June 2017, an improvement on $648,342 as of 30 June 2016. The increase in net assets is mainly as a result of balance sheet restructuring including equity raising, conversion of Convertible Notes into PHK shares and repayment of related party loans. Improved business activities led to increased inventory holdings, receivables and plant & equipment.

Capital Management

During FY2017 the Company undertook a $2.1 million Share Placements to a group of senior Chinese water industry executives. In addition, the conversion of $0.65m of Convertible Notes into PHK shares and the exercise of $0.3 million of unlisted Options resulted in an improvement in the balance sheet. The Company's net assets improved to $1.9 million as at 30 June, 2017. The Company's Gearing Ratio as at 30 June, 2017 (including trade creditors) was 31% (2016: 27%).

Future Developments, Prospects and Business Strategies

To improve the consolidated entity's earnings performance and maximize shareholder value, the following initiatives are in progress:

(i)	Diversifying PWS business base by adding a design, engineering and project implementation team which will not only be a new source of revenue but increase sales of Phoslock and other materials in these projects;
(ii)	Rapid expansion of business in China through the new Phoslock Beijing office;
(iii)	Large one off projects in China, North & Southern America, and Europe;
(iv)	Lower production and distribution costs of Phoslock and other materials through the new Changxing manufacturing operation;
(v)	Evaluation and development of other water treatment products via licensing arrangements or acquisition to add to the group's product range.

Significant Changes in State of Affairs

During FY2017 the Company issued $3.0m of new equity via Share Placement, conversion of Convertible Notes and Unlisted Options. At the end of the financial year, the Group establised a sales & marketing and engineering group in Beijing, along with an experienced team of 15 water industry specialists. Phoslock Beijing commenced formal operations on 1 July, 2017. The impact of this division to the Group is expected to be significant. The Company also established a large manufacturing operation in Changxing (150 km inland from Shanghai). The manufacturing operation is expected to significantly increase production and lower production costs over time.

Events after the Reporting Period

No significant events have occurred after the Reporting Period.

Environmental Issues The consolidated entity’s operations are subject to environmental regulation of the territories in which it operates. Details of the consolidated entity’s performance in relation to environmental regulation are as follows:

The Company commits to comply with all regulations governing the use and application of its water technology products both in Australia and internationally. In Australia, Phoslock is imported from a contract manufacturing operation in China that has received NICNAS certification. The certification is renewed annually.

Phoslock has been awarded the North American Drinking Water certification (NSF/ANSI 60) since 2011. The certification is also renewed annually.

Phoslock has been certified by Chinese Research Academy of Environmental Sciences (CRAES). Phoslock is classified as a general environmental substance. It is neither hazardous nor harmful to the environment. Phoslock has low risk to the hydro ecological system.

Internationally, the group is committed to comply with all local regulatory authority requirements.

The directors are not aware of any breaches of environmental regulations by the consolidated entity in any of the regions in which the company operates.

Information on Directors

Mr Laurence Freedman AM	Chairman (Non- executive)
Qualifications	CPA, MAusIMM
Experience	Board member since 20 October 2010.
	Mr Freedman has a long history and involvement with listed and private companies as both a major shareholder and also as non-executive director. He
	founded the EquitiLink Group, building it into a global investment management corporation , which he sold with his partner in 2000. He has held Chairman
	and Director roles in many international companies. He currently manages private investments in shares, property and fixed interest investments.
	Mr Freedman is Chairman of the Freedman Foundation, a philantropic enterprise, in Australia.
	Mr Freedman was previously Chairman of ASX listed companies KalNorth Gold Mines Ltd and Inca Copper & Gold Ltd.
	88,008,535 Ordinary Shares in Phoslock Water Solutions Ltd via his related company, Link Traders (Aust) Pty Ltd and related companies,
Interest in Shares & Options	and related party family members.
Special Responsibilities	Mr Freedman is Chairman of the Remuneration Committee and a Member of the Audit, Nomination and Compliance Committee.
Mr Robert Schuitema	Managing Director (Executive)
Qualifications	Chartered Accountant, BCA, INFINZ
Experience	Board member since April 2005.
	Former Managing Director of investment bank Chase Manhattan and later JP Morgan Chase responsible for the bank's mining, metals and
	project finance business in Australia and the Asia Pacific region.
	Mr Schuitema was previously a Director of ASX listed companies KalNorth Gold Mines Ltd, Electo Optical Systems Ltd and Inca Copper &
	Gold Ltd.
Interest in Shares & Options	14,495,948 Ordinary Shares in Phoslock Water Solutions Ltd via his related company, Sail Ahead Pty Ltd and related party family members.
	5,000,000 Options over Phoslock Water Solutions Ltd shares.
Special Responsibilities	Mr Schuitema is a Member of the Audit, Nomination and Compliance Committee.
The Hon. Pam Allan	Director (Non- executive)
Qualifications	B Arts (Hons) Dip.Ed. University of Sydney, Fellow at the Graduate School of Environment, Macquarie University.
Experience	Board member since 2007.
	18 years membership of the NSW parliament including 5 years as Minister for the Environment.
Interest in Shares & Options	485,000 Ordinary Shares in Phoslock Water Solutions Ltd.
Special Responsibilities	Ms Allan is a Chairperson of the Audit and Compliance Committee and a Member of the Remuneration Committee
Mr Zhigang Zhang	Director (Non- executive)
Experience	Board member since June 2017.
	Mr Zhang is a senior executive of a subsidiary of Beijing Enterprises Water Group (HK Listed 371), the largest water group in China. Mr Zhang has
	worked in the water remediation and water treatment industry in China and overseas for over 30 years.
Interest in Shares & Options	30,000,000 Ordinary Shares and 30,000,000 Unlisted Options in Phoslock Water Solutions Ltd held directly and indirectly.
Special Responsibilities	Mr Zhang is a Member of the Remuneration Committee and the Audit, Nomination and Compliance Committee.
This report details the nature and amount of remuneration for each director and key management personnel of Phoslock Water Solutions Limited.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290 DIRECTOR'S REPORT

Remuneration Policy

The remuneration policy of Phoslock Water Solutions Limited has been designed to align director and executive objectives with shareholder and business objectives by providing a fixed remuneration component and offering bonus payments based on the consolidated entity’s financial results. The board of Phoslock Water Solutions Limited believes the remuneration policy to be appropriate and effective in its ability to attract and retain the high quality executives and directors to run and manage the consolidated entity, as well as create goal congruence between directors, executives and shareholders.

The board’s policy for determining the nature and amount of remuneration for board members and senior executives of the consolidated entity is as follows:

The remuneration policy, setting the terms and conditions for the executive directors and other senior executives, was developed by the remuneration committee. The remuneration committee currently comprises of only non-executive directors. The Company has adopted the ASX recommendation for the remuneration committee to comprise only non-executive directors.

All executives receive a base salary (which is based on factors such as length of service and experience), superannuation and share options or a bonus (if certain milestones are met).The remuneration committee reviews executive packages annually by reference to the consolidated entity’s performance, executive performance and comparable information from industry sectors and other listed companies in similar industries. Executives and directors do not receive any other retirement benefits.

All remuneration paid to key management personnel is measured at cost to the company and expensed. Bonuses totalling $60,000 were paid to three PWS executive during FY2016/17. 7.25 million "out of the money" performance options were issued to the Key Management Personnel during 2017 (2016: 10.0 million).

The board's policy is to remunerate non-executive directors by reference to market rates for comparable companies, time commitment, responsibilities and experience relevant to the industry. The remuneration committee determines payments to non-executive directors and reviews their remuneration annually based on market practice, duties and accountability.

The maximum aggregate amount of fees that can be paid to non-executive directors is subject to approval by share holders at the Annual General Meeting. The current aggregate maximum sum available for remuneration of non-executive directors is set at $200,000 per year (approved at the 2004 Annual General Meeting). With the number of non-executive directors increasing from two to three and potentially further non-executive directors will be added to the Board, Shareholders will be asked to increase the aggregate amount of nonexecutive director fees at the 2017 Annual General Meeting. Fees for non-executive directors are not linked to the performance of the consolidated entity. However, to align directors’ interests with shareholder interests, the directors are encouraged to hold shares in the company and are able to participate in share placements on the same terms as other investors subscribing for shares.

The aggregate of non-executive director fees (including superannuation) for 2017 was $129,258 (2016: $110,012). As at 30 June 2017, the Board comprised three non- executive directors and one executive director. The four directors,directly and indirectly, held 132,989,483 (2016: 83,293,039) ordinary fully paid shares in the company as at 30 June, 2017 which comprised 32.2% (2016: 22.8%) of the total issued shares of the company.

Key Management Personnel Remuneration

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Post
Short-Term Employment Benefits Employment Benefits Long Term Benefits Share Based Payments Total Performance Related
Salary, Fees & Non- Bonus Allowance Superannuation Accrued Long Shares &
Commission Monetary Service Leave Options
30 June 2017 $ $ $ $ $ $ $ $ %
Mr Robert Schuitema 206,032 10,000 20,000 53,484 34,598 11,229 2,223 337,566 6.5%
The Hon. Pam Allan 55,003 5,501 - 60,504 0.0%
Mr Laurence Freedman 62,503 6,251 - 68,754 0.0%
Mr Zhigang Zhang (i) - - 0.0%
323,538 10,000 20,000 53,484 46,350 11,229 2,223 466,824 4.7%
Specified executives
Mr Nigel Traill 159,571 13,500 20,000 19,163 1,268 1,482 214,984 9.9%
Mr Andrew Winks 126,496 13,500 20,000 12,000 15,998 3,066 1,482 192,542 11.2%
Dr Sarah Groves 86,538 - - - 8,654 2,629 185 98,006 0.0%
Zhongming Hong 36,400 - - 81,600 24,000 - - 142,000 0.0%
Dr Xingyuan Wang - - - 42,000 12,000 - - 54,000 0.0%
409,005 27,000 40,000 135,600 79,815 6,963 3,149 701,532 6.1%
Total 732,543 37,000 60,000 189,084 126,165 18,192 5,372 1,168,356 5.6%
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(i) Mr Zhang was appointed a non executive director on 13 June, 2017

30 June 2016 Mr Robert Schuitema The Hon. Pam Allan Mr Laurence Freedman Specified executives Mr Nigel Traill Mr Andrew Winks Dr Sarah Groves Zhongming Hong (i) Dr Xingyuan Wang (ii) Total

Post Employment Benefits Long Term Benefits Share Based Payments Total Performance Related Salary, Fees & Commission Non- Monetary Bonus Allowances Superannuation Accrued Long Service Leave Shares & Options $ $ $ $ $ $ $ $ % 157,000 33,500 - 44,739 35,500 2,355 26,173 299,267 8.7% 50,004 - - - 5,002 - - 55,006 50,004 - - - 5,002 - - 55,006 257,008 33,500 - 44,739 45,504 2,355 26,173 409,279 6.4% 162,989 1,500 - - 16,000 4,997 26,173 211,659 12.4% 111,833 1,500 - - 10,708 23,269 26,173 173,483 15.1% 78,750 - - - 7,500 326 13,087 99,663 13.1% 32,000 - - 40,800 12,000 2,965 26,173 113,938 23.0% - - - 17,517 - - 13,087 30,604 42.8% 385,572 3,000 - 58,317 46,208 31,557 104,693 629,347 16.6% 642,580 36,500 - 103,056 91,712 33,912 130,866 1,038,626 12.6% Short-Term Employment Benefits

(i) Mr Hong commenced employment on 21 January, 2016

(ii) Dr Wang commenced employment on 27 April, 2016

Remuneration

The executive director and two executives were paid bonuses totalling $60,000 during the year (2016:$0) "Out of the money" Performance Options were issued to the Managing Director and specified executives as part of the Company's incentive and retention programme. The Performance Options have a performance criteria of $25 million of sales in the period 10 April 2017 to 30 June 2019. These options were allocated on a performance basis. The remuneration committee will consider future bonuses to encourage achievement of specific goals that have been given a high level of importance in relation to the future growth and profitability of the consolidated entity.

"Out of the money" Options were issued to 6 Key Management Personnel.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290 DIRECTOR'S REPORT

Shares Issued as Part of Remuneration for the Year Ended 30 June 2017

The movement during the year in the number of ordinary shares in Phoslock Water Solutions Limited held, directly, indirectly or beneficially, by each key management personnel, including their related parties is as follows:

Key Management Personnel

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30 June 2017
Balance Placement Con Notes Options On Market On Market Balance
1.07.2016 Exercised Exercised Purchases Sales 30.06.2017
Mr Laurence Freedman 68,312,091 - 14,130,435 5,000,000 566,009 - 88,008,535
Mr Robert Schuitema 14,495,948 - - - - - 14,495,948
The Hon. Pam Allan 485,000 - - - - - 485,000
Mr Zhigang Zhang 0 30,000,000 - - - - 30,000,000
Mr Nigel Traill 3,769,360 - - - - - 3,769,360
Dr Sarah Groves 516,996 - - - - - 516,996
Mr Andrew Winks 640,373 - - - - - 640,373
Zhongming Hong 12,265,500 - - - - (865,500) 11,400,000
Dr Xingyuan Wang 1,900,000 - - - 400,000 (1,100,000) 1,200,000
102,385,268 30,000,000 14,130,435 5,000,000 966,009 (1,965,500) 150,516,212
Total % PWS Shareholding 28.2% 36.4%
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Options Issued as Part of Remuneration for the Year Ended 30 June 2017

The movement during the year in the number of options over ordinary shares in Phoslock Water Solutions Limited held, directly, indirectly or beneficially, by each key management personnel, including their related parties is as follows:

Mr Laurence Freedman Mr Robert Schuitema The Hon. Pam Allan Mr Nigel Traill Dr Sarah Groves Mr Andrew Winks Zhongming Hong Dr Xingyuan Wang

Balance 1.07.2016 Issue Date Options Acquired Options Lapsed Balance 30.06.2017 Total Vested 30.06.2017 Total Exercisable 30.06.2017 Total Unexercisable 30.06.2017 No. No. No. No. No. No. No. - - - - - - - - 2,000,000 10 April 17 3,000,000 5,000,000 - - 5,000,000 - - - - - - - - 2,000,000 10 April 17 2,000,000 - 4,000,000 - - 4,000,000 1,000,000 10 April 17 250,000 - 1,250,000 - - 1,250,000 2,000,000 10 April 17 2,000,000 - 4,000,000 - - 4,000,000 7,000,000 - - - 7,000,000 5,000,000 5,000,000 2,000,000 1,000,000 - - - 1,000,000 - - 1,000,000 15,000,000 7,250,000 - 22,250,000 5,000,000 5,000,000 17,250,000

The movement during the period in the number of options over ordinary shares in Phoslock Water Solutions Limited issue to employees and consultants is as follows:

Outstanding at the beginning of the year * Options issued during the year Vesting conditions not met Vested options not exercised Outstanding at year end Exercisable at year end	Number of options Weighted Average Exercise price Number of options Weighted Average Exercise price 18,600,000 $0.082 5,000,000 $0.100 35,000,000 $0.105 18,600,000 $0.082 - $0.000 (5,000,000) $0.100 - - 53,600,000 $0.097 18,600,000 $0.082 5,000,000 $0.060 5,000,000 $0.060 2017 2016

• Includes options issued to Employees and Consultants

The 53,600,000 options were outstanding at 30 June 2017 had a weighted average exercise price of $0.097 and a weighted average expected life of 1.7 years. The average exercise price for the options outstanding at 30 June 2016 was $0.082

Options do not entitle the holder to participate in any share issue of the Company, nor do they carry any voting rights or rights to dividends. Details regarding the group's share-based payment schemes are included in Note 24.

For options to convert into ordinary shares, the vesting terms of the option must be met, then the option holder must pay the option price to the Company. Once this has been done, one option will convert into one fully paid ordinary share.

Other Equity related Key Management Personnel transactions

On 31 May, 2017 Link Traders (Aust) Pty Ltd, a related party of the Chairman, Laurence Freedman converted $650,000 of Convertible Notes into 14.1 million PWS shares.

Loans to Key Management Personnel

Details of loans made to directors of Phoslock Water Solutions Limited and other key management personnel of the group, including related entities are as follows:

Aggregates for Key Management Personnel

Loans advanced Loans repayments received (offset against salary) Balance at the beginning of the year Balance at the end of the year	2017 $ 37,000 - (37,000) -	2016 $ 28,500 45,000 (36,500) 37,000

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Phoslock Water Solutions Limited and Controlled Entities

A.B.N. 88 099 555 290 DIRECTOR'S REPORT

Loans advance in FY2016 were to employees to participate in Share Purchase Plan in May 2016. All employee loans have been repaid.

No interest is charged in respect of any of the loans to directors and key management personnel. The loans were unsecured and repayable over a period of up to 10 months by way of monthly salary deductions.

No new loan were made to any key management personnel during FY2017.

Other Transactions with Key Management Personnel and/or their Related Parties

Transactions with Key Management Personnel and/or Related Parties are detailed in Note 25. These transactions were conducted on terms no more favourable than those reasonably expected under arm's length dealings with unrelated parties.

Employment Contracts of Directors and Senior Executives

The employment conditions of the Managing Director and executives are formalised in contracts of employment or letters of appointment.

Employment contracts for senior executives stipulate a range of one to three month resignation periods (six months for the Managing Director) and up to twelve months if there is a change in control of the Company . The Company may terminate a contract of employment without cause by providing written notice or making payment in lieu of notice for a period equivalent to the resignation period. Termination payments are generally not payable on resignation or dismissal for serious misconduct. In the instance of serious misconduct the Company can terminate employment at any time. Directors and Key Management Personnel (and their related parties) hold 150,516,212 (2016: 102,385,268) and 22,500,000 options outstanding as at 30 June 2017 (2016: 15,000,000). Most of the options have performance criteria which must be met before the options can vest. There were no termination payments during the year (2016: nil).

Meetings of Directors

During the financial year, 13 meetings of directors (including committees of directors) were held. Attendances by each director during the year were:

	Directors' Meetings	Directors' Meetings			Committee Meetings
			Audit & Compliance			Remuneration
	Number	Number	Number Eligible	Number		Number	Number
	Eligible to	attended	to attend	attended		Eligible to	attended
	attend					attend
Mr Laurence Freedman		9 8	2	2			2 2
Mr Robert Schuitema		9 9	2	2			- -
The Hon. Pam Allan		9 8	2	2			2 2
Mr Zhigang Zhang		- -	-	-	-		- -

Indemnifying Officers or Auditor

During or since the end of the financial year the Company has given an indemnity or entered an agreement to indemnify, or paid or agreed to pay insurance premiums as follows:

The Company has paid premiums totalling $39,793 (2016: $31,539) to insure all directors and executives against liabilities for costs and expenses incurred by them in defending any legal proceedings arising out of their conduct while acting in the capacity of director or officer of the Company, other than conduct involving a wilful breach of duty in relation to the Company. Neither indemnities nor agreements to indemnify exist in relation to the Company's auditor.

Proceedings on Behalf of Company

No person has applied for leave of Court to bring proceedings on behalf of the Company or intervene in any proceedings to which the Company is a party for the purpose of taking responsibility on behalf of the Company for all or any part of those proceeding. The Company was not a party to any such proceedings during the year.

Non-Audit Services

No non-audit services were provided to the Company by the company's auditors during the reporting period.

Auditor’s Independence Declaration

The lead auditor’s independence declaration in accordance with Section 307C of the Corporations Act 2001, for the year ended 30th June 2017 has been received and can be found on page 9 of the Financial Report.

Signed in accordance with a resolution of the Board of Directors of Phoslock Water Solutions Limited

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Mr Robert Schuitema	Hon Pam Allan
Managing Director	Non-Executive Director - Chairman of Audit Committee
Dated at Sydney, 25th August 2017	Dated at Sydney, 25th August 2017

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Auditor’s Independence Declaration

under Section 307C of the Corporations Act 2001

To the directors of Phoslock Water Solutions Limited and Controlled Entities

I declare that, to the best of my knowledge and belief, in relation to the audit for the financial year ended 30 June 2017, there have been:

• no contraventions of the auditor independence requirements as set out in the Corporations Act 2001 in

• (i) relation to the audit; and

(ii) no contraventions of any applicable code of professional conduct in relation to the audit.

4th Floor 379-383 Pitt Street Sydney NSW 2000

Dated: 25 August 2017

W W Vick & Co

Chartered Accountants

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Phillip Jones - Partner

Fayworth House, Suite 403, 4th Floor, 379-383 Pitt Street, Sydney, NSW 2000 PO Box 20037, World Square, NSW 2002

Phone: 02 9266 0881 Fax: 02 9266 0886

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Liability limited by scheme approved under Professional Standards Legislation

9

Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDED 30 JUNE 2017

NOTE Sales revenue 2 Cost of sales Gross profit Other revenue 2 Distribution expenses Marketing expenses Occupancy expenses Administrative expenses Employee benefit expenses (excluding options expenses) 3 Employee benefit expenses- options expenses Depreciation and amortisation 13 Finance costs 3 Options expenses - non employees LOSS BEFORE INCOME TAX Income tax expense/ (revenue) 4 LOSS FOR THE YEAR 3 OTHER COMPREHENSIVE INCOME specific conditions are met: TOTAL COMPREHENSIVE LOSS FOR THE YEAR Profit (Loss) for the year attributable to: - Owners of parent entity - non-controlling interest Total loss for the year Total comprehensive loss for the year attributable to: - Owners of parent entity - non-controlling interest Total comprehensive loss for the year Earnings per share Basic earnings per share (cents per share) 8 Diluted earnings per share (cents per share) 8 Exchange differences arising on translation of foreign controlled entities Items that will be reclassified subsequently to profit or loss when

2017 2016 $ $ 3,825,406 1,730,649 (2,482,143) (1,101,367) 1,343,263 629,282 401,901 465,593 (44,407) (42,787) (333,800) (278,467) (188,070) (106,667) (1,022,673) (762,586) (1,661,118) (1,096,478) (20,991) (177,978) (56,679) (64,984) (225,222) (853,823) (14,817) (25,004) (1,822,613) (2,313,899) - - (1,822,613) (2,313,899) (11,868) 28,552 (1,834,481) (2,285,347) (1,867,295) (2,323,609) 44,682 9,710 (1,822,613) (2,313,899) (1,879,163) (2,295,057) 44,682 9,710 (1,834,481) (2,285,347) (0.50) (0.87) (0.46) (0.78)

The accompanying notes form part of these consolidated financial statements

10

Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290 CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2017

NOTE CURRENT ASSETS Cash and cash equivalents 9 Trade and other receivables 10 Inventories 11 Other assets 15 TOTAL CURRENT ASSETS NON-CURRENT ASSETS Financial assets 9(a) Plant and equipment 13 Intangible assets 14 TOTAL NON-CURRENT ASSETS TOTAL ASSETS CURRENT LIABILITIES Trade and other payables 16 Financial liabilities 17 (a) Other liabilities 5 Short term provisions 18 TOTAL CURRENT LIABILITIES NON-CURRENT LIABILITIES Long term provisions 18 TOTAL NON-CURRENT LIABILITIES TOTAL LIABILITIES NET ASSETS/(LIABILITIES) EQUITY Issued capital 19 Reserves 20 Accumulated loss Parent interest Non-controlling interest TOTAL EQUITY

2017 2016 $ $ 1,234,243 1,306,865 1,172,751 692,109 897,336 498,830 141,601 97,890 3,445,931 2,595,694 25,000 25,000 1,038,093 56,687 - - 1,063,093 81,687 4,509,024 2,677,381 330,443 597,758 1,792,241 943,549 89,830 89,830 352,134 390,330 2,564,648 2,021,467 8,707 7,572 8,707 7,572 2,573,355 2,029,039 1,935,669 648,342 41,551,112 38,465,112 405,896 411,341 (39,821,703) (37,983,793) 2,135,304 892,660 (199,636) (244,318) 1,935,669 648,342

The accompanying notes form part of these consolidated financial statements

11

Phoslock Water Solutions Limited and Controlled Entities

A.B.N. 88 099 555 290

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 30 JUNE 2017

Balance at 1 July 2015 Total comprehensive income Loss for the year Other comprehensive income/ (loss) Transfer to reserves Total comprehensive income/(loss) for the year Shares issued during the year Transaction costs relating to issue of equity Options issued during the year Balance at 30 June 2016 Balance at 1 July 2016 Total comprehensive income Loss for the year Other comprehensive income Total comprehensive income/(loss) for the year Shares issued during the year Options issued during the year Transfer option reserves to accumulated losses Balance at 30 June 2017 30 June 2016 30 June 2017 Transactions with owners in their capacity as owners Total transactions with owners in their capacity as owners Total transactions with owners in their capacity as owners Transactions with owners in their capacity as owners

Issued capital Option reserves Foreign currency translation reserves Non- controlling interest Accumulated losses Total $ $ $ $ $ 32,112,271 74,408 89,970 (238,600) (35,660,184) (3,622,135) - - - 9,710 (2,323,609) (2,313,899) - - 28,552 - - 28,552 15,428 (15,428) - - - - 43,980 (5,718) (2,323,609) (2,285,347) 6,425,561 6,425,561 (72,720) (72,720) 202,983 - - - 202,983 6,352,841 202,983 - - - 6,555,824 38,465,112 277,391 133,950 (244,318) (37,983,793) 648,342 38,465,112 277,391 133,950 (244,318) (37,983,793) 648,342 - - 44,682 (1,867,295) (1,822,613) - (11,868) - - (11,868) - - (11,868) 44,682 (1,867,295) (1,834,481) 3,086,000 - - - - 3,086,000 - 35,808 - - - 35,808 - (29,385) - - 29,385 - 3,086,000 6,423 - - 29,385 3,121,808 41,551,112 283,814 122,082 (199,636) (39,821,703) 1,935,669

The accompanying notes form part of these consolidated financial statements

12

Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2017

NOTE CASH FLOWS FROM OPERATING ACTIVITIES Receipts from customers and government grant Payments to suppliers and employees Interest received Finance costs NET CASH USED IN OPERATING ACTIVITIES 23 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from disposal of treasury shares Proceeds from disposal of plant & equipment Purchase of property, plant and equipment NET CASH FROM/( USED) IN INVESTING ACTIVITIES CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from issue of shares Payment of transaction cost - equity raising Repayment of convertible security Proceeds from borrowings Repayment of borrowings NET CASH FROM FINANCING ACTIVITIES Net increase/(decrease) in cash and cash equivalents held Cash and cash equivalents at the beginning of the period Effect of exchange rates on cash holdings in foreign currencies CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD 9

2017 2016 $ $ 3,745,170 2,092,818 (6,482,995) (3,623,400) 1,495 1,727 (221,030) (567,998) (2,957,360) (2,096,853) - - - - (1,040,323) (17,274) (1,040,323) (17,274) 2,436,000 4,778,645 - (72,720) - (805,000) 3,000,000 1,325,000 (1,500,000) (1,998,555) 3,936,000 3,227,370 (61,683) 1,113,243 1,306,865 107,367 (10,939) 86,255 1,234,243 1,306,865

The accompanying notes form part of these consolidated financial statements

13

Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

Corporate Information

Phoslock Water Solutions Limited (the "Company") is a public company listed on the Australian Stock Exchange (trading under the code "PHK"), and is incorporated and domiciled in Australia. The address of the Group's registered office and principal place of business is Suite 403, 25 Lime Street, Sydney, New South Wales 2000, Australia

This financial report covers the consolidated financial statements and notes of Phoslock Water Solutions Limited and Controlled Entities (the 'Group').

Separate financial statements for Phoslock Water Solutions Limited as an individual entity are not presented, however, limited financial information for the Company as an individual entity is included in Note 12.

NOTE 1 - STATEMENT OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Preparation

Statement of Compliance

The financial statements are general purpose financial statements that have been prepared in accordance with Australian Accounting Standards, Australian Accounting Interpretations, other authoritative pronouncements of the Australian Accounting Standards Board and the Corporations Act 2001. The Group is a for-profit entity for financial reporting purposes under Australian Accounting Standards.

These financial statements and notes comply with International Financial Reporting Standards as issued by the International Accounting Standards Board.

The significant accounting policies used in the preparation and presentation of these financial statements are provided below and are consistent with prior reporting periods unless otherwise stated.

The financial statements were authorised for issue by the Board of Directors on 25 August 2017.

Basis of Measurement

The financial statements are based on historical costs, except for cash flow information, the financial statements have been prepared on an accruals basis and are based on historical costs, modified where applicable, by the measurement at fair value of selected non-current assets, financial assets and financial liabilities.

Functional and Presentation Currency

The Group financial statements are presented in Australian dollars, which is the company's functional currency and the functional currency of the Group.

Significant Accounting Policies

The accounting policies set out below have been applied consistently to all periods presented in these consolidated financial statements, and have been applied consistently by the Group entities.

(a) Material Uncertainty Regarding Going Concern

The financial statements have been prepared on the going concern basis, which contemplates the continuity of normal business activity and the realisation of assets and settlement of liabilities in the normal course of business.

The consolidated entity incurred a significant loss after income tax of $1,822,613 (2016 $2,313,899), for the year ended 30 June 2017 in respect of the principal activities relating to the sale and marketing of Phoslock globally. The consolidated entity has accumulated losses of $39,821,703 (2016 : $37,983,793) as at 30 June 2017. The company has net assets of $1,935,669 (2016: $648,342) largely made up of $4.5 million of Current & Term Assets and $2.6 million of Liabilities.

Revenue for 2017 amounted to $4,227,307 (2016: $2,196,242), which was 92% higher than FY2016, which was just short of management's projection of $4.5 -5 million. This was largely attributable to delays reduced revenues from China operations. Phoslock Beijing did not formally commence operations until 1 July, 2017.

The total liabilities of the group as at 30 June 2017 totalled $2,573,355 is largely made up of trade creditors $281,438 (2016: 564,784) employee entitlements accrued $360,841 (2016:$397,902), subordinated loan from Bentophos GmbH to Phoslock Europe of $292,240 (2016: $293,549) and short-term loans of $1,500,000 (2016: $0). At balance date, the company has cash reserves of $1,234,243 (2016: $1,306,865).

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

The key underlying assumptions of the directors in preparing the report on the going concern basis are:

• the consolidated entity has prepared detailed cash flow forecasts and assumptions for the period ending 12 months period (1 September, 2017 to 31 August 2018), and the directors consider that the cash flow forecasts are reasonable in the circumstances to support the Company’s continued going concern. The detailed cash flows,

• • which reflect the detailed assumptions below, indicate a forecast cash balance of $4.3 million on 31 August, 2018. During the forecast period additional equity of A$4.5 million could be raised from the exercise of options, which at the date of this report are in the money, and possibly an equity raising to finance increased business activity in China.

• the budget for the period August 2017 to August 2018 which underpins the abovementioned cash flow forecasts, is dependent on sales revenue of materials and services of $19.8m and government grants of $0.4 million. Forecast

• • cost of goods sold are $13.2 million giving a gross profit margin of 35%, similar to FY2016-17. Capital expenditures is forecast to be $0.5 million. Operating costs are forecast to be $4.8 million. Implicit in the sales forecast is sales of 6,500 tonnes of Phoslock from the Changxing factory in China and internationally; contracting revenues and other materials of approx $5 million.

• this level of revenue would generate a gross profit of $7 million and an estimated consolidated net profit of approx $2-2.5 million.

Achieving the forecast budget, including the collection of trade receivables at 30 June 2017, will ensure the company has sufficient funds from existing cash and assets, and generated by operations in the next 12 months to meet its liabilities. Any material reduction in sales or an inability to repay or renegotiate the $1.0 million loan facility due on 30 November, 2017 will require the board to consider capital funding.

The Group has forecast cash operating costs of $4.8 million. The Group has the ability to contain these costs within the limits set. The Directors will continue to monitor the Group’s progress against the cash flow forecasts on a regular basis.

The forecast budget includes cash receipts of $0.5m from debtors, projects recently completed, orders received but not completed and orders from annual repeat customers totalling 20 projects/customers. The forecast budget also includes 4 Large Projects being undertaken during FY2017/18 - two in China and one in Europe and Brazil. Work on some of the Large projects will be greater than 12 months - Pampulha project in Brazil will be 18 months with a further new contract currently being finalised. Several of the Large Chinese projects are sceduled for 12-24 months of ongoing work.

The Company may need to undertake an equity raising in FY 2017-18 to fund the expansion of its business, particularly China, however no decision has been made regarding the amount, the timing, structure of any offering or whether it would be targeted towards existing equity holders or new equity holders (Australian or international), including strategic partners. If key items underpinning the cashflow forecast are not realised, the consolidated entity may need to raise capital in FY2017-18. The directors consider that any capital raising activities which are required to fund operating cash flow shortages will be successful based on the company’s prior capital raising initiatives.

In the event that adequate funds cannot be raised as required and anticipated forecast is not achieved, there exists a material uncertainty that may cast significant doubt on the Group's ability to continue as a going concern and therefore whether it will be able to realise its assets or extinguish its liabilities in the ordinary course of business.

The Directors believe that they will continue to be successful in securing additional funds through the issue of securities as and when required. Accordingly, the financial statements do not include any adjustment relating to the recoverability and classification of recorded assets amounts, nor to the amounts and classification of liabilities that may be necessary should the Group be unable to continue as a going concern.

(b) Principles of Consolidation

The consolidated financial statements incorporate all of the assets, liabilities and results of the parent (Phoslock Water Solution Ltd) and all of the subsidiaries. Subsidiaries are entities the parent controls. The parent controls an entity when it is exposed to, or has rights to, variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity.

The assets, liabilities and results of all subsidiaries are fully consolidated into the financial statements of the Group from the date on which control is obtained by the Group. The consolidation of a subsidiary is discontinued from the date that control ceases. Intercompany transactions, balances and unrealised gains or losses on transactions between group entities are fully eliminated on consolidation. Accounting policies of subsidiaries have been changed and adjustments made where necessary to ensure uniformity of the accounting policies adopted by the Group.

Equity interests in a subsidiary not attributable, directly or indirectly, to the Group are presented as “non-controlling interests”. The Group initially recognises non-controlling interests that are present ownership interests in subsidiaries and are entitled to a proportionate share of the subsidiary’s net assets on liquidation at either fair value or at the non-controlling interests’ proportionate share of the subsidiary’s net assets. Subsequent to initial recognition, non-controlling interests are attributed their share of profit or loss and each component of other comprehensive income. Non-controlling interests are shown separately within the equity section of the statement of financial position and statement of profit or loss and other comprehensive income.

Appropriate adjustments have been made to a controlled entity’s financial position, performance and cash flows where the accounting policies used by that entity were different from those adopted by the consolidated entity.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

A list of controlled entities is contained in Note 12(b) of the financial statements.

• (c) Foreign Currency Transactions and Balances

Functional and presentation currency

The functional currency of each of the group's entities is measured using the currency of the primary economic environment in which that entity operates. The consolidated financial statements are presented in Australian dollars which is the parent entity's functional and presentation currency.

Transaction and balances

Foreign currency transactions are translated into functional currency using the exchange rates prevailing at the date of the transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are generally recognised in the statement of comprehensive income. Foreign currency monetary assets and liabilities denominated in foreign currencies are translated at the year-end exchange rate. Non-monetary assets and liabilities measured at historical cost continue to be carried at the exchange rate at the date of the transaction. Non-monetary assets and liabilities measured at fair value are reported at the exchange rate at the date when fair values were determined.

Exchange differences arising on the translation of monetary assets and liabilities are recognised in statement of comprehensive income, except where deferred in equity as a qualifying cash flow or net investment hedge.

Exchange differences arising on the translation of non-monetary items are recognised directly in other comprehensive income to the extent that the underlying gain or loss is recognised in other comprehensive income; otherwise the exchange difference is recognised in profit or loss.

Group Companies

The financial results and position of foreign operations whose functional currency is different from the group's presentation currency are translated as follows:

— assets and liabilities are translated at year-end exchange rates prevailing at that reporting date;

— income and expenses are translated at average exchange rates for the period; and

— retained earnings are translated at the exchange rates prevailing at the date of the transaction.

Exchange differences arising on translation of foreign operations with functional currencies other than Australian dollars are recognised in other comprehensive income and included in the foreign currency translation reserve in the statement of financial position. The cumulative amount of these differences is reclassified into profit or loss in the period in which the operation is disposed of.

(d) Revenue and Other Income

Revenue is measured at the fair value of consideration received or receivable, net of discounts. When the inflow of consideration is deferred, it is treated as the provision of financing and is discounted at a rate of interest that is generally accepted in the market for similar arrangements. The difference between the amount initially recognised and the amount ultimately received is interest revenue. Revenue is recognised to the extent that it is probable that economic benefits will flow to the group, and revenue can be reliably measured.

Revenue from the sale of goods is recognised at the point of delivery (delivery location as specified in the contract) as this corresponds to the transfer of significant risks and rewards of ownership of the goods and the cessation of all involvement in those goods.

Interest revenue is recognised using the effective interest rate method, which, for floating rate financial assets is the rate inherent in the instrument.

Export development and Research and Development grants are recognised at fair value where there is reasonable assurance that the grant will be received and all grant conditions will be met. Grants relating to expense items are recognised as income over the periods necessary to match the grant to the costs it is compensating.

All revenue is stated net of the amount of goods and services tax (GST).

(e) Income tax

The income tax expense/(income) for the year comprises current income tax expense/(income) and deferred tax expense/(income).

Current income tax expense charged to profit or loss is the tax payable on taxable income for the current period. Current tax liabilities (assets) are measured at the amounts expected to be paid to (recovered from) the relevant taxation authority using tax rates (and tax laws) that have been enacted or substantively enacted by the end of the reporting period.

Deferred income tax expense reflects movements in deferred tax asset and deferred tax liability balances during the year. Current and deferred income tax expense (income) is charged or credited directly to equity instead of the profit or loss when the tax relates to items that are credited or charged directly to equity.

Deferred tax assets and liabilities are ascertained based on temporary differences arising between the tax bases of assets and liabilities and their carrying amounts in the financial statements. Deferred tax assets also result where amounts have been fully expensed but future tax deductions are available. No deferred income tax will be recognised from the initial recognition of an asset or liability, excluding a business combination, where there is no effect on accounting or taxable profit or loss.

Deferred tax assets and liabilities are calculated at the tax rates that are expected to apply to the period when the asset is realised or the liability is settled, based on tax rates enacted or substantively enacted at reporting date. Their measurement also reflects the manner in which management expects to recover or settle the carrying amount of the related asset or liability.

Deferred tax assets relating to temporary differences and unused tax losses are recognised only to the extent that it is probable that future taxable profit will be available against which the benefits of the deferred tax asset can be utilised.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

Where temporary differences exist in relation to investments in subsidiaries, branches, associates, and joint ventures, deferred tax assets and liabilities are not recognised where the timing of the reversal of the temporary difference can be controlled and it is not probable that the reversal will occur in the foreseeable future.

Current tax assets and liabilities are offset where a legally enforceable right of set-off exists and it is intended that net settlement or simultaneous realization and settlement of the respective asset and liability will occur. Deferred tax assets and liabilities are offset where a legally enforceable right of set-off exists, the deferred tax assets and liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities where it is intended that net settlement or simultaneous realisation and settlement of the respective asset and liability will occur in future periods in which significant amounts of deferred tax assets or liabilities are expected to be recovered or settled.

Investment allowances and similar tax incentives

Companies within the group may be entitled to claim special tax deductions for investments in qualifying assets or in relation to qualifying expenditure (eg the Research and Development Tax Incentive regime in Australia or other investment allowances). The group accounts for such allowances as other receivables/other income.

(f) Impairment of Assets At each statement date, the consolidated group reviews the carrying values of its tangible and intangible assets to determine whether there is any indication that those assets have been impaired. If such an indication exists, the recoverable amount of the asset, being the higher of the asset’s fair value less costs to sell and value in use, is compared to the asset’s carrying value. Any excess of the asset’s carrying value over its recoverable amount is expensed to the statement of profit or loss and other comprehensive income.

(g) Leases

Lease payments for operating leases, where substantially all the risks and benefits remain with the lessor, are charged as expenses to profit and loss on a straight line basis over the period of the lease. Lease incentives under operating leases are recognised as a liability and amortised on a straight-line basis over the lease term.

(h) Cash and cash equivalents

Cash and cash equivalents include cash on hand, deposits available on demand with banks, other short-term highly liquid investments with original maturities of 3 months or less.

(i) Trade receivables

Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision for impairment. Trade receivables are generally due for settlement within 60 days. They are presented as current assets unless collection is not expected for more than 12 months after the reporting date.

Collectability of trade receivables is reviewed on an ongoing basis. Debts which are known to be uncollectible are written off by reducing the carrying amount directly. An allowance account (provision for impairment of trade receivables) is used when there is objective evidence that the group will not be able to collect all amounts due according to the original terms of the receivables. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 30 days overdue) are considered indicators that the trade receivable is impaired. The amount of the impairment allowance is the difference between the asset's carrying amount and the present value of estimated future cash flows, discounted at the original effective interest rate. Cash flows relating to short-term receivables are not discounted if the effect of discounting is immaterial.

The amount of the impairment loss is recognised in profit or loss within other expenses. When a trade receivable for which an impairment allowance had been recognised becomes uncollectible in a subsequent period, it is written off against the allowance account. Subsequent recoveries of amounts previously written off are credited against other expenses in profit or loss.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

(j) Inventories

Inventories are all purchased finished goods and are measured at the lower of cost and net realisable value. Costs of purchased inventory comprises all costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition, net of rebates and discounts. Costs are assigned on the basis of weighted average costs. Net realisable value is the estimated selling price in the ordinary course of business less the estimated costs necessary to make the sale.

(k) Plant and Equipment Each class of property, plant and equipment is carried at cost or fair value as indicated less, where applicable, any accumulated depreciation and impairment losses.

Plant and equipment

Plant and equipment are measured on the cost basis and therefore carried at cost less accumulated depreciation and any accumulated impairment. In the event the carrying amount of plant and equipment is greater than the estimated recoverable amount, the carrying amount is written down immediately to the estimated recoverable amount and impairment losses are recognised either in profit or loss or as a revaluation decrease if the impairment losses relate to a revalued asset. A formal assessment of recoverable amount is made when impairment indicators are present

The cost of fixed assets constructed within the consolidated group includes the cost of materials, direct labour, borrowing costs and an appropriate proportion of fixed and variable overheads.

Subsequent costs are included in the asset’s carrying amount or recognised as a separate asset, as appropriate, only when it is probable that future economic benefits associated with the item will flow to the Group and the cost of the item can be measured reliably. All other repairs and maintenance are recognised as expenses in profit or loss during the financial period in which they are incurred.

Depreciation

The depreciable amount of all fixed assets is depreciated on a straight line basis over the asset's useful life to the consolidated group commencing from the time the asset is held ready for use.

The depreciation rates used for each class of depreciable assets are:

Class of Fixed Asset Depreciation Rate Plant and Equipment 10-33%

The assets' residual values and useful lives are reviewed, and adjusted if appropriate, at each balance sheet date. An asset's carrying amount is written down immediately to its recoverable amount if the asset's carrying amount is greater than its estimated recoverable amount.

Gains and losses on disposals are determined by comparing proceeds with the carrying amount. These gains or losses are included in the statement of comprehensive income. When revalued assets are sold, amounts included in the revaluation reserve relating to that asset are transferred to retained earnings.

(l) Intangibles Phoslock Licence Patents and Trademarks

Licences, patents and trademarks are recognised at cost of acquisition. All intellectual property has a finite life and is carried at cost less any accumulated amortisation and any impairment losses. Licences, patents and trademarks are amortised over their useful lives representing the term of the intellectual property.

Research and Development

Expenditure during the research phase of a project is recognised as an expense when incurred. Development costs are capitalised only when technical feasibility studies identify that the project will deliver future economic benefits and these benefits can be measured reliably.

Development costs have a finite life and are amortised on a systematic basis matched to the future economic benefits over the useful life of the project.

(m) Financial instruments

Initial recognition and measurement

Financial assets and financial liabilities are recognised when the entity becomes a party to the contractual provisions to the instrument. For financial assets, this is equivalent to the date that the company commits itself to either the purchase or sale of the asset (ie trade date accounting is adopted).

Financial instruments are initially measured at fair value plus transaction costs, except where the instrument is classified “at fair value through profit or loss”, in which case transaction costs are expensed to profit or loss immediately.

Classification and subsequent measurement

Financial instruments are subsequently measured at fair value, amortised cost using the effective interest method, or cost.

Amortised cost is calculated as the amount at which the financial asset or financial liability is measured at initial recognition less principal repayments and any reduction for impairment, and adjusted for any cumulative amortisation of the difference between that initial amount and the maturity amount calculated using the effective interest method .

The effective interest method is used to allocate interest income or interest expense over the relevant period and is equivalent to the rate that discounts estimated future cash payments or receipts (including fees, transaction costs and other premiums or discounts) over the expected life (or when this cannot be reliably predicted, the contractual term) of the financial instrument to the net carrying amount of the financial asset or financial liability. Revisions to expected future net cash flows will necessitate an adjustment to the carrying amount with a consequential recognition of an income or expense item in profit or loss.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

The Group does not designate any interests in subsidiaries, associates or joint ventures as being subject to the requirements of Accounting Standards specifically applicable to financial instruments.

(i) Financial assets at fair value through profit or loss

Financial assets are classified at “fair value through profit or loss” when they are held for trading for the purpose of short-term profit taking, derivatives not held for hedging purposes, or when they are designated as such to avoid an accounting mismatch or to enable performance evaluation where a group of financial assets is managed by key management personnel on a fair value basis in accordance with a documented risk management or investment strategy. Such assets are subsequently measured at fair value with changes in carrying amount being included in profit or loss.

• (ii) Loans and receivables

Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an active market and are subsequently measured at amortised cost. Gains or losses are recognised in profit or loss through the amortisation process and when the financial asset is derecognised.

• (iii) Financial liabilities

Non-derivative financial liabilities other than financial guarantees are subsequently measured at amortised cost. Gains or losses are recognised in profit or loss through the amortisation process and when the financial liability is derecognised.

Impairment

A financial asset (or a group of financial assets) is deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one or more events (a “loss event”) having occurred, which has an impact on the estimated future cash flows of the financial asset(s).

In the case of financial assets carried at amortised cost, loss events may include: indications that the debtors or a group of debtors are experiencing significant financial difficulty, default or delinquency in interest or principal payments; indications that they will enter bankruptcy or other financial reorganisation; and changes in arrears or economic conditions that correlate with defaults.

For financial assets carried at amortised cost (including loans and receivables), a separate allowance account is used to reduce the carrying amount of financial assets impaired by credit losses. After having taken all possible measures of recovery, if management establishes that the carrying amount cannot be recovered by any means, at that point the written-off amounts are charged to the allowance account or the carrying amount of impaired financial assets is reduced directly if no impairment amount was previously recognised in the allowance account.

When the terms of financial assets that would otherwise have been past due or impaired have been renegotiated, the Group recognises the impairment for such financial assets by taking into account the original terms as if the terms have not been renegotiated so that the loss events that have occurred are duly considered.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

Financial guarantees

Where material, financial guarantees issued that require the issuer to make specified payments to reimburse the holder for a loss it incurs because a specified debtor fails to make payment when due are recognised as a financial liability at fair value on initial recognition.

The fair value of financial guarantee contracts has been assessed using a probability-weighted discounted cash flow approach. The probability has been based on:

• the likelihood of the guaranteed party defaulting during the next reporting period;

• the proportion of the exposure that is not expected to be recovered due to the guaranteed party defaulting; and

• the maximum loss exposure if the guaranteed party were to default.

Financial guarantees are subsequently measured at the higher of the best estimate of the obligation in accordance with AASB 137: Provisions, Contingent Liabilities and Contingent Assets and the amount initially recognised less, when appropriate, cumulative amortisation in accordance with AASB 118: Revenue . Where the entity gives guarantees in exchange for a fee, revenue is recognised in accordance with AASB 118.

Derecognition

Financial assets are derecognised when the contractual rights to receipt of cash flows expire or the asset is transferred to another party whereby the entity no longer has any significant continuing involvement in the risks and benefits associated with the asset. Financial liabilities are derecognised when the related obligations are discharged, cancelled or have expired. The difference between the carrying amount of the financial liability extinguished or transferred to another party and the fair value of consideration paid, including the transfer of non-cash assets or liabilities assumed, is recognised in profit or loss.

(n) Trade and other payables

These amounts represent liabilities for goods and services provided to the group prior to the end of financial year which are unpaid. The amounts are unsecured and are usually paid within 30 days of recognition. Trade and other payables are presented as current liabilities unless payment is not due within 12 months from the reporting date. They are recognised initially at their fair value and subsequently measured at amortised cost using the effective interest method.

(o) Provisions

Provisions are measured using the best estimate of the amounts required to settle the obligation at the end of the reporting period.

(p) Financial liabilities

Financial liabilities are initially recognised at fair value, net of transaction costs incurred. Financial liabilities are subsequently measured at amortised cost. Any difference between the proceeds (net of transaction costs) and the redemption amount is recognised in profit or loss over the period of the borrowings using the effective interest method. Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In this case, the fee is deferred until the draw down occurs. To the extent there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalised as a prepayment for liquidity services and amortised over the period of the facility to which it relates.

Financial liabilities are classified as current liabilities unless the group has an unconditional right to defer settlement of the liability for at least 12 months after the reporting period.

(q) Borrowing costs

Borrowing costs directly attributable to the acquisition, construction or production of assets that necessarily take a substantial period of time to prepare for their intended use or sale are added to the cost of those assets, until such time as the assets are substantially ready for their intended use or sale. All other borrowing costs are recognised in profit or loss in the period in which they are incurred

(r) Employee benefits

Short-term obligations

Provision is made for the Group’s obligation for short-term employee benefits. Short-term employee benefits are benefits (other than termination benefits) that are expected to be settled wholly before 12 months after the end of the annual reporting period in which the employees render the related service, including wages and salaries. Short-term employee benefits are measured at the (undiscounted) amounts expected to be paid when the obligation is settled.

The Group’s obligations for short-term employee benefits such as wages and salaries are recognised as a part of current trade and other payables in the statement of financial position. The Group’s obligations for employees’ annual leave and long service leave entitlements are recognised as provisions in the statement of financial position.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

Other long-term obligations

Provision is made for employees’ long service leave and annual leave entitlements not expected to be settled wholly within 12 months after the end of the annual reporting period in which the employees render the related service. Other long-term employee benefits are measured at the present value of the expected future payments to be made to employees. Expected future payments incorporate anticipated future wage and salary levels, durations of service and employee departures and are discounted at rates determined by reference to market yields at the end of the reporting period on corporate bonds that have maturity dates that approximate the terms of the obligations. Any remeasurements for changes in assumptions of obligations for other long-term employee benefits are recognised in profit or loss in the periods in which the changes occur.

The Group’s obligations for long-term employee benefits are presented as non-current provisions in its statement of financial position, except where the Group does not have an unconditional right to defer settlement for at least 12 months after the end of the reporting period, in which case the obligations are presented as current provisions.

Equity-settled compensation

The Group operates an employee share and option plan. Share-based payments to employees are measured at the fair value of the instruments issued and amortised over the vesting periods. Share-based payments to non-employees are measured at the fair value of goods or services received or the fair value of the equity instruments issued, if it is determined the fair value of the goods or services cannot be reliably measured, and are recorded at the date the goods or services are received. The corresponding amount is recorded to the option reserve. The fair value of options is determined using the Black-Scholes pricing and Binomial Call Option pricing model. The number of shares and options expected to vest is reviewed and adjusted at the end of each reporting period such that the amount recognised for services received as consideration for the equity instruments granted is based on the number of equity instruments that eventually vest.

(s) Goods and Services Tax (GST) Revenues, expenses and assets are recognised net of the amount of GST, except where the amount of GST incurred is not recoverable from the Australian Tax Office. In these circumstances the GST is recognised as part of the cost of acquisition of the asset or as part of an item of the expense.

Receivables and payables in the statement of financial position are shown inclusive of GST.

Cash flows are presented in the statement of cash flow on a gross basis, except for the GST component of investing and financing activities, which are disclosed as operating cash flows.

(t) Contributed equity Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax, from the proceeds.

Where any group company purchases the company’s equity instruments, for example as the result of a share buy-back or a sharebased payment plan, the consideration paid, including any directly attributable incremental costs (net of income taxes) is deducted from equity attributable to the owners of Phoslock Water Solutions Limited as treasury shares until the shares are cancelled or reissued. Where such ordinary shares are subsequently reissued, any consideration received, net of any directly attributable incremental transaction costs and the related income tax effects, is included in equity attributable to the owners of Phoslock Water Solutions Limited.

(u) Earnings per share

Basic earnings per share

Basic earnings per share is calculated by dividing: — the profit attributable to owners of the company, excluding any costs of servicing equity other than ordinary shares

— by the weighted average number of ordinary shares outstanding during the financial year, adjusted for bonus elements in ordinary shares issued during the year and excluding treasury shares.

Diluted earnings per share

Diluted earnings per share adjusts the figures used in the determination of basic earnings per share to take into account: — the after income tax effect of interest and other financing costs associated with dilutive potential ordinary shares, and — the weighted average number of additional ordinary shares that would have been outstanding assuming the conversion of all dilutive potential ordinary shares.

(v) Parent entity financial information The financial information for the parent entity, Phoslock Water Solutions Limited, disclosed in Note 12 has been prepared on the same basis as the consolidated financial statements, except as set out below.

Investments in subsidiaries and associates

Investments in subsidiaries and joint venture entities are accounted for at cost in the financial statements of Phoslock Water Solutions Limited. Dividends received from associates are recognised in the parent entity’s profit or loss when its right to receive the dividend is established.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

Tax Consolidation

Phoslock Water Solutions Limited (Head entity) and its wholly-owned Australian subsidiaries have formed an income tax consolidated group under tax consolidation legislation. Each entity in the group recognises its own current and deferred tax assets and liabilities. Such taxes are measured using the 'stand-alone tax payer' approach to allocation. Current tax liabilities (assets) and deferred tax assets arising from unused tax losses and tax credits in the subsidiaries are immediately transferred to the head entity.

The entities have also entered into a tax funding agreement under which the wholly-owned entities fully compensate Phoslock Water Solutions Limited (head entity) for any current tax payable assumed and are compensated by the head entity for any current tax receivable and deferred tax assets relating to unused tax losses or unused tax credits that are transferred to the head entity under the tax consolidation legislation. The funding amounts are determined by reference to the amounts recognised in the wholly-owned entities’ financial statements.

Phoslock Water Solutions Limited notified the Australian Tax Office that it had formed an income tax consolidated group to apply from 1 July 2005.

Financial guarantees

Where the parent entity has provided financial guarantees in relation to loans and payables of subsidiaries for no compensation, the fair values of these guarantees are accounted for as contributions and recognised as part of the cost of the investment.

Share-based payments

The grant by the company of options over its equity instruments to the employees of subsidiary undertakings in the group is treated as a capital contribution to that subsidiary undertaking. The fair value of employee services received, measured by reference to the grant date fair value, is recognized over the vesting period as an increase to investment in subsidiary undertakings, with a corresponding credit to equity.

(w) Segment reporting

Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief operating decision maker, who is responsible for allocating resources and assessing performance of the operating segments, has been identified as the strategic steering committee.

(x) Comparative figures

Where required by Accounting Standards comparative figures have been adjusted to conform to changes in presentation for the current financial year.

• (y) Critical Accounting Estimates and Judgements

The directors evaluate estimates and judgements incorporated into the financial statements based on historical knowledge and best available current information. Estimates assume a reasonable expectation of future events and are based on current trends and economic data, obtained both externally and within the Group. The areas involving a higher degree of judgment or complexity, or areas where assumptions and estimates are significant to the financial statements, are as follows:

(i) Income taxes

The group is subject to income taxes in Australia and jurisdictions where it has foreign operations. Significant judgment is required in determining the worldwide provision for income taxes. There are certain transactions and calculations undertaken during the ordinary course of business for which the ultimate tax determination is uncertain.

The group estimates its tax liabilities based on the group's understanding of the tax law. Where the final tax outcome of these matters is different from the amounts that were initially recorded, such differences will impact the current and deferred income tax assets and liabilities in the period in which such determination is made.

(ii) Estimation of useful lives of assets

The group determines the estimated useful lives and related depreciation and amortisation charges for property, plant and equipment and finite life intangible assets. The useful lives could changes significantly as a result of technical innovations or some other event. The depreciation and amortisation charge will increase where useful lives are less than previously estimated.

(iii) Provision for impairment of receivables

The provision for impairment of receivables assessment requires a degree of estimation and judgment. The level of provision is assessed by taking into account the recent sales experience, the ageing of receivable, historical collection rates and specific knowledge of individual debtors financial position.

(iv) Long Service Leave Provision

As per note 1, the liability for long services leave is recognized and measured at the present value of estimated future cash flows to be made in respect of all employees at the reporting date. In determining the prevent value of the liability, estimates of attrition rates and pay increases through inflation have been taken into account.

(v) Impairment

The Group assesses impairment at the end of each reporting period by evaluating the conditions and events specific to the Group that may be indicative of impairment triggers. Recoverable amounts of relevant assets are reassessed using value-in-use calculations which incorporate various key assumptions.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

(z) New Accounting Standards for Application in Future Periods

Accounting Standards and Interpretations issued by the AASB that are not yet mandatorily applicable to the Group, together with an assessment of the potential impact of such pronouncements on the Group when adopted in future periods, are discussed below:

AASB 9 : Financial Instruments and associated Amending Standards (applicable to annual reporting periods beginning on or after 1 January 2018).

The Standard will be applicable retrospectively (subject to the provisions on hedge accounting outlined below) and includes revised requirements for the classification and measurement of financial instruments, revised recognition and derecognition requirements for financial instruments and simplified requirements for hedge accounting.

The key changes that may affect the Group on initial application include certain simplifications to the classification of financial assets, simplifications to the accounting of embedded derivatives, upfront accounting for expected credit loss, and the irrevocable election to recognise gains and losses on investments in equity instruments that are not held for trading in other comprehensive income. AASB 9 also introduces a new model for hedge accounting that will allow greater flexibility in the ability to hedge risk, particularly with respect to hedges of non-financial items. Should the entity elect to change its hedge policies in line with the new hedge accounting requirements of the Standard, the application of such accounting would be largely prospective.

Although the directors anticipate that the adoption of AASB 9 may have an impact on the Group’s financial instruments, including hedging activity, it is impracticable at this stage to provide a reasonable estimate of such impact.

AASB 15 : Revenue from Contracts with Customers (applicable to annual reporting periods beginning on or after 1 January 2018, as deferred by AASB 2015-8: Amendments to Australian Accounting Standards – Effective Date of AASB 15).

When effective, this Standard will replace the current accounting requirements applicable to revenue with a single, principles-based model. Apart from a limited number of exceptions, including leases, the new revenue model in AASB 15 will apply to all contracts with customers as well as non-monetary exchanges between entities in the same line of business to facilitate sales to customers and potential customers.

The core principle of the Standard is that an entity will recognise revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for the goods or services. To achieve this objective, AASB 15 provides the following five-step process:

• identify the contract(s) with a customer;

• identify the performance obligations in the contract(s);

• • determine the transaction price;

• allocate the transaction price to the performance obligations in the contract(s); and

• • recognise revenue when (or as) the performance obligations are satisfied.

The transitional provisions of this Standard permit an entity to either: restate the contracts that existed in each prior period presented per AASB 108: Accounting Policies, Changes in Accounting Estimates and Errors (subject to certain practical expedients in AASB 15); or recognise the cumulative effect of retrospective application to incomplete contracts on the date of initial application. There are also enhanced disclosure requirements regarding revenue.

The Directors have analysed a sample of material contracts that are currently in place for the Group. These fall into two categories inventory sold at shipment and inventory sold on delivery. For Inventory sold at shipment revenue is recognised when the goods are shipped. For inventory sold on delivery revenue is recognised when the goods have been delivered. The adoption of AASB15 Is not expected to impact on these revenue recognition methods. The Group is in negotiations with a number of customers to supply product from the Groups new manufacturing facility. The Directors are unable to determine the impact of the adoption of AASB 15 on these proposed contracts at this date.

AASB 16 : Leases (applicable to annual reporting periods beginning on or after 1 January 2019).

When effective, this Standard will replace the current accounting requirements applicable to leases in AASB 117: Leases and related Interpretations. AASB 16 introduces a single lessee accounting model that eliminates the requirement for leases to be classified as operating or finance leases

The main changes introduced by the new Standard include:

• recognition of a right-to-use asset and liability for all leases (excluding short-term leases with less than 12 months of tenure and leases relating to low-value assets);

• depreciation of right-to-use assets in line with AASB 116: unwinding of the liability in principal and interest components; Property, Plant and Equipment in profit or loss and

• variable lease payments that depend on an index or a rate are included in the initial measurement of the lease liability using the index or rate at the commencement date;

• by applying a practical expedient, a lessee is permitted to elect not to separate non-lease components and instead account for all components as a lease; and

• additional disclosure requirements.

The transitional provisions of AASB 16 allow a lessee to either retrospectively apply the Standard to comparatives in line with AASB 108 or recognise the cumulative effect of retrospective application as an adjustment to opening equity on the date of initial application

The Group has operating leases over premises in Sydney and a manufacturing plant in China. Based on the leases that are currently operative the Group expects that the impact on initial adoption will be as follows:

• there will be an initial recognition of a right to use asset and a lease liability on the balance sheet of approximately $500,000

• the affect on the consolidated profit or loss of the Group is expected to be immaterial to the Group. However operating leases of the company are currently recognised as a rental expense of the Group. Under AASB 16 the

• • operating lease expenditure will be recognised as depreciation and interest expense. On adoption this is likely to result in an improvement to earnings before interest, tax depreciation and Amortisation for the 30 June 2018 year of approximately 200K. Earnings before interest and tax is likely to result in a 50K improvement for the 30 June 2018 year.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

NOTE 2 REVENUE Sales Revenue Sale of goods Sale Revenue Other Revenue - interest received 2 (a) - export development/R&D grants - other income Total Sales and other revenue (a) Interest revenue from - other persons - related parties	2017 2016 $ $ 3,825,406 1,730,649 3,825,406 1,730,649 1,495 1,564 377,906 329,062 22,500 134,967 401,901 465,593 4,227,307 2,196,242 1,495 1,564 - - 1,495 1,564

NOTE 3 LOSS FOR THE YEAR

Loss for the year includes the following specific expense items:

Expenses

Finance costs: - Convertible Notes issued to third party - amortised interest expense - Convertible Notes issued to related parties - loans provided by related parties - other interest - Convertible Notes issued to third party - upfront finance fee expense - Bank Charges Total finance costs Fair Value movement on Derivative Liability (included as part of other income for 2016) Rental expense on leased premise - minimum lease payments Superannuation contributions Depreciation and amortisation For detailed discussion on siginificant expenses items, please refer to the Director's Report. NOTE 4 INCOME TAX EXPENSE - Current tax - Deferred tax Operating profit/ (loss) before tax Tax at the Australian tax rate of 27.5% (2016 - 28.5%) - share options expense - foreign subsidiaries Income tax expense/ (revenue) Weighted average effective tax rate (c) Unrecognised deferred tax assets Accumulated losses Potential tax losses Temporary differences - accruals and provisions Potential tax benefit Total deferred tax assets not bought to account - deferred tax assets not bought to account, the benefits of which will only be realised if the conditions for deductible set out in Note 1(e) occur (a) Income tax expense Tax effect of: (b) Numerical reconciliation of income tax expense to prima facie tax payable

- 334,031 97,505 307,973 116,938 204,138 2,560 213 - - 8,219 7,468 225,222 853,823 - (121,977) 188,070 106,667 164,642 126,620 56,679 64,984 - - - - - - (1,822,613) (2,313,899) (501,219) (659,461) 10,592 60,895 133,625 13,764 357,002 584,802 - (0) 27.5% 28.5% 30,638,832 29,791,851 8,425,679 8,490,678 402,865 430,878 110,788 122,800 8,425,679 8,490,678

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

NOTE 5 OTHER LIABILITIES

Amount received in advance from customers

2017	2016
$	$
89,830	89,830

• this is recorded as Other Liability as the goods have not been delivered by the end of FY2017. The revenue will be recorded in FY2018.

NOTE 6 KEY MANAGEMENT PERSONNEL COMPENSATION

Refer to the remuneration report in the directors report for details of the remuneration paid or payable to each member of the Groups Key Management Personnel for the year ended 30 June 2017.

The totals of remuneration paid to key management personnel of the Company and the Group during the financial year are as follows:

Short term employee benefits Post employment benefits (contributions to superannuation including salary sacrifice) Long term benefits (net increase in long service leave provision) Equity compensation benefits Total compensation NOTE 7 AUDITORS REMUNERATION Remuneration of the auditor for: - auditing of the financial report - reviewing of the financial report - overseas auditors - China There are no other services provided by W W Vick & Co. NOTE 8 EARNINGS PER SHARE (a) Reconciliation of earnings to profit and loss Loss Loss/(profit) attributable to non controlling equity interest Earnings used to calculate basic EPS Earnings used in the calculation of dilutive EPS Weighted average number of shares Weighted average number of options outstanding & shares issued by convertible notes (b) Weighted average number of ordinary shares outstanding during the year used in calculating Weighted average number of ordinary shares outstanding during the year used in the calculation of EPS

2017 2016 $ $ 1,018,627 746,475 126,165 91,712 18,192 33,912 5,372 130,886 1,168,356 1,002,985 2017 2016 $ $ 31,000 30,000 2,500 2,500 17,500 - (1,822,613) (2,313,899) (44,682) (9,710) (1,867,295) (2,323,609) (1,867,295) (2,323,609) No. No. 372,117,399 268,026,356 35,100,000 31,667,391 407,217,399 299,693,747 Consolidated Group

Options with low probability of conversion at year end are not included in basic and dilutive EPS as the exercise of the options is unlikely. As at reporting date, conditions which would result in the exercise of the options and issue of shares had not been met.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

==> picture [408 x 34] intentionally omitted <==

----- Start of picture text -----

NOTE 9 CASH AND CASH EQUIVALENTS 2017 2016
$ $
Cash at bank and on hand 1,234,243 1,306,865
1,234,243 1,306,865
----- End of picture text -----

Reconciliation of cash

Cash at the end of the financial year as shown in the statement of cash flows is reconciled to items in the financial position as follows:

Cash and cash equivalents	1,234,243 1,306,865 1,234,243 1,306,865

NOTE 9(a) Financial assets

Westpac Banking Corpration holds security over a cash deposit account (rental guarantee) of $25,000 (2016:$25,000) with effective interest rate of 3.0% (2016: 2.7%).

NOTE 10 TRADE AND OTHER RECEIVABLES

Current Trade receivables Less provision for impairment 10(a)	2017 2016 $ $ 797,751 285,109 - -
	797,751 285,109
Loans to related parties (i) and 25(e ) Grant income receivables	- 37,000 375,000 370,000
	375,000 407,000
	1,172,751 692,109

(i) the loans to related parties were provided in relation to the purchase of shares in the parent entity. Refer details provided in Note 25.

10 (a) Provision For Impairment of Receivables

Current trade receivables are generally on 30-60 day terms. Non-current trade and other receivables are assessed for recoverability based on the underlying terms of the contract. A provision for impairment is recognised when there is objective evidence that an individual trade or term receivable is impaired. There has been no movement to the provision for impairment of receiveables during the year (2016: $ 0).

The following table details the consolidated entity’s trade and other receivables exposed to credit risk with ageing analysis and impairment provided thereon. Amounts are considered “past due” when the debt has not been settled within the terms and conditions agreed upon between the consolidated entity and the customer or counterparty to the transaction. The balances of receivables that remain within initial trade terms, as detailed below, are considered to be of a high credit quality.

2017 Other receivables Total 2016 Other receivables Total NOTE 11 INVENTORIES CURRENT At lower of cost and net realisable value Finished goods Trade and other receivables Trade and term receivables	Gross Amount Past Due and Impaired $ $ < 30 $ 797,751 - - 375,000 - - 1,172,751 - - 285,109 - - 407,000 - - 692,109 - -	Within Initial Trade Terms $ 31–60 61–90 > 90 $ $ $ - - - 797,751 - - - 375,000 - - - 1,172,751 - - - 285,109 - - - 407,000 - - - 692,109 2017 2016 $ $ 897,336 498,830 897,336 498,830 (Days Overdue) Past Due but Not Impaired

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

NOTE 12 PARENT ENTITY INFORMATION

NOTE 12 PARENT ENTITY INFORMATION (a) The Parent Entity of the Consolidated Entity is Phoslock Water Solutions Limited. Current assets Non-current assets Total assets Term Liabilities Total Liabilities Net assets Issued Capital Share based payment and options reserve Accumulated losses Total Equity Profit/(Loss) after income tax Other comprehensive income Total comprehensive income/ (loss)	2017 2016 $ $ 2,103 883 10,728,387 8,391,561 10,730,490 8,392,444 - (650,000) - (650,000) 10,730,490 7,742,444 41,551,112 38,465,112 283,814 277,391 (31,104,436) (31,000,059) 10,730,490 7,742,444 (133,762) (864,622) - - (133,762) (864,622)

During FY2017, $650,000 of Convertible Notes issued by the parent company were converted into shares.

The parent entity is a guarantor under the Loan Facility Deed between Phoslock Pty Ltd and Link Traders (Aust) Pty Ltd. The Loan Facility is for a maximum amount of $1,000,000 commenced on 15 December 2016 and matures on 30 November 2017. As at 30 June, 2017, the loan was drawn to $1,000,000.

The parent entity had entered into a Payment Indemnity Deed in respect of an accounts receivable that was sold to Link Traders (Aust) Pty Ltd under a factoring arrangement. The arrangement commenced on 13 June 2017 and end on 22 September 2017.

There are no contingent liabilities and contractual commitments at balance date.

(b) Controlled Entities of the Parent Entity

Subsidiaries of Phoslock Water Solutions Limited:	Country of Incorporation 2017 2016 Percentage Owned (%)*|
Phoslock Pty Ltd	Australia 100 100
Phoslock Technologies Pty Ltd	Australia 100 100
Phoslock International Pty Ltd	Australia 100 100
Phoslock Water Solutions UK Co Ltd	United Kingdom 100 100
Phoslock Europe GmbH	Switzerland 60 60
Phoslock (Shanghai) Water Solutions Limited	China 100 100
Phoslock (Changxing) Water Solutions Limited	China 100 NA
Phoslock Beijing Ecological Engineering Technolgy Co., Ltd	China 100 NA

Phoslock (Changxing) Water Solutions Ltd was incorporated on 17 November, 2016.

Phoslock Beijing Ecological Engineering Techology Co., Ltd was incorporated on 6 June, 2017

NOTE 13 PLANT AND EQUIPMENT Plant and equipment, at cost Less accumulated depreciation Movements in Carrying Amounts	2017 2016 $ $ 1,342,631 304,546 (304,538) (247,859) 1,038,093 56,687

Movements in the carrying amounts for plant and equipment ( including one motor vehicle*) between the beginning and the end of the current financial year:

Additions Disposals Depreciation Expense Additions Disposals Depreciation Expense Balance at 1 July 2015 Balance at 30 June 2016 Balance at 30 June 2017 Balance at 1 July 2016	Plant and Equipment Total $ $ 56,687 56,687 1,038,085 1,038,085 - - (56,679) (56,679) 1,038,093 1,038,093 106,635 106,635 15,036 15,036 - - (64,984) (64,984) 56,687 56,687

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

NOTE 14 INTANGIBLE ASSETS

NOTE 14 INTANGIBLE ASSETS Trademarks and licences Cost impairment Net carrying value Development costs Cost impairment Net carrying value	2017 2016 $ $ 4,159,660 4,159,660 (4,159,660) (4,159,660) - - 323,740 323,740 (323,740) (323,740) - -

There has been no movement in the intangible assets for both 2017 and 2016 as such no movement schedule has been presented.

There is no amortisation on intangible assets for both 2017 and 2016 financial years as the intangibles have been fully impaired in 2011 (see following note).

Impairment of Trademarks & Licences and Development Costs as at 30 June 2017

In 2011, the directors resolved to impair the carrying value of company’s Intellectual Property ($2,092,554) based on value in use calculation. The company’s Intellectual Property is core to the Phoslock business. The directors believe that the carrying value of the Intellectual Property does not affect the Phoslock business and that nothing has changed to the length of protection afforded to the company via its patents and trademarks.

NOTE 15 OTHER ASSETS CURRENT Prepayments VAT deposit guarantee NOTE 16 TRADE AND OTHER PAYABLES CURRENT Trade payables Sundry payables and accrued expenses	2017 2016 $ $ 107,430 62,322 34,171 35,568 141,601 97,890 281,438 564,784 49,005 32,974 330,443 597,758

All trade and other payables are unsecured and are non-interest bearing. The Group's exposure to currency and liquidity risk related to trade and other payables is disclosed ion Note 27 Financial Risk Management.

NOTE 17 FINANCIAL LIABILITIES

CURRENT Convertible Notes (unsecured) with releated parties Related party borrowings - loan(unsecured) Related party borrowings - debtor factoring (secured) Related party subordinated loan (unsecured)	- 650,000 1,000,000 - 500,000 - 292,241 293,549 1,792,241 943,549

The Convertible Notes (unsecured), borrowings and sub-ordinated loan relating to related parties as disclosed in Note 25. $0.65m Convertible Note has been converted into 14.1 million shares. Refer cashflow non cash financing note (Note 23).

NOTE 18 PROVISIONS CURRENT Employee entitlements Opening balance at 1 July Additional provisions Amounts used Balance at 30 June NON-CURRENT Employee entitlements Opening balance at 1 July Additional provisions Amounts used Balance at 30 June Analysis of total provisions Current Non-current	2017 2016 $ $ 390,330 323,182 27,465 92,668 (65,661) (25,520) 352,134 390,330 7,572 32,954 1,135 (25,382) - 8,707 7,572 352,134 390,330 8,707 7,572 360,841 397,902

Current employee entitlements

During FY2017 the Company undertook 2 buy-backs of annual leave. Each employee with more than 200 hours of accued leave were entitled to sell-back 80 hours of annual leave at each buy back. The Board approved the buy-backs to reduce the amount of accrued employee entitlements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

Non-current employee entitlements

Non-current employee entitlements relates to employees' long service leave estimated using the present value of future cash flows of long service leave discounted by the probability that the leave will be taken. Probability is guided by the Company's history of leave taken. The measurement and recognition criteria relating to employee benefits has been included in Note 1 to this report.

NOTE 19 ISSUED CAPITAL

413,084,403 fully paid ordinary shares (2016: 362,953,968) (a) Ordinary Shares At the beginning of the year Shares issued during the year - 5 August 2015 - shares issued under Convertible Security - 8 September 2015 - shares issued under Convertible Security - 8 September 2015 - shares issued under to Consultant - 23 December 2015 - shares issued under a Placement - 14 January 2016 - shares issued under a Placement - 12 May 2016 - shares issued under a Placement - 8 June 2016 - shares issued under Share Purchase Plan - 17 June 2016 - shares issued for Conversion of $1.4m Convertible Notes - 20 June 2016 - shares issued under a Placement - 18 July, 2016 - conversion of options - 9 May, 2017 - conversion of options - 15 May, 2017 - issue of shares under a Placement - 31 May, 2017 - issue of shares under a Placement - 31 May, 2017 - shares issued under Conversion of $0.65m Convertible Notes Transaction costs arising from Share Placement Balance at the end of the year - 19 November 2015 - sale of collateral shares under Convertible Security	2017 $ 41,551,112 41,551,112 2017 2017 2016 No. $ No. 362,953,968 38,465,112 250,851,616 3,333,333 3,650,793 1,000,000 - 1,500,000 8,500,000 20,000,000 22,318,506 32,880,435 18,919,285 5,000,000 265,000 1,000,000 71,000 15,000,000 1,050,000 15,000,000 1,050,000 14,130,435 650,000 413,084,403 41,551,112 362,953,968	2016 $ 38,465,112 38,465,112 2016 $ 32,112,271 90,000 94,916 26,000 128,000 60,000 340,000 1,400,000 1,562,295 1,400,000 1,324,350 (72,720) 38,465,112

Ordinary shares participate in dividends and the proceeds on winding up of the parent entity in proportion to the number of shares held.

At shareholder meetings each ordinary share is entitled to one vote when a poll is called, otherwise each shareholder has one vote on a show of hands.

(b) Options

For information relating to Phoslock Water Solutions Limited employee options, including details of options issued, exercised and lapsed during the financial year and the options outstanding at year-end, refer to Note 24 Share-based Payments and the Remuneration Report.

(i) financial year and the options outstanding at year-end, refer to Note 24 Share-based Payments and the Remuneration Report. For information relating to share options issued to key management personnel during the financial year, refer to Note 24 Share-based Payments and the (ii) Remuneration Report.

(c) Capital Management

Management control the capital of the group in order to maintain a good debt to equity ratio, provide the shareholders with adequate returns and ensure that the group can fund its operations and continue as a going concern.

The group's debt and capital includes ordinary share capital and financial liabilities, supported by financial assets.

Management effectively manages the group's capital by assessing the groups financial risks and adjusting its capital structure in response to changes in these risks and in the market. These responses include the management of debt levels and share issues.

Group equity increased during the year by $3.0 million from a share placement ($2.1 million); conversion of unlisted options ($0.3 million) and conversion of Convertible Notes The gearing ratio's for the year ended 30 June 2017 and 30 June 2016 are as follows:

Note Total borrowings 16,17 Less cash and cash equivalents 9 Net debt Total equity Total assets Gearing ratio	2017 2016 $ $ 2,122,684 1,541,307 (1,234,243) (1,306,865) 888,442 234,442 1,935,669 648,342 4,509,024 2,677,381 31% 27%

NOTE 20 RESERVES

(a) Foreign Currency Translation Reserve

The foreign currency translation reserve records exchange differences arising on translation of foreign subsidiaries

(b) Option Reserve

The option reserve records items recognised as expenses on valuation of employee share options and options issued to third parties. 35,000,000 options were issued to employees and consultants during FY2017 plus 30,000,000 options were issued during FY2017 to China Environmental Corporation Pty Ltd as part of the terms of a Share Placement. An option expense of $20,991 was recorded for FY 2017 for share option expenses issued to employees and an additional $14,817 for options issued to third parties. This amount of $35,808 was also credited to the Option Reserve (see Consolidated Statement of Changes in Equity). $29,395 was transferred from the Option Reserve to Retained Earnings for options which had expired or exercised (FY2016:$0).

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

2017 2016 $ $

NOTE 21 COMMITMENTS

(a) Finance Lease Commitments

The Group does not have any finance lease commitments.

(b) Operating Lease Commitments

Non-cancellable operating lease Payable - minimum lease payments - not later than 12 months - between 12 months and 5 years - greater than 5 years	217,669 43,401 493,827 - - - 711,496 43,401

One of the non-cancellable leases relates to the leased Sydney office premise expiring 30 September, 2019. Rent is payable monthly in advance.

The other non-cancellable leases relates to the leased Shanghai office premise expiring 28 February, 2018. Rent is payable monthly in advance.

The other non-cancellable leases relates to the leased Changxing factory premise expiring 28 February, 2022. Rent is payable annual in advance. Some rent is rebatable from the Changxing local government if certain sales revenue targets are met.

NOTE 22 SEGMENT REPORTING

Segment Information

Identification of reportable segments

The group has identified its operating segments based on the internal reports that are reviewed and used by the board of directors (chief operating decision makers) in assessing performance and determining the allocation of resources.

The group is managed primarily on the basis of geographical areas – Australia/NZ, Europe/UK, US/Canada/Brazil and China. The Group’s operations inherently have similar profiles and performance assessment criteria.

Types of products and services by segment

The sale of Phoslock granules and application services and lake restoration consulting services is the main business of the Group. These products and services are provided on a geographical basis with offices and representation in each of the company’s four key geographical areas - Australia/NZ, Europe/UK, US/Canada/Brazil and China.

Basis of accounting for purposes of reporting by operating segments

Accounting policies adopted

Unless stated otherwise, all amounts reported to the Board of Directors as the chief decision maker with respect to operating segments are determined in accordance with accounting policies that are consistent to those adopted in the annual financial statements of the Group.

Inter-segment transactions

An internally determined transfer price is set for all inter-entity sales. This price is based on what would be realised in the event the sale was made to an external party at arm’s-length. All such transactions are eliminated on consolidation for the Groups financial statements.

Corporate charges are allocated to reporting segments based on the segments’ overall proportion of revenue generation within the Group. The Board of Directors believes this is representative of likely consumption of head office expenditure that should be used in assessing segment performance and cost recoveries.

Inter-segment loans payable and receivable are initially recognised at the consideration received net of transaction costs and then revalued to the exchange rate used at the end of the current accounting period.

Segment assets

Where an asset is used across multiple segments, the asset is allocated to the segment that receives the majority of economic value from the asset. In the majority of instances, segment assets are clearly identifiable on the basis of their nature and physical location.

Unless indicated otherwise in the segment assets note, investments in financial assets, deferred tax assets and intangible assets have not been allocated to operating segments.

Segment liabilities

Liabilities are allocated to segments where there is direct nexus between the incurrence of the liability and the operations of the segment. Borrowings and tax liabilities are generally considered to relate to the Group as a whole and are not allocated. Segment liabilities include trade and other payables and certain direct borrowings.

Unallocated items

The following items of revenue,expense, assets and liabilities are not allocated to operating segments as they are not considered part of the core operations of any segment:

• net gains on disposal of available-for-sale investments;

• income tax expense;

• deferred tax assets and liabilities;

• intangible assets

• Corporate and Finance cost

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A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

NOTE 22 SEGMENT REPORTING (continued)

(i) Segment performance
			Australia/NZ	Europe/UK	US / Canada	China	Total	Eliminations	Total
Twelve months ended 30 June 2017					Brazil
Revenue
External sales			101,851	623,033	2,893,103	207,419	3,825,406	-	3,825,406
Inter-segment sales			328,538	-	-	-	328,538	(328,538)	-
Other revenue			377,906	-	-	-	377,906	-	377,906
Total segment revenue			808,295	623,033	2,893,103	207,419	4,531,850	(328,538)	4,203,312
Reconciliation of segment revenue	to group
revenue
Unallocated interest and other income									23,994
Total group revenue									4,227,306
Segment (loss)/profit before tax			(366,958)	26,708	582,586	(1,107,339)	(865,002)	-	(865,002)
Reconciliation of segment result to	group net
profit/(loss) before tax
Amounts not included in segment result		but
reviewed by the Board
- Depreciation and amortisation							-	-	(56,679)
Unallocated items:
- Corporate charges									(675,711)
- Finance costs									(225,222)
Loss before income tax from continuing		operations							(1,822,613)
Twelve months ended 30 June 2016
Revenue									-
External sales			307,337	257,648	1,118,317	47,347	1,730,649	-	1,730,649
Inter-segment sales			145,522	43,707	-	-	189,229	(189,229)	-
Other revenue			329,062				329,062	-	329,062
Total segment revenue			781,921	301,355	1,118,317	47,347	2,248,940	(189,229)	2,059,711
Reconciliation of segment revenue	to group
Unallocated interest and other income									136,530
Total group revenue									2,196,241
Segment loss before tax g	g	p	(112,358)	(14,514)	(153,650)	(439,049)	(719,571)	-	(719,571)
profit/(loss) before tax
Amounts not included in segment result		but
- Depreciation and amortisation							-	-	(64,984)
Unallocated items:
- Corporate charges									(675,521)
- Finance costs									(853,823)
Loss before income tax from continuing		operations							(2,313,899)
(ii) Segment assets
30 June 2017
Segment assets			5,724,549	251,459	-	2,423,493	8,399,502	(3,890,476)	4,509,026
Unallocated assets - intangibles
Total group assets									4,509,026
30 June 2016
Segment assets			3,409,056	202,408	-	130,022	3,741,486	(1,064,105)	2,677,381
Unallocated assets - intangibles									-
Total group assets									2,677,381
(iii) Segment liabilities
30 June 2017
Segment liabilities			2,255,608	329,356	-	11,167	2,596,132	(22,776)	2,573,356
Unallocated liabilities									-
Total group liabilities									2,573,356
30 June 2016
Segment liabilities			1,725,220	342,011	-	(6,845)	2,060,386	(31,347)	2,029,039
Unallocated liabilities									-
Total group liabilities									2,029,039

(iv) Major customers

The Group has a number of customers to which it provides both products and services. The Group's largest external customer accounts for 66% of external revenue (2016: 39%). This customer is purchasing product for three separate projects.

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

NOTE 23 CASH FLOW INFORMATION Net loss after income tax Depreciation expense Shares and Option expense Interest on Convertible Notes- amortised cost FV movement of derivative liability Issue of shares to consultant Accrued interest paid from prior year (Increase)/decrease in trade and term receivables (Increase)/decrease in prepayments and other assets (Increase)/decrease in inventories Increase/(decrease) in trade payables and accruals Increase/(decrease) in other liabilities Increase/(decrease) in provisions Change in assets/liabilities Cash flow used in operating activities Reconciliation of net cash from operating activities to operating profit after income tax Non Cash Flows to Profit

2017 2016 $ $ (1,822,613) (2,313,899) 56,679 64,984 35,808 202,982 - 334,031 - (121,977) - 26,000 - (48,207) (480,642) (69,550) (43,711) (34,740) (398,506) (358,292) (267,314) 90,218 - 89,830 (37,061) 41,766 (2,957,360) (2,096,853)

Non-Cash Financing Activities

$0.65 million of Convertible Notes were converted to 14.1 million shares (Note 19)

NOTE 24 SHARE-BASED PAYMENTS

At 30 June 2017 the Group has the following share-based payment scheme:

Phoslock Water Solutions Limited Employee Options Plan

The Employee Plan is designed as an incentive for senior managers and above. Under the plan, participants are granted options which only vest if certain performance standards are met. On 20 June, 2016, 13.6 million share options were granted to 13 employees and consultants who contribute to the Phoslock business, with a vesting condition to be employed or engaged by PWS by 1 July, 2017and exercisable by 30 September, 2017. The exercise price is 9 cents.

On 16 June, 2017, Shareholders approved 65 million performance share options with a Grant date of 10 April, 2017, all subject to sales revenue performance criteria before 30 June, 2019. 30 million performance options were granted to senior Chinese water executives who can assist PWS business in China; 20 million performance options were granted to Phoslock Beijing executives; 15 million perfromance options were granted to 13 PWS employees and consultants who contribute to the Phoslock business exercisable by 20 December, 2019. The exercise price is 10.5 cents. All of these options are performance options and can only vest if performance criteria is met. The details of the performance criteria is contained in the General Meeting Notice for the 16 June, 2017 meeting.

Under the plan, where a participant ceases employment prior to the vesting of their share options, the share options are forfeited unless cessation of employment is due to death. All options granted are for ordinary shares in Phoslock Water Solutions Limited which confer a right of one ordinary share for every option held. The options hold no voting or dividend rights and are not transferable.

The following is a table reconciling the movements of share options during the year ended 30 June 2017:

Outstanding at the beginning of the year Granted Vesting Conditions not met / lapsed Exercised Vesting options not exercised Outstanding at year end Exercisable at year end	Number of options Weighted Average Exercise price Number of options Weighted Average Exercise price 28,100,000 0.078 $ 14,500,000 $0.100 65,000,000 0.082 $ 18,600,000 $0.082 (5,000,000) $0.100 (6,000,000) 0.059 $ - 87,100,000 0.100 $ 28,100,000 $0.078 8,500,000 0.083 $ 14,500,000 $0.060 2017 2016

The options outstanding at 30 June 2017 had a weighted average exercise price of $0.083 and a weighted average expected life of 2 years.

Options that are not exercised by the designated expiry date automatically expire. Options will be forfeited when specified conditions attached to the options are not met. All share options were valued at grant date using a Black-Scholes option-pricing and Biomial Call Option methodology.

Details of the share-based payments held by key management personnel are included in Remuneration Report.

NOTE 25 RELATED PARTIES

All transactions between related parties are on normal commercial terms and conditions no more favorable than those available to other parties unless otherwise stated. Information in respect of parent entity and subsidiries are contained in Note 12.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

	2017	2016
	$	$
(a) Key Management Personnel Compensation
Details of key management personnel compensation are included in Note 6 and the Remuneration Report.
Transaction with related parties:
(b) Relatives of Specified Executives
Services provided on a normal commercial basis by parties related to specified executives
Margaret Schuitema – part time employment (1))	69,230	60,000
Yolanda Winks – part time employment (2)	34,616	30,000
Ben Schuitema – part time employment (1)	31,495	24,510
Martin Schuitema – part time employment (1)	39,434	19,500
(c) Transactions with related parties
Link Traders (Aust) Pty Ltd – rental costs for Sydney Office (3)	97,138	90,339
Link Traders (Aust) Pty Ltd – interest on loans (3) (6)	212,618	519,579
Sail Ahead Pty Ltd – interest on loans (4) (7)	1,825	37,602
Serenety Holdings Pty Ltd - investor relations (8)	54,000	50,000
Contribution to self-managed superannuation funds managed by related parties (1) (3)	75,866	72,404
(d) Transactions with other related parties
Bentophos GmbH - purchase of goods & services	15,724	18,113
Bentophos GmbH - subordinated loan payments to Phoslock Europe GmbH	-	-
Bentophos GmbH is a major business partner and currently holds 40% interest in subsidiary Phoslock Europe	GmbH.
(e) Balances with related parties
Robert Schuitema - loan from Phoslock Pty Ltd to purchase PHK shares (5)	-	10,000
Link Traders (Aust) Pty Ltd – Convertible Notes (3) (5)	-	650,000
Link Traders (Aust) Pty Ltd – loan to Phoslock Pty Ltd (3)	1,500,000	-
Bentophos GmbH - subordinated loan to Phoslock Europe GmbH	292,241	293,549

(1) related party of Robert Schuitema

(2) related party of Andrew Winks

(3) Laurence Freedman is a director of this company

(4) Robert Schuitema is a director of this company

(5) Convertible Notes issued by Phoslock Water Solutions Ltd convertible/ extended to 30 June 2017 and converted into shares; interest rate – 15%

(6) interest paid on loans, debt factoring to Phoslock Pty Ltd (interest rate 15%-20%) and Convertible Notes to Phoslock Water Solutions Ltd (interest rate 15%)

(7) interest paid on loans to Phoslock Pty Ltd (interest rate 20%) and Convertible Notes to Phoslock Water Solutions Ltd (interest rate 15%)

(8) related party by of Laurence Freedman

NOTE 26 EVENTS SUBSEQUENT TO BALANCE DATE

No material events subsequent to Balance Date.

NOTE 27 FINANCIAL RISK MANAGEMENT

(a) Financial Risk Management Policies

This note discloses the Group's objectives, policies and processes for managing and measuring these risks. The Group‘s overall risk management plan seeks to minimise potential adverse effects due to the unpredictability of financial markets. The Group does not speculate in financial assets.

(i) Financial Risk Exposure Management

Risk management is carried out by the Group’s risk management committee under the delegated power from the Board of Directors. The Chief Financial Officer has primary responsibility for the development of relevant policies and procedures to mitigate the risk exposure of the Group, these policies and procedures are then approved by the risk management committee and tabled at the board meeting following their approval. The main risks the group is exposed to through its financial instruments are interest rate risk, foreign currency risk, liquidity risk and credit risk.

Interest rate risk

The consolidated group’s exposure to interest rate risk, which is the risk that a financial instruments value will fluctuate as a result of changes in market interest rates is detailed at Note 27 (b). The groups debt exposure is not subject to fluctuating interest rates.

Foreign currency risk

The group is exposed to fluctuations in foreign currencies arising from the sale and purchase of goods and services in currencies other than the group's measurement currency. In particular the US dollar, Chinese Yuan and European Euro. This risk is managed by the maintenance of foreign currency denominated bank accounts. Refer to Note 27 (b) for further details.

Liquidity risk

Liquidity risk is the risk that the consolidated entity will not be able to meet its financial obligations as they fall due. The consolidated entity's approach to managing liquidity risk is to ensure, that as far as possible, it will always have sufficient liquidity to meet its liabilities when due. The group manages liquidity risk by closely monitoring forecast cash flows and ensuring that adequate access to cash facilities are maintained.

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A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

Credit risk

Credit risk is the exposure to financial loss by the consolidated entity if a customer fails to meet its contractual obligation and arises from the consolidated entity’s trade receivables. During the year the consolidated group entered into a factoring arrangements with a related party for the accounts receivable of a major customer.

Credit risk is managed on a group basis and reviewed on a monthly basis by the board and management. All potential customers are rated for credit worthiness taking into account their size, market position and financial standing. Customers that do not meet the group's strict credit policies may only purchase on a cash basis.

(b) Financial Instruments

(ii) Financial Instrument Composition and Maturity Analysis

The tables below reflect the undiscounted contractual settlement terms for financial instruments of a fixed period of maturity, as well as management's expectations of the settlement period for all other financial instruments. As such the amounts may not reconcile to the consolidated statement of financial position.

2017

Weighted Average Effective Interest rate % Financial Assets Cash and cash equivalents 1.5% Long term deposits 3.0% Trade and other receivables 0% Total Financial Assets 2016 Weighted Average Effective Interest rate % Financial Assets Cash and cash equivalents 1.5% Long term deposits 2.7% Trade and other receivables 0% Total Financial Assets 2017 Weighted Average Effective Interest rate % Financial Liabilities Trade and sundry payables 0% Borrowings 15-18% Subordinated Loan 0% Total Financial Liabilities 2016 Weighted Average Effective Interest rate % Financial Liabilities Trade and sundry payables 0% Convertible Notes 15% Subordinated Loan 0% Total Financial Liabilities

Floating Interest rate Within 1 year 1 to 5 years Over 5 Years Non- interest bearing Total 1,234,243 - - - - 1,234,243 25,000 25,000 - - - - 1,172,751 1,172,751 1,259,243 - - - 1,172,751 2,431,994 Floating Interest rate Within 1 year 1 to 5 years Over 5 Years Non- interest bearing Total 1,306,865 - - - 1,306,865 25,000 25,000 692,109 692,109 1,331,865 - - - 692,109 2,023,974 Floating Interest rate Within 1 year 1 to 5 years Over 5 Years Non- interest bearing Total - - - - 330,443 330,443 1,500,000 1,500,000 - - - - 292,241 292,241 - 1,500,000 - - 622,684 2,122,684 Floating Interest rate Within 1 year 1 to 5 years Over 5 Years Non- interest bearing Total - - - - 597,758 597,758 - 650,000 - - - 650,000 - - - - 293,549 293,549 - 650,000 - - 891,307 1,541,307 Fixed Interest Rate Maturing Fixed Interest Rate Maturing Fixed Interest Rate Maturing Fixed Interest Rate Maturing

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Phoslock Water Solutions Limited and Controlled Entities A.B.N. 88 099 555 290

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED 30 JUNE 2017

			2017	2016
			$	$
(b) Financial Instruments (continued)
Financial liabilities are expected to be paid as follows:
Less than 6	months		1,830,443	597,758
6 months to	1 year		-	650,000
1-5 years			292,241	293,549
			2,122,684	1,541,307
	(ii)	Net Fair Values
		The net fair values of other assets and liabilities approximate their carrying value.
	(iii)	Sensitivity analysis
		Interest Rate Risk and Foreign Currency Risk

The group has performed sensitivity analysis relating to its exposure to interest rate risk and foreign currency risk at balance date. This sensitivity analysis demonstrates the effect on the current year results and equity which could result from a change in these risks.

Interest Rate Sensitivity Analysis As at 30 June 2017, the effect on profit and equity as a result of changes in the interest rate on Cash and cash equivalents, with all other variables remaining constant would be as follows:

Change in profit
- Increase in interest rate by 1%	12,342 13,069
- Decrease in interest rate by 1%	(12,342) (13,069)
Change in equity
- Increase in interest rate by 1%	12,342 13,069
- Decrease in interest rate by 1%	(12,342) (13,069)
Foreign Currency Risk and Sensitivity Analysis
As at 30 June 2017, the effect on profit and equity as a result of changes in the value of the Australian Dollar to the US Dollar on US$ sales (assumed to
be 70% of total sales); 70% (2016) with all other variables remaining constant is as follows:
Change in profit
- Improvement in AUD to USD by 10%	200,834 90,859
- Decline in AUD to USD by 10%	(200,834) (90,859)
Change in equity
- Improvement in AUD to USD by 10%	200,834 90,859
- Decline in AUD to USD by 10%	(200,834) (90,859)
As at 30 June 2017, the effect on profit and equity as a result of changes in the value of the Australian Dollar to the Euro on Euro sales (assumed to be
10% of total sales) 10% (2016) with all other variables remaining constant is as follows:
Change in profit
- Improvement in AUD to Euro by 10%	25,630 11,595
- Decline in AUD to Euro by 10%	(25,630) (11,595)
Change in equity
- Improvement in AUD to Euro by 10%	25,630 11,595
- Decline in AUD to Euro by 10%	(25,630) (11,595)

The above interest rate and foreign exchange rate risk sensitivity analysis has been performed on the assumption that all other variables remain unchanged.

NOTE 28 CONTINGENT LIABILITIES

The group has no contingent liabilities.(2016: NIL)

Page 35

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Director's Declaration

In the Directors' opinion:

• the consolidated financial statements and notes, as set out on pages 10 to 35, and the remuneration report on

• 1 pages 6 to 8 of the directors' report, are in accordance with the Corporations Act 2001 including:

• giving a true and fair view of the financial position as at 30 June 2017 and of the performance for the financial

• (a) year ended on that date of the Group; and

• (b) complying with Australian Accounting Standards and the Corporations Regulations 2001; and

• there are reasonable grounds to believe that the Group will be able to pay its debts as and when they become

• 2 due and payable.

Note 1 confirms that the consolidated financial statements is in compliance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

The Chief Executive and Chief Financial Officer have given the declarations required by section 295A of the Corporations Act 2001 to the Directors.

The declaration is made in accordance with a resolution of the Board of Directors.

==> picture [76 x 27] intentionally omitted <==

Mr Robert Schuitema Managing Director

==> picture [88 x 24] intentionally omitted <==

Hon Pam Allan

Non-Executive Director - Chairman of Audit Committee

Dated this 25th day of August 2017 Sydney

Dated this 25th day of August 2017 Sydney

Sydney Head Office

 Suite 403, Level 4, 25 Lime Street, Sydney, NSW 2000, Australia



www.phoslock.com.au

Page 36

Chartered Accountants ABN 14 568 923 714

W. W. Vick & Co.

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INDEPENDENT AUDITOR'S REPORT

TO THE MEMBERS OF PHOSLOCK WATER SOLUTIONS LIMITED AND CONTROLLED ENTITIES

Opinion

We have audited the financial report of Phoslock Water Solutions Limited (the Company) and its subsidiaries (together the Group), which comprises the consolidated statement of financial position as at 30 June 2017, the consolidated statement of profit or loss and other comprehensive income, consolidated statement of changes in equity and consolidated statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies, and the directors’ declaration.

In our opinion, the accompanying financial report of the Group is in accordance with the Corporations Act 2001, including;

• a) giving a true and fair view of the Group’s financial position as at 30 June 2017, and of its financial performance for the year then ended; and

• b) complying with Australian Accounting Standards and the Corporations Regulation 2001.

Basis for Opinion

We conducted our audit in accordance with Australian Auditing Standards. Our responsibilities under those standards are further described in the Auditor’s Responsibilities for the Audit of the Financial Report section of our report. We are independent of the Group in accordance with the auditor independence requirements of the Corporations Act 2001 and the ethical requirements of the Accounting Professional and Ethical Standards Board’s APES 110 Code of Ethics for Professional Accountants (the Code) that are relevant to our audit of the financial report in Australia. We have also fulfilled our other ethical responsibilities in accordance with the Code.

We confirm that the independence declaration required by the Corporations Act 2001 , which has been given to the directors of the Company, would be on the same terms if given to the directors as at the time of this auditor’s report.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

Material uncertainty regarding continuation as a going concern

We draw attention to Note 1 (a) in the financial report, which indicates that the consolidated entity incurred a net loss of $1,822,613 during the year ended 30 June 2017, has accumulated losses totalling $39,821,703, and net cash used in operating activities of $2,957,360. As stated in Note 1 (a), these events or conditions, along with other matters as set forth in Note 1 (a), indicate that a material uncertainty exists that may cast significant doubt on the consolidated entities’ ability to continue as a going concern. Our opinion is not modified in respect of this matter.

Key Audit Matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial report of the current period. These matters were addressed in the context of our audit of the financial report as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. In addition to the matter described in the “Material Uncertainty Related to Going Concern” section, we have determined the matters described below to be the key audit matters to be communicated in our report.

Fayworth House, Suite 403, 4th Floor, 379-383 Pitt Street, Sydney, NSW 2000 PO Box 20037, World Square, NSW 2002 Phone: 02 9266 0881 Fax: 02 9266 0886

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Liability limited by scheme approved under Professional Standards Legislation

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Key audit matter Revenue Recognition Refer Note 1 (d) Revenue and Other Income and Note 2 Revenue

• How our audit addressed the key audit matter Our procedures included, among others: • We considered the appropriateness of the Group’s revenue recognition accounting policies;

Revenue from the sale of goods is recognised at the moment when the significant risks and rewards of ownership have been passed to the buyer.

• We also considered the accuracy of the Group’s description of the accounting policy related to revenue and whether revenue is adequately disclosed throughout the financial statements.

This area is a key audit matter due to the nature of revenue arrangements, the systems and processes used to transact sales and the importance of the revenue balance to stakeholders.

• We analytically reviewed sales, cost of goods sold, gross margin, and inventory levels by comparing to sale price, volume sold, and movement of stock;

• We assessed transactions taking place either side of the balance sheet date to evaluate whether revenue was recognised in the correct period; and

Auditing standard ASA 240 requires us to obtain reasonable assurance that the financial report is free from material misstatement regarding revenue recognition.

• We have reviewed all revenue transactions administered by the Australian Parent entity against the shipment/delivery documents and invoices. The revenue as recorded has occurred during the year. Revenue originated in China has been substantially tested by our Component Auditors.

Auditing standard ASA 240 requires us to obtain reasonable assurance that the financial report is free from material misstatement regarding revenue recognition.	•	the balance sheet date to evaluate whether revenue was recognised in the correct period; and We have reviewed all revenue transactions administered by the Australian Parent entity against the shipment/delivery documents and invoices. The
Revenue is an essential element of how the Group		revenue as recorded has occurred during the year.
measures its performance upon which management are		Revenue originated in China has been substantially
incentivised. The Group focuses on revenue as a key		tested by our Component Auditors.
performance measure, which could create an incentive
for revenue to be recognised before the risks and
rewards have been transferred.
Overseas Subsidiaries
Refer Note 12(b) – Controlled Entities of the Parent	Our procedures included, among others:
Entity and Note 22 – Segment Reporting	•	We sent ASA 600 checklists and questionnaires to
		the Chinese auditor to ensure that the Chinese audit
The Group has 2 subsidiaries incorporated in China.		is be conducted in accordance with International
These are considered risk for the following reasons:		Auditing Standards;
• Different laws and regulations in China and a different tax jurisdiction to the Australian head entity	•	We requested confirmation that the Chinese auditor was independent of Phoslock Water Solutions Limited Group;
• There is also a risk that local accounting policies may not comply with International Financial Reporting	•	We reviewed selected workpapers and responses to questionnaires;
Standards.	•	We sent follow up questions and discussed the work
		performed by the Chinese auditor; and
	•	We obtained audit clearance from the Chinese
		auditor of the reporting package and relevant
		disclosures for the year ended 30 June 2017.
Related Party Loans
Refer to Note 25 Related Parties	Our procedures included, among others:
	•	We obtained a list of all related party transactions
The group has obtained significant funding from a		from the Directors;
related party Link Traders (Aust.) Pty Limited. The loans	•	We obtained confirmations from the Directors that
have been provided for working capital and include debt factoring arrangements for the Group.	•	transactions were complete; We reviewed terms and conditions of related party
This is considered a risk as there is potential that the		transactions and compared to commercial terms;
funding may not be appropriately recorded and the	•	We reviewed compliance of terms of the related party
transactions not being at arm’s length.		loans and debt factoring arrangement; and

• We reviewed selected workpapers and responses to questionnaires;

• • We sent follow up questions and discussed the work performed by the Chinese auditor; and

• • We obtained audit clearance from the Chinese auditor of the reporting package and relevant disclosures for the year ended 30 June 2017.

• Our procedures included, among others: • We obtained a list of all related party transactions from the Directors;

• • We obtained confirmations from the Directors that transactions were complete;

• • We reviewed terms and conditions of related party transactions and compared to commercial terms;

• • We reviewed compliance of terms of the related party loans and debt factoring arrangement; and

• • We determined that related party transactions are adequately disclosed throughout the financial statements.

Other Information

The directors are responsible for the other information. The other information comprises the information included in the Group’s annual report for the year ended 30 June 2017, but does not include the financial report and our auditor’s report thereon.

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W.W. Vick & Co.

Our opinion on the financial report does not cover the other information and accordingly we do not express any form of assurance conclusion thereon.

In connection with our audit of the financial report, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial report or our knowledge obtained in the audit or otherwise appears to be materially misstated.

The following other information is expected to be received after the date of the auditor’s report; Chairman’s report, Managing Director’s report and Corporate Governance Statement. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

Responsibilities of Directors for the Financial Report

The directors of the Company responsible for the preparation of the financial report that gives a true and fair view in accordance with Australian Accounting Standards and the Corporations Act 2001, and for such internal control as directors determine is necessary to enable the preparation of the financial report that gives a true and fair view and is free from material misstatement, whether due to fraud or error.

In preparing the financial report, the directors are responsible for assessing the ability of the Group to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless directors either intends to liquidate the Group or to cease operations, or has no realistic alternative but to do so.

Auditor’s Responsibilities for the Audit of the Financial Report

Our objectives are to obtain reasonable assurance about whether the financial report as a whole is free from material misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with Australian Auditing Standards will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial report.

A further description of our responsibilities for the audit of the financial report is located at the Auditing and Assurance Standards Board website at http://www.auasb.gov.au/auditors_files/ar6.pdf. This description forms part of our auditor’s report.

Report on the Remuneration Report

Opinion on the Remuneration Report

We have audited the Remuneration Report included in pages 6 to 8 of the directors’ report for the year ended 30 June 2017.

In our opinion, the Remuneration Report of Phoslock Water Solutions Ltd and Controlled Entities., for the year ended 30 June 2017, complies with section 300A of the Corporations Act 2001 .

Responsibilities

The directors of the Company are responsible for the preparation and presentation of the Remuneration Report in accordance with section 300A of the Corporations Act 2001. Our responsibility is to express an opinion on the Remuneration Report, based on our audit conducted in accordance with Australian Auditing Standards.

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4th Floor 379-383 Pitt Street Sydney NSW 2000

Dated: 25 August 2017

W W Vick & Co

Chartered Accountants …………………………… Phillip Jones - Partner

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