Hong Kong Exchanges and Clearing Limited and The Stock Exchange of Hong Kong Limited take no responsibility for the contents of this announcement, make no representation as to its accuracy or completeness and expressly disclaim any liability whatsoever for any loss howsoever arising from or in reliance upon the whole or any part of the contents of this announcement.

WINSHINE SCIENCE COMPANY LIMITED

瀛 晟 科 學 有 限 公 司 *

(Incorporated in Bermuda with limited liability)

(Stock Code: 209)

  1. KEY FINDINGS OF THE INDEPENDENT INVESTIGATION AND
    1. CONTINUED SUSPENSION OF TRADING

This announcement is made by the board (the "Board") of directors (the "Directors" and each a "Director") of Winshine Science Company Limited (the "Company", together with its subsidiaries, the "Group") pursuant to Rule 13.09 of The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Stock Exchange") (the "Listing Rules") and the provisions of inside information under Part XIVA of the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong).

References are made to the Company's announcements (i) dated 28 March 2019, 16 April 2019, 19 June 2019, 2 September 2019 and 2 October 2019 in relation to the delay in publication of the annual results and despatch of the annual report of the Group for the year ended 31 December 2018 and the suspension of trading of the shares of the Company on the Stock Exchange; (ii) dated 6 May 2019, 8 May 2019 and 10 June 2019 in relation to the change of auditors of the Group; and (iii) dated 25 June 2019 in relation to the resumption guidance (the "Resumption Guidance") (collectively, the "Announcements"). Unless otherwise defined, terms used in this announcement shall have the same meanings as those defined in the Announcements.

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As disclosed in the announcement of the Company dated 19 June 2019, in regards to the audit issues (i) direct confirmation received by the Former Auditors from a debtor of the Group and (ii) advancement of funds, FTI Consulting was engaged to perform the Independent Investigation. On 29 October 2019, FTI Consulting issued a report on its findings.

INDEPENDENT INVESTIGATION

Scope of the Independent Investigation

The primary scope of the Independent Investigation comprises the following:

  1. review the Group's books, records, bank documentation and original documents relating to the Transactions and the Loans;
  2. conduct background searches on the companies and personnel involved;
  3. conduct interviews with the management of the Group, the Subsidiary and relevant personnel to understand the circumstances leading to the Transactions and the Loans;
  4. carry out site visits to the relevant companies' offices;
  5. conduct background investigation on, and interviews with, third parties involved with the Transactions and the Loans;
  6. review all payments of RMB100,000 or more made by the Subsidiary during the period from 1 January 2018 to 31 December 2018 to identify whether there were any irregular fund transfer arrangements similar to the Transactions and the Loans; and
  7. prepare a report summarising the findings of the Independent Investigation.

Summary of key findings of the Independent Investigation

1. Direct confirmation received by the Former Auditors from a debtor of the Group

Background

The Former Auditors, as part of their audit procedures, sent an audit confirmation

(the "Audit Confirmation") to a debtor of the Group (the "Debtor") regarding an amount of RMB1,380,000 owed to 海南瀛晟科技產業投資有限公司 (the "Subsidiary"), an indirect wholly-owned subsidiary of the Company. The Debtor replied to the Audit Confirmation and indicated that the Transactions appear to have involved arrangements with certain former Directors that were not reflected in the books and records of the Subsidiary.

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Key Findings

In regards to the Transactions, FTI Consulting made the following key findings:

  1. FTI Consulting observed that RMB2,872,557 was transferred from the Subsidiary to the Debtor between May 2018 to January 2019, more particularly:
    1. a sum of RMB600,000 was transferred from the Subsidiary to the Debtor between May 2018 and August 2018. FTI Consulting was advised by the Subsidiary and the Debtor that this was for the partial settlement of fees pursuant to a service contract dated 6 February 2018 and a supplementary service contract dated 7 May 2018 entered between the Subsidiary and the Debtor in relation to a horse racing project in Hainan (the "Horse Racing Project"). The available documentation indicated that the Subsidiary and the Debtor have entered into a termination agreement dated 24 April 2019 and agreed the final contract fee at RMB1,300,000. The RMB700,000 difference (the "Outstanding Contract Fee") has been fully settled by the Subsidiary; and
    2. a sum of RMB2,272,557 was transferred from the Subsidiary to the Debtor between August 2018 and January 2019. The Debtor then transferred a sum of RMB2,272,557 to four individuals and two companies that were not members of the Group (the "Recipients") as follows:
      1. RMB131,120 to Individual A;
      2. RMB18,880 to Individual B;
      3. RMB50,000 to Individual C;
      4. RMB100,000 to Individual D;
      5. RMB400,000 to Company E; and
      6. RMB1,572,557 to Company F.

The general manager of the Subsidiary informed FTI Consulting that he effected these payments, with the exception of the payments that were ultimately made to Company F, based on the instructions of Mr. Wei Guo ("Mr. Wei"), a former executive Director and the former Chief Executive Officer of the Company, who did not hold any positions within the Subsidiary.

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Transaction with Individual A, Individual B, Individual C and Individual D (collectively, the "Individuals")

  1. FTI Consulting noted that the Individuals were instructed by Mr. Wei to receive and process the cash transferred to them as payment for the development and market research services in connection with the Horse Racing Project and a tea bag wholesale business in Hainan (the "Tea Bag Business"). Except for Individual A who was an employee of Company E, all the other Individuals were business acquaintance of Mr. Wei. No written agreements were entered into between the Subsidiary and each of the Individuals. As at the date of this announcement, FTI Consulting noted that the cash transferred to the Individuals were refunded in full to the Debtor and subsequently applied by the Debtor to settle part of the Outstanding Contract Fee owed to it.

Cash advance to Company E

  1. FTI Consulting noted that Mr. Wei was the sole shareholder and legal representative of Company E. Two payments advanced to Company E in the sum of RMB400,000 were instructed by Mr. Wei as loans provided by the Subsidiary to Company E. No loan agreement was entered into between the Subsidiary and Company E. As at the date of this announcement, FTI Consulting noted that Company E had refunded the amount advanced in full to the Debtor and subsequently applied by the Debtor to settle part of the Outstanding Contract Fee owed to it.

Transaction with Company F

  1. Mr. Wei informed FTI Consulting that he was not aware of the cash transferred to Company F. The general manager of the Subsidiary informed FTI Consulting that he authorised the transfer with consent from management of the Company. FTI Consulting noted that the Group did not communicate with Company F directly. Instead, the Debtor had communicated and negotiated with Company F as an agent on behalf of the Subsidiary and understood that the payments in the sum of RMB1,572,557 were initial service fees made by the Subsidiary to Company F, via the Debtor, to perform services in relation to the development of the Horse Racing Project. No written agreement was entered into between the Subsidiary and Company F in relation to the engagement of Company F by the Subsidiary. FTI Consulting also noted that Company F subsequently refunded the amount advanced in full to the Debtor.

Explanation provided by Mr. Wei

  1. FTI Consulting was advised by Mr. Wei that the cash transferred to Individual A, Individual B, Individual C, Individual D and Company E in the sum of RMB700,000 were effected based on his instructions. According to Mr. Wei, he had verbally mentioned some of the payments to Mr. Xing Wei ("Mr. Xing"), a former executive Director and the former Chairman of the Company, prior to effecting these payments and no objections were raised by Mr. Xing.

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  1. FTI Consulting was advised by Mr. Wei that the purpose behind these payments, with the exception of the cash transferred to Company E and Company F, was to diversify the business of the Group. The Horse Racing Project and the Tea Bag Business were business opportunities he had identified for the Group.
  2. FTI Consulting was advised by Mr. Wei that he had to pay the Recipients, aside from Company E and Company F, for the work carried out in relation to the Horse Racing Project and the Tea Bag Business. FTI Consulting was given to understand that as Mr. Wei wanted to maintain the confidentiality of the Horse Racing Project and the Tea Bag Business to prevent the Company's business strategy from being disclosed to potential competitors, he had chosen to pay the service providers through intermediaries such as the Debtor.
  3. In regards to the cash advanced to Company E, FTI Consulting was advised by Mr. Wei that the loans were provided to meet the cash flow needs of Company E, on the basis that he had devoted a lot of time and resources in exploring business opportunities for the Subsidiary which resulted in cash flow difficulties for Company E.
  4. FTI Consulting was given to understand that the RMB700,000 returned by Individual A, Individual B, Individual C, Individual D and Company E to the Debtor was subsequently applied by the Debtor to settle the Outstanding Contract Fee owed to it.

2. Loans advanced to entities outside the Group Background

As disclosed in the announcement of the Company dated 19 June 2019, a wholly-owned subsidiary of the Company advanced loans of approximately RMB7.04 million to several entities outside the Group. The Former Auditors considered that the recoverability and purposes of the Loans to be factors affecting their audit work of the Financial Statements.

Key Findings

Subject to certain limitations, FTI Consulting made the following key findings:

  1. FTI Consulting observed that RMB7,041,789 was advanced by the Subsidiary to several entities that were not members of the Group between 3 February
    2018 and 31 July 2018, more particularly:
    1. RMB159,177 to Company G;
    2. RMB200,000 to Company H;

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    1. RMB200,000 to Company E;
    2. RMB1,700,000 to Company I;
    3. RMB2,422,612 to Company J;
    4. RMB1,000,000 to Company K; and
    5. RMB1,360,000 to Company L.
  2. The general manager of the Subsidiary informed FTI Consulting that he effected the payments to Company E, Company H and Company I based on the instructions of Mr. Wei.

Transaction with Company G

Based on FTI Consulting's interview with Mr. Wei and review of the available information, the cash transferred in the sum of RMB10,359,177 to Company G between 6 February 2018 and 28 April 2018 was proof of funds provided by the Subsidiary to assist Company G in its discussions with potential parties in Hainan in relation to the Horse Racing Project. No written agreement was entered into between the Subsidiary and Company G. The available documentation indicated that there was an outstanding balance of RMB159,177 due from Company G as at 31 December 2018. FTI Consulting noted that Company G subsequently refunded the amount advanced in full to the Subsidiary.

Transaction with Company H

  1. Based on FTI Consulting's interview with Mr. Wei, the cash transferred to Company H was a loan provided by the Subsidiary to assist Company H in settling its operating expenses. No loan agreement was entered into between the Subsidiary and Company H. FTI Consulting noted that Company H subsequently refunded the amount advanced in full to the Subsidiary.

Transaction with Company E

  1. Based on the available documentation and FTI Consulting's interview with Mr. Wei, the RMB200,000 advanced to Company E was an interest-free loan to assist Company E to meet its cash flow needs, on the basis that he had devoted a lot of time and resources in exploring business opportunities for the Subsidiary which resulted in cash flow difficulties for Company E. FTI Consulting noted that Company E subsequently refunded the amount advanced in full to the Subsidiary.

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Transaction with Company I

  1. Based on available documentation and FTI Consulting's interviews with the sole shareholder and legal representative of Company I and Mr. Wei, the cash transferred to Company I was payment for the provision of consultancy services in relation to the Horse Racing Project. The relevant consultancy service agreement was terminated in April 2019 and FTI Consulting was informed that the reason for its termination was due to changes in the Chinese government's policy which might negatively impact the Horse Racing Project. Company I subsequently refunded the amount advanced in full to the Subsidiary in April 2019.

Transaction with Company J

  1. The available documentation indicated that the cash transferred to Company J was an interest-free loan and was fully settled in April 2019. FTI Consulting was informed by the legal representative of Company J and Mr. Wei that the loan was provided to Company J by Mr. Wei to deal with Company J's cash flow needs.

Transaction with Company K

  1. Based on available documentation and FTI Consulting's interviews with Mr. Wei and the chairman of the holding company of Company K, the principal business activity of Company K was property management and the cash transferred to Company K was deposit for future cooperation between the Subsidiary and Company K in relation to the development of healthcare facilities in Hainan. FTI Consulting was given to understand that the Subsidiary decided to cease its cooperation with Company K and the available documentation indicated that Company K subsequently refunded the amount advanced in full to the Subsidiary at the request of Mr. Wei.

Transaction with Company L

  1. The available documentation indicated that the cash transferred to Company
    L was an interest-free loan, and that the payment was made by the Subsidiary on behalf of its wholly-owned subsidiary, 海南瀛晟御馬文化投資有限公司 ("Yuma Wenhua"), for the purchase and import of four horses through Company L as Yuma Wenhua's agent. Mr. Wei informed FTI Consulting that the purchase of the said horses through Company L was part of the business plan of the Horse Racing Project. FTI Consulting was given to understand that the said horses were located on a farm which was operated by Company L. No documentation has been provided to FTI Consulting in relation to the current ownership of the said horses other than a purchasing contract and two VAT invoices issued to Yuma Wenhua in the sum of RMB1,360,000 in relation to the aforesaid payment made for import of the four horses. The Board is of the view that, as Yuma Wenhua obtained a purchasing contract and two VAI invoices issued to Yuma Wenhua in the sum of RMB1,360,000, the horses are expected to be recognised as assets for the year ending 31 December 2019.

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3. Similar fund transfers

As part of the Independent Investigation, FTI Consulting reviewed all payments of RMB100,000 or more made by the Subsidiary during the period from 1 January 2018 to 31 December 2018 to identify whether there were any irregular fund transfer arrangements similar to the Transactions and the Loans. Based on available documentation and FTI Consulting's interviews with the management of the Subsidiary, FTI Consulting did not identify any irregular fund transfers similar to the Transactions and the Loans.

LIMITATIONS OF THE INDEPENDENT INVESTIGATION AND UNRESOLVED MATTERS

FTI Consulting encountered a number of limitations and challenges which may have limited both the nature and extent of its investigation. The main limitations include:

  1. being unable to obtain electronic records of instructions made by Mr. Wei. FTI Consulting understood that some of the instructions provided by Mr. Wei to relevant parties in relation to the processing of payments to the Recipients were via electronic communication platforms and that the electronic communication records have since been deleted by Mr. Wei and the relevant parties. Due to such limitation, FTI Consulting reported that the information derived from its review may be incomplete;
  2. being unable to verify the identities of Individual C, the legal representative and shareholder of Company I and the general manager of Company F as only telephone interviews were able to be conducted with them;
  3. being unable to conduct an interview with Individual B. Due to Individual B's unavailability for an interview, FTI Consulting's understanding of the payment made by the Debtor is based on the information provided by Mr. Wei and the available documentation; and
  4. being unable to conduct an interview with Company L. Due to Company L's unavailability for an interview. FTI Consulting's understanding of the transaction with Company L is based on the information provided by Mr. Wei and the available documentation.

FTI Consulting identified the following unresolved matters: the lack of supporting documentation to confirm the ownership of the four horses by Yuma Wenhua other than a purchasing contract and two VAT invoices issued to Yuma Wenhua in the sum of RMB1,360,000 in relation to the aforesaid payment made for the import of the four horses.

Despite the aforementioned limitations, it is the view and assessment of the Board that FTI Consulting has taken proper and reasonable actions with a view to ensuring the integrity and reliability of the findings of the Independent Investigation within its expertise. The Board is also of the view that FTI Consulting is properly qualified and has the relevant credentials and experience in investigation like that on the Group.

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The Board is also of the view that the limitations as articulated by FTI Consulting exist by virtue of the nature of its investigative process. Furthermore, in using the findings of FTI Consulting in its assessment, the Board and the Special Investigation Committee were careful to only draw conclusions directly supported by the findings of FTI Consulting. As such, given the professionalism and expertise of FTI Consulting, the Board considered that the limitations to the Independent Investigation has not adversely affected the reliability of the Independent Investigation.

VIEW OF FTI CONSULTING

FTI Consulting is of the view that Mr. Wei was able to process the payments in connection to the Transactions and the Loans at the time due to a lack of internal controls and an applicable payment approval policy within the Subsidiary which in effect, allowed Mr. Wei to process such payments on a discretionary basis that otherwise should have been subjected to internal control mechanisms and an internal approval process.

It is recommended that the Subsidiary implement appropriate internal control mechanisms, including the implementation of appropriate controls over the use of its bank accounts and adopting a payment approval policy that involves the authorization of the members of the board of the Subsidiary, to avoid any future situations such as the audit issues identified by the Former Auditors.

VIEW OF THE SPECIAL INVESTIGATION COMMITTEE

The Special Investigation Committee has reviewed and accepted the key findings of the Independent Investigation. The Special investigation Committee is of the unanimous view that:

  1. Mr. Wei effected the Transactions in pursue of business opportunities for the Group, which included the development of the Horse Racing Project and the Tea Bag Business. Mr. Wei effected those transfers through the intermediaries to maintain the confidentiality of the Company's business and to prevent the Company's business strategy from being disclosed to any potential competitors which could damage their business prospects;
  2. there is no intention of fraud in regards to the Transactions and the Loans. As throughout the report of the Independent Investigation, FTI Consulting stated that the Transactions and the Loans were effected with the intention to pursue business opportunities for the Group and there is no substantial loss for the Group;
  3. the payments effected in connection to the Transactions and the Loans at the time are due to a lack appropriate internal controls which concurred with view of FTI Consulting;
  4. there is room for improvement on the Group's internal control systems and procedures; and
  5. the four horses as mentioned in sub-section headed "Transaction with Company L" will be recognised as assets for the year ending 31 December 2019 which concurred with the view of the Board.

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REMEDIAL ACTIONS

With the recommendations of the Special Investigation Committee and FTI Consulting, the Board will take the following remedial actions to address the concerns identified in the Independent Investigation:

  1. to review the internal control systems and procedures of the Group so as to minimize the possibility of any fund outflow which does not relate to any agreements, arrangements or transactions to which the Group is not a party to, and to ensure compliance with the Listing Rules by properly and timely identifying and reporting the relevant transactions to the Board;
  2. the reporting mechanism of the subsidiaries of the Group be improved, including monthly reporting of the financial and operation conditions of the relevant companies;
  3. to engage the Internal Control Adviser to conduct an internal control review of the Company and selected subsidiaries of the Company;
  4. the findings of the Independent Investigation raised concerns over internal control of the Subsidiary's chops and monitoring of bank accounts opened in the Subsidiary's name. The payments authorities of the current Directors and directors and/or management of the subsidiaries of the Group would be strengthened and improved in accordance with the recommendations provided by the Internal Control Adviser;
  5. the structure, size and composition of the Board and its senior management team would be reviewed more regularly in order to ensure they possess the necessary experience and skills to carry out their duties in managing the business operations of the Group properly and effectively; and
  6. to conduct regular training sessions to all Directors, senior management and other officers of the Group to ensure that necessary financial and internal control measures are able to be implemented and observed.

As at the date of this announcement, the Board has engaged the Internal Control Adviser to conduct an internal control review of the Company and selected subsidiaries of the Company, and the Internal Control Adviser has issued the report of Internal Control Review. A follow-up review has been conducted by the Internal Control Adviser, the Group has implemented enhanced internal control measures to remedy all major internal control deficiencies identified, except for one item as longer time than expected for the bank to proceed administrative procedure. The Special Investigation Committee will ensure that the Group will implement the recommendations provided by the Internal Control Adviser to the fullest extent possible.

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CONTINUED SUSPENSION OF TRADING

At the request of the Company, trading in the shares of the Company on the Stock Exchange has been suspended since 9:00 a.m. on 1 April 2019 and will remain suspended until further notice pending fulfilment of the Resumption Guidance.

Shareholders and potential investors of the Company are advised to exercise caution when dealing in the shares of the Company.

By Order of the Board

Winshine Science Company Limited

Zhao Deyong

Chairman

Hong Kong, 30 October 2019

As at the date of this announcement, the Board comprises three Executive Directors, namely Mr. Zhao Deyong (Chairman), Mr. Liu Michael Xiao Ming (Chief Executive Officer) and Mr. Luo Lianjun; one Non-executive Director, namely Mr. Lin Shaopeng; and three Independent Non-executive Directors, namely Mr. Kwok Kim Hung Eddie, Mr. Ng Wai Hung and Ms. Shi Xiaolei.

*  For identification purpose only

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Winshine Science Co. Ltd. published this content on 31 October 2019 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 30 October 2019 22:46:02 UTC