Allied Tech suspends trading, appointing special auditor

CATALIST-listed Allied Technologies has recommended that its trading halt be converted to a voluntary trading suspension with immediate effect, until the concerns raised by its auditors have been satisfactorily resolved, and a special audit has been undertaken. 

The company's shares last traded at 1.1 Singapore cents on May 2, before it requested for a trading halt on May 3. 

In a regulatory filing on Wednesday morning, Allied Tech said it is in the process of appointing a special auditor to undertake a "special review" and further analysis on concerns identified by its auditors. This appointment will be made in consultation with the Singapore Exchange Regulation, it said 

The company also said that the SGX has granted it a two-month extension to hold its FY2018 annual general meeting (AGM) by July 1, and a 1.5-month extension to release its Q1 FY2019 financial results by the same date. SGX has also granted an extension for the company to issue its sustainability report together with its annual report on, or around June 14. 

Allied Tech noted that its auditors, Ernst & Young LLP (EY), are in the process of completing the group's audit for FY2018, and that the group will require additional time, as it is still working on the auditors' queries and making arrangements to provide the necessary documents. The auditors also anticipate that they may need to seek further clarification from the company following their review.

"Given that some of the management members of the company were only recently appointed, additional time is also required to complete the audit," the company said. 

The delay is exacerbated by the fact that Allied Tech's chief executive was only appointed on March 1, and its chief financial officer only took office on Feb 1.

In January this year, Allied Tech's CFO, Andrew Wong, left the company barely two months into his new job after raising concerns over expenses classification, documentation processes, and an audit of Asia Box Office (ABO) - an e-commerce ticketing platform that Allied Tech invested in last year.

The company, which sold its metal stamping business in 2017, had acquired a 51 per cent stake in ABO for S$30 million on April 4; and another 51 per cent stake in Activpass Holdings, which provides software as a service solutions for businesses, for S$25.2 million on April 3. Allied Tech needs shareholders' approval to ratify those transactions.

More significantly, the auditors have now raised various key concerns and observations to the board following its audit. 

One example is related to transactions between ABO and an event financier regarding a financing agreement entered into on June 8 last year for the financing of a concert event. As the concert was cancelled in FY2018, the deposit should have been returned to ABO within seven business days as per the agreement. 

However, a S$1.7 million deposit for the artist fee of the concert had not been refunded by the event financier to ABO as of Dec 31, 2018. Instead, the funds were transferred from ABO to an external related party, Platform Capital Asia Singapore (PCA). On the same day, S$1.68 million was transferred from PCA to the event organiser. PCA's director, Kenneth Low was also appointed as executive director of Allied Tech on June 27 last year, after the financing agreement was entered into. 

Among other things, the auditors questioned the business rationale for PCA's involvement, and the fact that ABO did not charge interest to the event financier. They also noted that the event organiser paid to the financier S$102,000 being interest on the sum of S$1.68 million. However, the S$102,000 was remitted from the event organiser to PCA. 

EY added that there have been "high volume of transactions" including various advances and repayments between ABO and PCA, though they did not see sufficient supporting documents to understand the nature of these transactions. 

In addition, the auditors also raised concerns over transactions between ABO and the event financier regarding a revolving loan agreement dated Oct 1, 2018, for a sum of up to S$3 million, of which S$0.35 million was drawn down as at end-December last year. The event financier in turn loaned the S$0.35 million to various external parties, EY pointed out. 

Though this amount has been fully repaid, and the revolving loan agreement has been mutually terminated as at March 15, 2019, the auditors raised the issue of the business rationale for granting the interest free revolving loan facility, given the principal activities of ABO and the company.

They also flagged corporate governance issues, disclosure requirements, and legal implications arising from the grant of this interest-free credit facility to the event financier, and requested for information to demonstrate the relevance of these loans for the business of ABO. 

Separately, ABO had also signed an investment agreement with the principal of an international sporting event to provide financing of US$1.6 million, with a 10 per cent return. This agreement was entered into prior to Allied Tech's acquisition of ABO. "Although the transaction is meant to be a form of investment, ABO is unable to hold the direct interest to the international sporting event as the direct interest belongs to the principal. As such, the auditors have advised that the transaction may not be accounted for as an investment," EY noted. 

Accordingly, ABO decided to withdraw from the transaction in Q3 FY2018. EY added that the company had "erroneously classified this transaction as an asset held for sale" on its Q3 balance sheet last year, and that the classification was rectified in its fourth-quarter results announcement.

In this case, EY flagged that ABO transferred the investment funds to a company related to the principal before the relationship between the recipient of the funds and the principal was established, and that there was no due diligence performed prior to the ABO acquisition to determine the recoverability of such funds.

Further, EY also noted that there was a factual error in the valuation report of ABO, which referred to certain contracts as having been entered into, though they have yet to be signed. There were also other assumptions such as contracts and memorandum of understanding being entered into and applied to the impairment assessments of goodwill, and cost of investments, EY observed. 

Based on the unaudited financial statement for FY2018, goodwill arising from acquisitions of ABO and Activpass represents about 44 per cent of the group's net assets, and investments in ABO and Activpass represent approximately 45 per cent of Allied Tech's net assets as at Dec 31, 2018.

Lastly, EY noted that out of the group's total cash and bank balances of S$43.6 million as at Dec 31, 2018, some S$1.09 million from ABO and S$33.4 million from Allied Tech were held in trust and/or in escrow by a Singapore law firm, JLC Advisors LLP. Pok Mee Yau, an independent director of Allied Tech is a salaried partner of the law firm. 

As at April 2 this year, ABO's S$1.09 million in funds had been fully returned. Nonetheless, the auditors raised concerns over the business rationale for maintaining the funds with the Singapore law firm for a prolonged period of time, when there is no clear purpose for the use of such funds, and no interest generated for the group. 

EY also noted that while there is a formal escrow agreement between Allied Tech and JLC Advisors, but no such agreement nor operating mandate exists between ABO and the law firm. Instead, the trust account is operated by the law firm based on verbal instruction from Allied Tech's executive director Mr Low. The auditors also flagged that there is credit risk involved, and that the recovery of Allied Tech's funds remain outstanding to date.