Over the past few months, I haven't been quite as active on Hotcopper as I used to be. However, given the sheer quantum of time that I have spent posting on the Phoslock threads over the past decade, and in light of the gravity of the recent announcements by this company, I feel compelled to end my extended leave of absence.
It does appear that Phoslock shareholders are approaching a precarious 'do or die' moment, and as such, if there was ever a time to add input to a discussion on this forum, that time would surely be now.
As disheartening as this situation is, I think it is important for a wide range of voices to chip in. Commentary on Hotcopper often seems to resemble loud shouting from the sidelines during a sporting event. The shouters, while undoubtably loud, might not reflect of the opinion of majority of the crowd, and it is also the case that more often than not, the loudest voices are not always fully appraised of all the facts.
With respect to this particular forum, my personal view is that shareholders in this company need to be a little wary about the raucous 'Class action' clarion calls.
Legal manoeuvrers of this nature developed as a 'civilised' alternative to what came before, namely, tit-for-tat violence, and that is pretty much the only positive I can say about such legal machinations. In my opinion these are basically 'ticket clipping' exercises on the part of legal firms, who hide their intentions behind noble sounding words like 'justice' in an attempt to make it appear as if they are engaged in some type of worthy endeavour.
So, I think shareholders need to be careful not to get distracted by the 'class action' circus going on in the background.
Having said that, I do agree with one comment from Kingkev over the past week on that same subject (or at least, if my interpretation of his post is correct).
I do feel that the threat of the class action(s) is one of the key factors that has prompted the current management to steer this company towards voluntary liquidation.
Certainly, I am extremely sceptical about the suggestion that has been mooted in the two most announcements ('Update on Going Concern Status', 15/08/23, as well as the one above), namely, that the voluntary winding up of the company is simply on account of the fact that the company will not be able to meet all of their obligations within the next 12 months.
This suggestion doesn't quite pass muster from where I stand. Let me explain why it is that I find this notion to be quite problematic.
There is a small mining company that I have been following for years called Thomson Resources. Earlier this decade, this company made some unwise acquisitions, and as a consequence, the company was very nearly floored at the start of this year, almost running out of cash, and the share price tanking. Shortly afterwards, back in March, shares in the company were placed in a trading halt, which at time of writing, still hasn't been lifted.
When Thomson was first suspended, many shareholders were convinced that the company was never going to see the light of day again, simply on account of the fact that the company simply wasn't going to have enough cash to pay their creditors and to cover their other day-to-day obligations.
However, five months on, despite the clamant predictions, it does look like Thomson is set to resume trading once again. Or, at the very least, given that a credible director joined the company board last month, you would have to assume that outcome now looks quite likely.
Now, the reason I raise this example, is because at the end of March, just after Thomson went into a trading halt, the company had less than $150,000 left in the kitty.
Let's compare that to Phoslock's situation. According to the most recent Phoslock quarterly (released on 28/07/23), Phoslock had $10.3 million dollars in the bank at the end of June.
So, on the one hand, the management of the company with less than $150,000 remaining in the bank seems to have been able to scrape on by, whereas on the other, the management of the company with $10,300,000 in the bank have gone into panic mode, throwing their hands up in the air, and screaming 'every man for himself'.
Something about that simply doesn't seem to add up.
One suggestion, mooted here last month by one poster, is that some extraneous issue is impacting their access to their $10 million in cash. Perhaps it has ended up becoming trapped behind the 'Great Wall of China' and thus the company has no ready access to these funds.
That's certainly a possibility. But one point to bear in mind, is that $10 million is largely the residual of the funds that were raised by shareholders in early 2020 (See the 'Share Purchase Plan Raises $15m', announcement of 05/05/2020).
Most of the money raised was earmarked to be spent on 'international' markets. Here is the relevant extract from the above announcement:
So, you have to wonder, why would funds that were mostly destined for global markets end up getting shunted into a Chinese bank account? And if so, why is it that this issue has never previously been flagged by the management?
One thing I will say about the 'China bank' argument is that it at least offers a plausible explanation as to why a company apparently loaded with cash now seems to be headed for the abyss, or at least if you believe the picture that has been painted by the management.
That said, while I might be proven wrong in time, my gut feeling is that there probably isn't any real issue with the company accessing that cash.
Aside from the cash in the bank, it is also clear that the company is capable of generating money off its own bat. In that last announcement, the company mentioned $600,000 worth of contacts from Brazil and Finland, and this is on top of the $440,000 from projects in Australia and Brazil that was announced in June.
So, over one million in sales in less than 12 months. And these wouldn't account for the numerous tiny phoslock applications, that take place in dams, golf courses and in aquaculture facilities all over the world on a regular basis.
Needless to say, there would be hundreds of ASX listed companies that would love to be generating over a million dollars in turnover a year.
And of course, to that you can add to that the interest from the $10 million dollars they have sitting the bank, which, given the currently elevated interest rates, would have to be worth around $400,000 dollars a year to the company (here I am assuming, of course, that the money is in fact readily accessible).
On top of that, the management also has another option on the table if they really needed more money to help cover their obligations: A capital raising. Even with the current depressed share price, I am sure they could raise a few million dollars from shareholders if we were faced with a genuine liquidity emergency.
In summary, it is very hard to believe that a company with $10 million sitting in the bank, and generating sales in excess of a million dollars a year, and with the option of raising money from shareholders, is really all out of options, as the management seem to be currently suggesting.
So what's going on? In my view, two other factors are probably driving the management's decision to opt for voluntary administration.
1) Firstly, as mentioned earlier, I think it is partly driven by concerns on the part of the current management and directors that they are going to end up getting caught up in a class action against the company.
2) Secondly, and probably more importantly, I don't think that the current management are in any way willing to walk the hard road, which is probably what is really necessary if this company is too survive the lean years.
In my assessment, over the past couple of years, the management had two potential routes they could have taken to get the Phoslock bandwagon back on to the road.
Option 1, would be to engage in some manner of partnership with another entity, which would provide Phoslock with funds in exchange for a position in the company. As the management have mentioned in the update of 15 August, this avenue is problematic because the ongoing AFP and regulatory investigations has resulted in potential funders getting cold feet.
That leaves Option 2: basically, the hard road, which would entail cutting costs in the short to medium term, while pushing to secure a multi-million dollar contract down the track.
If you look at the number of projects in the 'project pipeline' page on the Phoslock website, it is in no way unrealistic to think that the company couldn't secure a small multi-million dollar project. It will take time of course, you can't assume it is going to happen within the next 12 months, but I think it is a realistic goal within the next couple of years.
The challenge Phoslock would face in pursuing this second option, is that they are going to need to cut costs down while they are waiting for that payday.
And what is the most notable discretionary cost for the company?
Basically, the executive renumeration. The base salary of the current MD, McKinnon, is $527,000, according to the Annual Report. The base salary of the CFO, Matthew Parker, is $384,000.
In other words, the two significant contracts that have been announced this year- the $440,000 one back in June, and the $600,000 contract that was just announced- would probably only just cover the cost of the salaries of the two most senior executives of Phoslock, once you have factored for superannuation and other entitlements.
These overly generous salaries are obviously not sustainable.
If you look into the backgrounds of McKinnon and Parker, they are basically corporate suits. It is clear that they have never had any real passion for water remediation.
However, I am pretty certain that they would have known exactly who Lawrence Freedman was when they opted to join the company. Indeed, I think it is likely that they joined Phoslock in the hope that some of Freedman's $$ would trickle down to them. And if so, it looks like that their assumption was correct.
In other words, I doubt that McKinnon and Parker would be willing to countenance a hefty pay cut, even though this measure is probably needed to save the company.
Something that adds some clout to the suggestion that the move to wind up the company is partly driven by an unwillingness by the management to give up their lucrative pay arrangements can be found in the results from the AGM voting that took place earlier this year. 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, potentially the current crop of directors could end up getting voted out, and if they are replaced by less friendly directors, as seems likely, that might signal the end of the high-pay gravy-train for the two most senior executives.
In summary, I think shareholders need to be very sceptical about the claim mooted by the company management in the past two announcements that winding up the company is the only viable course available to shareholders.
If a company such a Thomson is able to survive for five months with less than 150 k in the bank, how is it that a company with $10 million in the bank and generating over a million in sales can't get by? If the company is so pressed for cash, why aren't the management drastically paring back their salaries?
Regrettably, I think that you have to conclude that the present management have opted to prioritise their reputational and financial interests over the company's survival.
I don't doubt that many shareholders will be feeling despondent after reading over the last couple of announcement, but now is not the time to fall into a morose stupor.
Phoslock shareholders need to stand up and pay attention. It now looks like we are standing on the precipice of a 'make or break moment' for this company. Shareholders might well be faced with the most important vote in the history of this company before the year is out.
I feel it has become increasingly apparent that the interests of the management do not align with those of the majority of shareholders.
However, don't doubt for a moment that the power to save this company lies within the hands of its shareholders. This won't happen unless we demonstrate a willingness to step up, stand up and be counted.
(20min delay)