In my time as a stock investor, I've observed some truly strange-going ons in the various listed entities in which I've been a shareholder.
But after reading through the Phoslock announcements over recent months, I find myself starting to wonder if I've woken up in some kind of Bizarro World.
The announcements I am alluding to here, as I am sure you would have picked up, are the series of company updates since the 'Update on going concern' bombshell was dropped on unsuspecting shareholder back in August.
When you pick through the announcements up to and following this release, the inconsistencies are truly mind-boggling to behold.
Over the course of this post, I intend to shed light on some striking examples.
On the 15th of August, in the 'Update of Going Concern Status' release, the management, for the first time, revealed that they were considering winding up the business.The bulk of the announcement was comprised of a list of eight bullet points, with points 2, 3, 6 and 7 containing the relevant details as to why they were considering this course of action. I've pasted the key points below for convenience:
2. A Board Meeting on 10 August 2023 reviewed various cash flow projections and the statement of financial position of the consolidated entity. The Board concluded that without securing additional funding to support the business through the reporting period, it is more likely than not that management will be required to liquidate the assets of the business and discontinue operations.
3. Funding pressure has resulted from a combination of factors previously disclosed by the Company, including the ongoing cost of responding to and managing legacy issues; continued delays in recovering receivables pertaining to past sales in China and a slower than expected build in revenues.
6. Ongoing regulatory and Australian Federal Police investigations into matters relating to the previous mismanagement of the business have adversely impacted these discussions with third parties. There have not been any material developments in relation to these regulatory matters and investigations. It continues to be the case Page 2 that the potential exposure to costs, penalties and other liabilities for the Company is significant; that the Company is engaged on a path in response to these matters; and that the likely timeframe for resolution of these matters is not currently capable of being determined, but is likely to be years, rather than months.
7. The Board is considering all viable options identified by Resolute including possible options for securing the necessary capital and funding support to continue operating the business.
Bear these four points in mind. I'll return to these key points over the course of this post.
It would be an understatement to say that the suggestion that the business was no longer a viable operation came as something of a surprise to shareholders. Just over two weeks earlier, the commentary in the quarterly update was positively glowing ('Appendix 4C quarterly (Q2 2023) and Business Update', 28/07/2023)
Here are some extract from the above, which gives the gist:
'...Sales and business development activity in the quarter showed an improvement on the prior period, which was impacted by the Christmas break and winter seasonal conditions in the northern hemisphere.
In Europe, Phoslock trials were completed in Poland and showed excellent results. Discussions are now underway with local authorities to consider commercial applications across up to six lakes with an additional river system application also being considered. Contract negotiations are also underway in Finland and in The Netherlands, where a relatively large application is close to being confirmed.
Sales for the quarter were made for projects in Belgium and Poland, with one of our distributors in the Netherlands placing an order for stock to support their enquiries. While these sales were relatively small, they represent significant progress and foundational work in securing much larger opportunities in the future.
Several opportunities are being progressed in other European countries including Sweden, Spain, Ireland, Czech Republic and Germany and new distribution arrangements are being reviewed in France, Spain, and Ireland.
In the US, Phoslock sales to distributors continue to grow and – for the first six months of the year - are some 26% ahead of sales in the same period last year. The June quarter also saw a significant increase in larger lake enquiries throughout the US. This improvement and increased interest validate the new distribution strategy implemented within the last 12 months...'
Needless to say, there is nothing in that would seem to indicate that the company was on the edge of the abyss.
You might easily explain this away as the usual corporate sugarcoating: focusing on the positives and ignoring the negatives. However, the issue with this interpretation is that in the financial section that follows on from the commentary, in the 'Estimated cash available for future operating activities' table, it explicitly states that there was an estimated 17 quarters of funding available for the company.
The glaring inconsistencies in the second quarter update release of 28 July and the subsequent 'Update of Going Concern Status' announcement of the 15th August invariably prompted commentary on this forum.
I think it would be fair to state that most posters here concluded that the management of the company must have been lying about the position of the company in the quarterly update.
That conclusion was understandable at the time. However, with the benefit of hindsight, I think that conclusion was probably wrong.
If you pick through the announcements subsequent to the 'Update of Going Concern Status' announcement in August, and carefully read between the lines, it becomes increasingly clear that the rosy outlook that was presented in the Second quarter update seems to have been largely justified.
I'll illustrate some examples, below.
Firstly, let's look at the announcement that followed on the heels of the aforementioned 'Update of Going Concern Status' announcement of the 15th of August.
At the very end of that same month, there was a rather innocuous sounding announcement, titled 'Timing and Status of HY Accounts.' There were some rather interesting details in this release, which belied the rather dry title.
In the first paragraph of the announcement, the management reveal, for the first time, that they have decided that the company should no longer be considered a going concern:
'...In the absence of adequate funding or alternative transactions being concluded in a timely manner, the directors intend to put a resolution to shareholders for voluntary (solvent) winding-up of the Company. As a result, the directors have determined that the going concern basis of accounting is no longer appropriate, and the interim financial statements will be prepared on a non-going concern basis....'
Bear in mind here that the very first time the management suggested this might be a possibility was just two weeks before, in the announcement of the 15th of August.
As I noted above, just over two weeks prior to this, on the 28th of July, the management were indicating that all was hunky-dory: the outlook was bright, and they apparently had sufficient cash-flow and cash reserves to get them through the next few years.
So in the space of just 34 days, the company has somehow gone from hero to zero, with the management revealing in the announcement of the 31st of August that they will no-longer consider the company to be a going concern. But let's have a look at the other details in that announcement.
Firstly, the management note that they have received some of the outstanding Chinese receivables:
...PET today advised that it has secured a part payment (RMB3 million, equating to approx. A$642,000) in respect of a receivable associated with the Xingyun Lake project in China. The payment was made to PET’s Beijing based subsidiary, Beijing Ecosystime Environmental Science and Technology Co., Ltd (“BEST”) on 25 August. This payment represents just under 10% of the principal owed (RMB33,096,529), with efforts continuing to secure the balance.
They end the passage with a note of caution, however, adding
...The recoverability of the outstanding amounts for Xingyun Lake therefore continues to be uncertain and the impairment provision remains...':
But it is the next paragraph, under the heading 'Sales Update', that really makes you question the managements sudden change of heart about the prospects of the company:
...PET also announced today that it has recently secured orders for Phoslock applications in Brazil and Finland. The combined value of these contracts is approximately $600,000, with the applications scheduled for September. Whilst it is pleasing to secure these sales, the sales rebuild and associated revenues remain well below expectations and at a level insufficient to support the operations of the business....
As those here who have been following this company for years would be aware, $600,000 is no small deal for Phoslock. Remember that Lake Bromont contract in Canada five years ago? That was worth around $600,000, and it was considered a significant win at the time.
So basically, in the same announcement in which they reveal that they have scored a pair of contracts the size of the Bromont contract, which would have easily ranked as one of the top-ten contract wins in the history of the company, they somehow determine that the company is not going to be able to stand on its own two feet for much longer?
This is an example of the 'Bizarro World' quality of some of the recent announcements. No one who read the last two paragraphs of this announcement would conclude that the company was headed for the rocks. Or at least no-one other than the management and directors of the company, it would seem.
But while the announcement at the end of August was truly bizarre in its inconsistencies, things got still weirder in the announcements last week.
Let's tun to the announcement of last Tuesday ('Potential asset sale and Wind-up', 31/10/2023)
The management kick off the announcement by stating that they have resolved to proceed with the wind up of the business:
'...Phoslock Environmental Technologies (ASX: PET) (the ‘Company’) today announced that Directors have resolved to proceed with a proposed asset sale and to seek a de-listing from the ASX and a winding-up of the Company... and subsequently note '...PET is currently negotiating with a third party regarding a potential divestment of PET’s key assets in exchange for cash. While these negotiations are incomplete and there can be no guarantee that a transaction will be consummated, should the parties agree on terms, completion will be contingent on shareholder approval and other conditions precedent. In that event, further information will be provided to all PET shareholders, including a notice of meeting with resolutions to consider the proposed transaction. PET will continue to monitor and satisfy the Company’s liabilities including costs associated with the necessary administration steps leading to a wind-up of the Company. Depending on the quantum of proceeds and the extent of liabilities/costs, there may be a return of capital to PET shareholders....'
So, things are as bad as ever. But when we read through the next section, on page two, we plunge back into Bizarro World:
'... On 31 August 2023, the Company updated shareholders on the XingYun Lake Project debt recovery matter in China after the customer made a partial payment of RMB 3,000,000 (equating to approximately $A 642,000) to PET’s Beijing based subsidiary, Beijing Ecosystime Environmental Science and Technology Co., Ltd (“BEST”).
PET is pleased to report that following negotiation with the customer, a settlement agreement was entered into between the parties (“Settlement Agreement”). Under the Settlement Agreement the customer paid BEST the amount of RMB 21,686,737.50 (equating to approximately $A 4,650,000) on 27 October 2023.
This amount represented a 25% reduction of the remaining principal amount owed which, under the Settlement Agreement, was accepted by the Company as satisfaction of the full amount owed, being RMB 28,915,650.
It should be noted that the payment was made to PET’s Chinese subsidiary BEST. Steps will need to be taken to try to repatriate the funds to Australia...'
Effectively, Phoslock has just closed of a multi-million dollar contract, one of the very few of such contracts secured in the history of the company, albeit after an extended delay.
You'd think the management would be screaming about this from the rooftops. And yet, it didn't even rate a mention in the title of the announcement.
We know that the resolution to the XingYun Lake dispute was of a material nature for the business: the management cited this as to being one of the reasons that the company needed to be wound down.
Remember those four points in the 'Update of Going Concern Status' on the 15th of August? As can be seen below, the issue of debt recovery in China was cited as one of the key reasons as to why the management were considering winding up the operation:
3. Funding pressure has resulted from a combination of factors previously disclosed by the Company, including the ongoing cost of responding to and managing legacy issues; continued delays in recovering receivables pertaining to past sales in China and a slower than expected build in revenues.
So basically, Phoslock has just met one of the key benchmarks that the management stated needed to be achieved if they wanted to continue as a going concern.
Of course, that money needs to be repatriated out of China. That might not be straightforward, but it is hardly out of the question either, particularly in light of the easing of tensions between Australia in China.
But I think the problems associated with repatriating funds from China gets a little overcooked on these forums, anyway.
Just because they might not be able to transfer funds directly from China to Australia, it hardly makes the money worthless.
Let me give an example. One of the other stocks I hold, Vmoto, is currently needing cash to expand their Shanghai factory, and as such, they recently initiated a capital raising.
In theory, Phoslock could strike a deal with Vmoto, providing them with funds to satisfy their need for capital. In return, Phoslock would get issued shares in Vmoto, which they could then sell on-market in Australia, though ideally, when the Vmoto share price was somewhat higher.
I am citing that example just to illustrate that China isn't some black hole, there are ways to get money out of China even if a company is unable to transfer the funds directly across.
In effect, it is a mistake to assume that the $4.6 million we received for the XingYun lake is worthless just because it is in China, it is an assumption that is well wide of the mark.
The fact we the company has now received these funds is a big deal, it was one of the key challenges that needed to be overcome, based on the commentary of the management in the August 15 announcement . So why hasn't the resolution of the matter granted the company a stay of execution?
That isn't the only question that shareholders should be asking in relation to this rather hasty attempt to wind up the business. I'm going to now turn to two of the other four points that were raised back in that mid-August announcement.
2. A Board Meeting on 10 August 2023 reviewed various cash flow projections and the statement of financial position of the consolidated entity. The Board concluded that without securing additional funding to support the business through the reporting period, it is more likely than not that management will be required to liquidate the assets of the business and discontinue operations.
7. The Board is considering all viable options identified by Resolute including possible options for securing the necessary capital and funding support to continue operating the business.
The gist of the above is that the company needs to raise capital.
Now, this might be a radical suggestion, but if the company is so desperately in need of funds, couldn't the company just initiate a capital raising, like Vmoto is doing at the moment? Isn't that the point of being a listed entity, to allow a company to tap shareholders for cash when the going gets tough?
At current, Phoslock has 625 million shares outstanding. These days, that isn't particularly excessive: in these inflationary times, there are plenty of companies with in excess of a billion shares outstanding. There is absolutely no reason as to why Phoslcok couldn't have initiated a capital raising at some stage over the past 12 months.
If they had done so in the early months of 2023, they could have easily raised $6 million. I think they would have even been able to raise a few million back in August, when they first suggested the company needed to be wound up.
The fact the company has made no effort to initiate a capital raising over the past 12 months is damning. That the management have not opted to go down the capital raising route indicates that someone is standing in the way and preventing them from doing so.
I don't believe Lachlan McKinnon and Parker are calling the shots at Phoslock. There is someone above them, giving them their marching orders. For evidence of that, just look at the termination notice last week ('Employment of CEO and CFO terminated', 31/10/23)
Essentially, I think Laurence Freedman is still pulling the strings.
This would explain the inconsistency between the bright picture that was presented in the Second Quarter update release of 28 July and the subsequent two announcements in August ('Update of Going Concern Status' as well as the follow up announcement).
While the outlook in the quarterly was probably a little too cheery, overall, I think that quarterly update was produced in good faith. I don't think the management at the time had any reason to believe that the company wasn't going to be able to continue its operations going forward.
Information revealed in the subsequent announcements add weight to this suspicion, most notably the recovery of the XingYun lake monies. Based on the information that has been presented to shareholders in recent announcements, there is no real reason to believe that this ship could not be turned around. Perhaps the shareholders may have needed to chip in via a capital raising to effect this outcome, but for reasons unknown, this rather obvious course of action was never pursued.
Essentially, this company is being driven off a cliff. Based on all the available evidence, it is hard to arrive at any other conclusion. The motive underlying this is most likely something that I noted in my previous post here.
The extract below is taken from the 'Results of Meeting' announcement on the 23/05/23:
Back in May, the company remuneration report was hit with a '1st strike', with over 32% of votes cast being against the report.
Remember, that boards face being spilled if they suffer shareholder votes of more than 25 per cent against their executive pay proposals at two consecutive company annual general meetings. So if they were to get hit by a second strike next year, the current crop of directors would end up getting voted out.
The crucial point to remember here is that the current directors were appointed after Laurence Freedman announced his resignation on the 11th of March, 2021. They were almost certainly installed to watch over Freedman's interests.
We know Barry Sechos is connected to Freedman, being previously involved with Freedman's EquitiLink group. He is also currently a director of the Sherman Group, which was founded by the co-founder of EquitiLink, Brian Sherman, who died last year.
There is also good reason to suspect a link between the new Chairman, Krasnostein ,and Freedman. There is certainly a conncetion between Laurence Freedman's Daughter, Mia, and Krasnostein's daughter, Sarah.
Both Mia and Sarah are actively involved in the media circuit: Mia, who founded the Mamamia website is well known, and Sarah is a writer who married ABC identity Charlie Pickering back in 2013. Pickering certainly knows Mia Freedman, as he has written scores of articles for Mamamia over the years, and Sarah Krasnostein has likewise
contributed to the same site. Mia Freedman was also a guest on Pickering's ABC show The Weekly, featuring in an episode in 2015.
You'd have to conclude that Mia and Sarah, the daughters of former and current Phoslock Chairs, are well acquainted, and it isn't much of a leap to assume the same would be true for the respective fathers. They would have surely bumped into each other over the years.
All up, I think it is very likely that David Krasnostein falls within Freedman's orbit, in the same manner as does Barry Sechos. The fact that his appointment as Chairman coincided with Freedman's departure does nothing to dispel this suspicion.
The Chairman, Krasnostein, also has a longstanding connection with the other director, Bob Prosser. Krasnostein has been a director of the National Breast Cancer Foundation since 2009, and Bob Prosser was also a director of the National Breast Cancer Foundation at the time he took up a job as a Phoslock director. Prosser was appointed as a director to the Phoslock board at the same time that Krasnostein was appointed as Chairman. I get the impression that Prosser is one of Krasnostein's hangers-on.
In summary, it is very difficult not to shake a suspicion that Krasnostein, Scehos and Prosser were appointed as directors simply to do the bidding of Freedman.
The results of the meeting on the 23rd of May made it clear that the writing is on the wall for Freedman's toadies. Given how livid Phoslock shareholders are, you'd have to assume that the board is set to get spilled at next years AGM.
If that eventuates, they'll be replaced by new, independent directors, and that's a major problem for Freedman. To understand the reason why this is such a pickle for the former Chairman, we have to go back to point no. 6 in the 'Going Concern' announcement of August 15:
6. Ongoing regulatory and Australian Federal Police investigations into matters relating to the previous mismanagement of the business have adversely impacted these discussions with third parties. There have not been any material developments in relation to these regulatory matters and investigations. It continues to be the case Page 2 that the potential exposure to costs, penalties and other liabilities for the Company is significant; that the Company is engaged on a path in response to these matters; and that the likely timeframe for resolution of these matters is not currently capable of being determined, but is likely to be years, rather than months.
As indicated above, the AFP investigation is likely to drag on for years. Which means if the current board get spilled at the next AGM, as seems likely, the investigations will still be underway when new, independent directors are on board.
In other words, Freedman will no longer have anyone to watch his back. Bear in mind, last year, the new Chairman, Krasnostein, pinned the blame for the mismanagement of the company on Robert Schuitema and Zhigang Zhang (see the 'Chairman's Address to Shareholders', announcement, of 27/05/2022).
Strangely, he made no mention of the Chairman at the time, Laurence Freedman. Of course, a new set of independent directors are unlikely to have any compunctions about pointing out what has been obvious to shareholders all along: the Emperor, a certain Laurence Freedman, is wearing no clothes.
In summary, it does look like the company is being deliberately scuttled, in order to protect the reputation of Freedman.
One reason I have a high degree of confidence in this assessment is because I have seen something like this play out before.
Over much of the 2010s, I was a shareholder in a company called Entek Energy, a North-American focused oil company, in which the Chairman of the company, a certain Riley, was a major shareholder.
Things got pretty ugly in the oil space in the middle years of last decade. The tide went out on the oil price, and the share price of small companies like Entek ended up getting smashed. But Entek was in a better position than most, as they had built up a large cash-buffer.
One day, the Chairman announced that the CEO of the company had been terminated. Several months later, the company wrote down the value of the oil assets controlled by the company, which was rather surprising, given that the company had been spruiking them for years. Not long after, in one of the quarterlies, the Chairman made a passing mention in the commentary that they'd concluded an arrangement whereby they had effectively given away the oil assets to an interested party, basically in return for nothing. I remember it well, because only a week later, the oil price surged...
It looks to me as if something very similar is currently underway at Phoslock.
In the case of Entek, the sabotage reflected an attempt by the Chairman to reverse-engineer the company, to transfer the focus of the company from oil, to minerals, hence the ill-considered rush to dump the assets. In the event, things didn't quite pan out as planned.
Some Entek shareholders were affiliated with another company, called 88 Energy, and as they steadily accumulated more shares in Entek, they were eventually able to take over the company by stealth.
So, in the end, the Chairman of Entek became an involuntary shareholder in 88 Energy. But 88 Energy is still listed, at least.
Unfortunately, in the case of Phoslock, it does appear as if the aim of the directors is simply the derail the company, in order to protect Freedman's reputation.
I believe shareholders would be wise to approach the commentary in the recent announcements with scepticism.
There's no compelling reason to think that Phoslock couldn't be salvaged. In fact, one of the paradoxes in the recent announcements concerning the business's winding-up is that they provide reasons for optimism about the company's state. Clawing back the money that was owed from the XingYun lake project is no small deal. Imagine what impact that would have had on the shareprice, if the company hadn't been suspended.
Make no mistake: the company wind-down is a critical issue that should be subject to a shareholder vote. Despite what's been stated in the recent announcements, reading between the lines reveals that there is no valid reason for the company to cease its operations. The wind-down serves neither shareholders nor the company; it's a maneuver to protect the reputation of a billionaire ex-chairman.
(20min delay)