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“The directors, like many shareholders, continue to believe in the potential of Phoslock’s offering,” Krasnostein told investors. “However, despite best efforts, the company has unfortunately not been able to convert this potential into profitable operating performance.”
If wound up, the company would pay shareholders 1.7¢ to 2¢ per share.
Phoslock began unravelling in 2020 when McKinnon and chief financial officer Matthew Parker joined the water treatment company and discovered major governance issues centred around its sales and operations in China, which had accounted for the majority of reported profits and sales.
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Within months, the duo announced the sudden departure of deputy chairman Zhigang Zhang, disclosed to the market an internal investigation uncovered evidence of fraud including “false accounting” and “misappropriation of funds”, and self-reported to the Australian Federal Police and Australian Securities and Investments Commission.
Leaked emails to The Age and Sydney Morning Herald revealed an array of alleged wrongdoing and repeated red flags that the company’s governance system missed until the arrival of new senior executives in mid-2020.
The files show highly suspicious payments were regularly sought and paid, including to win major contracts in China and shake off an investigation into an accidental death. Some overseas staff privately confessed that they had paid bribes to secure work, the leaked files reveal.
“The China venture ended disastrously,” Krasnostein said. “In their new roles as CEO and CFO, Lachlan McKinnon and Matthew Parker … quickly discovered what appeared to be instances of widespread fraud, falsified accounting, bribery and corruption, bogus sales, breaches of Chinese and Australian laws, irregular tax compliance, and extensive conflicts of interest and self-dealing.”
Krasnostein said a significant majority of Phoslock’s sales in China were not Phoslock products. In some instances, products such as water blankets and aeration machines were sourced by companies separately controlled by the appointed Chinese directors and sold to Phoslock at a “significant mark up”.
“PET [Phoslock] then on-sold or applied these products to companies such as BHZQ, which the same Chinese directors sat on the board of, or had effective control over,” he said.
The company has spent almost $10 million dealing with the effects of the corrupt behaviour, and anticipates further fines from Australian and Chinese authorities.
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