A shocking run for investors in water-treatment business Phoslock Technologies was capped on Monday by an admission that accounting irregularities at its Chinese operations are being investigated.
KPMG’s forensic accounting division will investigate suspected irregularities discovered during the audit process for the six months to June 30, 2020. The shares last closed at 24¢, before a September 17 trading halt, and are down 84 per cent over the past year.
Fund manager Dean Fergie, of Cyan Asset Management, said he previously suspected Phoslock was ripe to blow up in some way, shape, or form.
"I'd suggest if they're talking accounting irregularities there's something very, very concerning going on in that business and for a number of reasons it's going to lose any faith or goodwill that market participants had in the company."
This time last year, shares in Phoslock, which reports on a calendar year basis, soared to $1.47 for an $812 million market value. This after it gave an August 2019 forecast for 2019 net profit between $6 million to $8 million on revenue up 55 per cent to $27 million to $30 million.
In the end, Phoslock reported a 2019 net profit of $2.99 million on revenue of $24.54 million. For the six months to June 30, 2020, revenue totalled just $1.2 million.
Just days after the overly optimistic forecast was provided, four of Phoslock's directors sold about $35 million worth of shares. Phoslock subsequently reiterated its forecasts on October 31, 2019, confirming they were unchanged, and once again at the Macquarie conference the following month.
Phoslock said receivables stood at a higher-than-anticipated $15 million as at June 30, 2020, but that it expects to secure the majority in late 2020 or 2021. It said Chinese customers were blaming the impact of COVID-19 for not making payments owed.
The company previously said contracts signed in 2019 with Chinese government agencies provided for longer payment terms based on back-ended periodic payments and performance milestones.
Over the six months to June 30, 2020, Phoslock raised $30 million from investors and reported $35.2 million cash on hand at the period end. Its operating cash outflow for the period landed at $8.39 million, versus a reported cash inflow of $10.83 million to June 30, 2019.
It also admitted that 78 per cent of the $1.2 million in revenue booked for the six months to June 30 had come from just three customers in China and Brazil.
Before the news of KPMG's investigation into accounting irregularities, the company had blamed the revenue gap mainly on the impact of floods and COVID-19 in China.