08-Oct-2020:  Market Update

Market Update – China accounting irregularities

Phoslock Environmental Technologies (ASX:PET) announced today that KPMG has reported its preliminary findings into suspected accounting irregularities relating to PET’s China operations.

Fraudulent activity has been identified, including false accounting and falsification of invoices and service contracts where PET or its subsidiaries are the recipient, and potential improper tax reporting and misappropriation of funds. Several China-based employees have been either stood down or terminated in relation to these matters.

It has also been confirmed that several previously undisclosed related party transactions have taken place.

Further investigations are required to determine the full extent of these, and possibly further, irregularities and to quantify the impact on the company’s finances and accounts. This work is underway.

In addition to the work being undertaken by KPMG, PET has retained an experienced corporate finance consultant specialising in financial due diligence to be based at PET’s China office and to provide assistance and support to the company. That assistance includes, but is not limited to:

• Help with the quantification of losses associated with any malpractice and assistance with related asset recovery;
• Arrangement of on-site forensic investigations into books and records to prepare for the reconstruction of the company accounts;
• Recommendations on new procedures and payment protocols; and
• Interim management of the business and approval of cash payments, including suppliers’ payments, wages and salaries, statutory payments and reimbursements.

Measures are also being taken to protect the company’s assets, including cash reserves, and intellectual property while the investigations continue. All company operations and assets outside of China are unaffected by these matters, including significant cash reserves on deposit in Australia.

PET will actively investigate and consider its rights in relation to pursuing legal action against individuals and/or entities found to have been involved in any fraudulent activity and to securing the recovery of amounts associated with all irregularities.

The company’s shares will remain suspended from trading until such time as the investigations are complete; the financial and accounting impact has been assessed; and audited accounts for the half year have been released.

While PET addresses these matters in China, the company is continuing its focus on developing its expanding business in other parts of the world and remains confident in its overall growth opportunities.

Further updates will be provided to the market in due course.

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[I do not hold PET shares.]

30-7-2020 (5:02pm):  Business Update   and (at 5:09pm):  Appendix 4C - quarterly

I do not hold PET shares.  Not comfortable holding such a Chinese-facing Australian-headquartered business at this point.  I sold out last year actually, and removed PET from my Strawman.com scorecard earlier this year.  These two announcements were obviously released after the market had already closed yesterday.  Today, PET are down about -16.7% at 3pm eastern time (at 22.5 cps), although they were down as much as -31.5% earlier today (from 27c down to 18.5c).  They have underperformed and underdelivered on their own hype and promises for a while now.  Momentum is all heading in the wrong direction for PET - for me to be a shareholder of this company at this time.  So much promise...

06-July-2020:  Business Update

Interesting that this announcement (Business Update) was NOT marked as price sensitive.  Despite that, the PET SP has risen 3c so far today (up +10.7%) off a very low base - they've been heading steadily south east for 12 months!

30-Apr-2020:  Business Update  and  Quarterly Cashflow Report and  Appendix 4c - Page 4 Amendment

First off, they didn't explain the reason for the third announcement - the Ammended 4C, but I will:  They had a mathematical error on page 4 that resulted in them stating that they had (NEGATIVE) -0.44 "Estimated quarters of funding available".  Quite an achievement!  The correction improves things, but not much:  The new figure is 1.44 quarters, so at their current cash burn rate that suggests they will run out of cash some time in August this year.  However, they've just raised capital - this month, in April 2020 - which is not factored into the March quarterly report.

The following are excerpts from their Business Update announcement:

Capital Raisings  
 
In April, PET undertook three capital raisings which, when completed, will generate some $20m in new equity. A $12m Institutional placement was extremely well supported; PET directors and officers personally undertook to invest $3m (requiring shareholder approval at the 25 May Annual General Meeting); and a Share Purchase Plan (SPP), while currently capped at $5m, is already oversubscribed.  All three capital raisings were priced at the same 50c per share. 
 
The SPP officially closes today.  Demand has been very strong from our large retail shareholder base. The Board plans to wait until final numbers are received before deciding how to treat excess demand for new shares. 

These funds will facilitate the Company’s rapidly growing business opportunities in China and elsewhere. China’s desire to get environmental remediation projects started is accelerating. The additional working capital these funds provide will enable us to commence large projects and to compete for the ever-expanding global remediation and corporate opportunities. 

Business Update 
 
Key Points: 

• China Projects and Factory production largely unaffected by CV19 crisis
• Some International sales may be delayed
• 2020 Revenue forecast: unchanged $50-70m; (up 100% on FY2019)
• Balance Sheet significantly strengthened through Successful $20m new Capital raisings
• Debt free, $50m cash & receivables
• $380m Global Project pipeline   

China 
 
As previously advised, PET’s China Projects and Phoslock® production at our Changxing factory have been largely unaffected by the Covid-19 crisis.  
 
All three of PET China’s current major projects are in Yunnan province, in south western China. This province has been essentially unaffected by Covid-19.  
 
The contract value of the Shilongba restoration near Kunming, Yunnan province, has increased in size to $25m, with some $20m to be completed in FY2020. This project will include significant quantities of Phoslock®, as well as installation of a water treatment technology, building of wetlands, and engineering technology. On completion, a five-year maintenance contract will commence, with a value of some $5m pa.  
 
Results from the 2019 application Xingyun Lake application of some 3,000 tonnes of Phoslock® have met or exceeded all criteria. A further 4,000 tonne application of Phoslock® to Xingyun Lake is planned over several campaigns during 2020. 
 
A significant in-lake Phoslock® trial for Lake Dianchi is currently being finalised. This is China’s eighth largest freshwater lake, 300 km2, six times larger than Sydney Harbour, and ten times larger than Lake Xingyun.

[click on first link above for the photos that accompany the report]

International

The pandemic has affected the commencement date of most first half International projects in Europe/UK, United States and Canada. A number of these projects have been moved to the second half of 2020. 
 
We have made significant sales in Brazil since 2017. Several projects were undertaken this quarter including a large inner-city lake for drinking water in Rio de Janeiro. Work is scheduled to re-commence on existing Brazilian projects from May.

Pipeline

The current project pipeline remains at $380m, comprising $250m in China and the previously announced increased total of $130m of new International projects. This covers the period to end 2023 and includes six Chinese projects and over 40 International projects.

The criteria for pipeline inclusion is that projects are at an advanced stage, dependent on final customer approval and/or financing. For multi-year projects, we have used our best current estimate of sales over the forecast period.

...click on the first link above for the full report, including:

• Changxing Factory 
• Financial Commentary 
• Annual General Meeting 

[The 2020 AGM will be held on Monday 25 May at 2pm. Due to restrictions relating to the Coronavirus Crisis, the AGM will be held as a Virtual Meeting.]

09-Apr-2020:  Share Placement Presentation

Also:  Capital Raising Successfully Completed

PET have raised $12m of new capital from Institutions plus a further $3m from Directors and Officers (Management) of the company, and announce an SPP for existing shareholders.

Key Points: 

• $12m share issue placed at 50c to Australian and International Institutions.
• Directors and Officers to contribute a further $3m+, subject to shareholders approval.
• Share Purchase Plan (SPP) for shareholders to be offered at 50c.
• Funds to be used to fast track large Chinese projects.

--- click on link above for more ---