When a stock goes into an undisclosed trading halt, it can be a nervous wait.
Most of the time, the outcome is fine. But sometimes, on rare occasions, it is not…
For Phoslock Environmental Technologies Ltd [ASX:PET] it has been a case of the latter recently. Ever since 21 September the company has been investigating ‘accounting irregularities’. After both the company’s Chairman and Managing Director became suspicious of their Chinese operations.
That revelation prompted an immediate third-party investigation. With KPMG stepping in to figure out whether something fishy had or had not occurred.
Well, today the initial findings were made public and they’re not looking great for Phoslock.
Down the rabbit hole
When it comes to cooking the books there is no gentle way to spin it. And as far as KPMG and Phoslock are concerned, these ‘irregularities’ are in fact true.
Here is what the company had to share in today’s update:
‘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.’
Needless to say, that is a grim assessment. One that will rattle a stock that has already suffered a dramatic fall from grace.
Prior to the trading halt Phoslock shares were trading at 24.5 cents each. A far cry from the $1.44 high they peaked at in mid-2019.
Now, with this ongoing report, shares may fall even flatter when they finally resume trading. With no indication when that will even be allowed to happen. This investigation could take quite some time to resolve.
In the meantime, Phoslock has stated that they’re still focusing on expanding the business. But it is hard to imagine that they can dedicate their full efforts to that goal with this issue hanging over them.
For that reason, it could be a rough end to 2020 for this small-cap.
What comes next for Phoslock?
For now, the only thing Phoslock can do is wait.
They need the full KPMG report to be finalised before they can even begin to formulate their next steps. And while they have stated that they will investigate potential legal action against the perpetrators, that in itself will just be another drag on the stock.
This is not going to be an issue that will likely be dealt with quickly or cleanly.
If you’re a Phoslock investor strap in, it could be a long wait before we see any closure.
For Money Morning
PS: For more value-oriented small-cap recommendations, check out our latest report. Get your own copy, for free, right here.