SINGAPORE - Epicentre Holdings executive chairman and acting chief executive officer Kenneth Lim Tiong Hian has been uncontactable since May 24, the Catalist-listed former Apple reseller announced on Thursday afternoon (May 30), following its request for a trading suspension that morning.
Epicentre said it will not be proceeding with a proposed placement of up to about 79.7 million new ordinary shares in its capital, saying that Mr Lim, "who has been key and instrumental to the proposed placement", has been uncontactable. It noted that it does not have any monies held in escrow.
"In order to repay the existing liabilities of the company, the company is currently trying to come up with a workout plan to facilitate repayment to creditors," said Epicentre.
Having received statutory demands dated May 21 and May 27 from three creditors, Epicentre "is seeking legal advice and assessing the potential impact on the group".
"This potentially raises issues in terms of the group's and the company's ability to continue as a going concern," it added.
"In the absence of Mr Lim, the company remains under the leadership of the independent directors, who are considering all possible options in the best interests of the company," said Epicentre.
Separately, an independent review of Epicentre Holdings' FY2017 accounts has found "governance and internal control issues" regarding consultancy services agreements and a supply agreement in which Mr Lim was involved, as well as a breach of internal policy relating to a $1.76 million loan, which might have amounted to breaches of listing rules.
After market close on Thursday, Epicentre provided an executive summary of the findings, noting that they were unrelated to the voluntary suspension of trading that day. "The company has since taken steps to improve its internal controls and will keep shareholders updated on this via a further announcement in due course," it said.
On Oct 9, 2017, Epicentre announced that its auditor BDO had withheld its opinion on several matters in the company's FY2017 accounts, noting that it had not been given "sufficient appropriate audit evidence regarding the veracity of the purported transactions".
Epicentre appointed Deloitte & Touche LLP to conduct an independent review. The accumulative net impact of the transactions reviewed, as at Oct 9, 2018, was an increase in cash holdings by $4.21 million and a net income gain of $3.9 million.
One area of review were three agreements under which Epicentre provided consultancy services: one $1.4 million contract with LaVita (Thailand) Co, later raised to $1.45 million; and two contracts with KT Pacific Group for a total value of $2.5 million.
Both firms were "personal contacts" of Mr Lim. The review noted a Sy Meng Meng who is a director of KT Pacific and son of its controlling shareholder, and also held a 6.42 per cent stake in Epicentre as at Oct 2, 2017.
Deloitte & Touche said there "have clearly been governance and internal control issues" regarding these agreements. It noted that Epicentre's core business was in running IT retail outlets, and providing consultancy advisory was not part of its ordinary business.
There was no record that management had consulted the board of directors before executing the agreements, and no board resolutions passed. "The materiality of these agreements and the breach of internal controls suggests that, in this regard, the company did not have a robust and effective system of internal controls and therefore may not have met the requirements of Listing Rule 719," said Deloitte & Touche.
It added that given the materiality of the agreements, Epicentre should have announced them in line with Catalist disclosure rules, with the failure to do so potentially amounting to a breach of Listing Rule 703.
Deloitte & Touche also said the flow of funds was "unusual and has not been fully evidenced in terms of primary documents". It recommended that management review and enhance its policies on credit and material transactions, and ensure adherence to these policies.
A second area of review was a supply agreement with Shenzhen Blueway Technologies Co, for an original contract value of $5.33 million with a discount of $888,000 if Epicentre made an advance payment of $4.44 million.
The advance was paid into two escrow agents, one of which was beneficially owned by Epicentre shareholder Leow Kok Meng and the other by Mr Lim. The escrow agents, Mr Leow and Mr Lim also issued a performance guarantee for the benefit of Epicentre.
Here, Deloitte & Touche also found "governance issues and internal control issues". The conduct of the supply agreement was "irregular and unusual", as Epicentre's funds were transmitted via Mr Lim and a shareholder.
When the agreement and performance guarantee were established and funds remitted, management should have disclosed the terms of the agreement and the involvement of Mr Lim to the board. "There should also have been a discussion with the Catalist sponsor on whether this constituted an Interested Person Transaction, and if the appropriate disclosure should have been made," said Deloitte & Touche.
The failure to obtain board approval was a breach of internal policy and controls, and also suggests that Epicentre may not have met the requirements of Listing Rule 719. Deloitte & Touche said management should set up internal procedures and guidelines on provision of advances to suppliers.
The third and final area of review was a $1.76 million bridging loan taken on Sept 7, 2016 from Encore Investment Group, with a contracted interest rate of 24 per cent per annum, in order to meet payment obligations to Apple. On Oct 27 that year, Epicentre entered a novation agreement to novate the loan to Mr Lim, with the only change being that the loan was now interest free.
Deloitte & Touche said it was advised by management that Encore is beneficially owned by Mr Wong Kum Yong, who held an 8.03 per cent stake in Epicentre as at Oct 2, 2017. There was no formal consultation with the board prior to the loan's execution, amounting to a breach of internal policy and suggesting that Epicentre may not have been in line with Listing Rule 719.
"Management should have disclosed the Encore loan and the novation to the board of directors, and the novation should have been discussed with the Catalist sponsor on whether this constituted an interested person transaction," said the review.
Deloitte & Touche said it had not seen disclosure of the loan from Mr Lim, nor the payments of the loan, in results announcements for the period ended Dec 31, 2016 and June 30, 2017. "Management should review and re-establish, if relevant, internal procedures and guidelines on drawdown of future loans and financing," it said.