With the Federal Court approving the $5 million civil penalty agreement between Noumi and the Australian Securities and Investments Commission (ASIC), details of the historical company disclosure obligations breaches at Freedom Foods Group have been aired.
Federal Court Justice Ian Jackman ruled that Noumi, formally Freedom Foods Group (FFG), would pay the agreed $5 million, in instalments of $2 million payable within 28 days of judgment, $1.5 million within 12 months of judgment and a further $1.5 million within 24 months of judgment. Noumi will pay $50,000 of ASIC’s costs within 28 days of judgment.
The court found FFG failed to disclose material information about the value of inventories in its financial reports for FY19 and HY20. In FY19, its disclosed inventory of $120.2 million was overstated by $31.77 million due to the inclusion of unsaleable inventory. In 1H20, the disclosed inventory was $122.3 million, including $36.6 million in unsaleable stock.
The court also found FFG’s HY20 disclosed revenue was overstated by at least $9.8 million because it included lactoferrin invoice amounts despite the existence of non-revenue information. No lactoferrin that the lactoferrin invoices outlined was delivered. And HY20 disclosed profit also included the lactoferrin invoices, causing an overstatement of around $8.5 million.
Justice Jackman said that as a listed entity, FFG had to provide half and full financial year results to the ASX that gave a true and fair view of the financial position and performance of the company and its subsidiaries.
The court found the company had an accounting policy and an inventory accounting policy that were consistent with Australian accounting standards.
ASIC deputy chair, Sarah Court, said, “Companies have a fundamental responsibility to ensure compliance with their continuous disclosure obligations. By failing to do so, they not only cause harm to investors by denying them the information they are entitled to, they also erode confidence in Australia’s financial markets.”
Noumi chair, Genevieve Gregor, said, “Over the past four years, the Noumi Board and leadership team have been actively resetting the business to focus on sustainable growth. This includes managing the legacy legal issues that relate to its history as Freedom Foods.
“The closure of the ASIC matter represents a pivotal milestone for the company and will enable the board and leadership team to focus more time and resources on growing the business.”
The CEO Instructions
In 2018, Freedom Foods Group used an enterprise resource planning software known as QAD for inventory management. Within that, various terms were used for stock depending on if it was available for sale – nettable or available, or not – non-nettable.
If inventory was non-nettable, there were more specific status codes including:
- WWHOLD – unable to be found;
- MISS-NNN – missing;
- REJECT – unsaleable due to poor quality; and
- MLOR – expired or subject to minimum life on receipt requirements.
Justice Jackman said some inventory in QAD didn’t exist, and that was referred to by employees as “virtual” or “phantom” stock.
During the period in question, FFG’s CEO was Rory Mcleod and its CFO was Campbell Nicholas.
“From around June 2018, Mr Macleod had (with the knowledge of Mr Nicholas) put in place a standing policy that stock was not to be disposed of or written off unless Mr Macleod gave authority or permission to do so (the CEO Instructions).
“During the period of contravention, Mr Macleod did not authorise any significant disposal or write-down of inventory of FFG, and no such disposal or write-down occurred,” Justice Jackman said.
From time to time, FFG staff requested approval from Mr Macleod to write off stock, or raised the issue of obsolete stock but Macleod did not provide approval to write off stock.
This meant that until May 2020, not saleable inventory was not written off, but instead stored in the group’s warehouses and recorded in QAD as non-nettable inventory.
For Justice Jackman, the CEO Instructions and Mcleod’s failure to authorise “any significant disposal or write-down of inventory”, both Mcleod and Nicholas “at the very least” should have known the company was not applying its own inventory accounting policy.
While that reality is a world of pain, there was also the question of the physical obsolete, rejected, or expired stock. As early as 2018, when the CEO Instructions came to pass, FFG was running out of room and had to lease additional warehouses in Shepparton and Mooroopna.
In early 2019, FFG former group financial controller and GM Commercial Strategy, Stephanie Graham, went to two warehouses leased by FFG near its Shepparton facility, and photographed the stock she saw in the warehouses. She then showed the photos to Mcleod and Nicholas.
In late 2019 (6 November) Nicholas texted Graham, “I have just walked through all the hidden factories at Shepparton – holy holy crap!”. Graham responded, “Yep, photos don’t do it justice.”
The lactoferrin lament
Lactoferrin is a high profit by-product extracted from milk, with a margin above 94 per cent.
In April 2019, FFG received an order from Singaporean company, Interfood, for 4000 kilograms of lactoferrin at US$1950 per kilo. If the deal was successful, FFG would bank US$7.8 million.
But the sale was contingent on a number of factors: customer sample approval, Certification and Accreditation Administration of China (CNCA) approval, and an export licence to China by June 2019. Without these, Interfood had the right to cancel its order.
From July-December 2019, FFG raised 16 invoices to Interfood totalling US$6.8 million. FFG recognised and recorded in its accounts that lactoferrin invoice amounts as soon as the invoices were raised and did not record any cost of goods sold.
But in that same time, no lactoferrin as detailed in the invoices was delivered to Interfood. Also – Interfood had the right to cancel its order as CNCA and sample approval had not been obtained by June 2019. No payment was made by Interfood to FFG regarding lactoferrin.
Justice Jackman said Mcleod and Nicholas received regular accounts receivable reports, and knew that, as of 7 February 2020, no payment from Interfood had been received.
On 26 March, Shepherd told Nicholas that the lactoferrin sales to Interfood with a P&L impact of $(9,309,375) had not been shipped.
But the lactoferrin invoice amounts contributed at least $8.5 million to FFG’s gross profit as reported in the HY20 financial report.
“Mr Macleod’s and Mr Nicholas’s awareness of the facts and circumstances giving rise to the relevant information, especially as to the mounting non-nettable inventory, of concerns expressed to them by senior employees, the admitted “CEO Instructions”, and Mr Macleod’s refusal to write off stock even when requested by FFG staff, give rise to the clear inference that the omission of the relevant information from the financial reports was deliberate, or at least reckless, conduct by Mr Macleod and Mr Nicholas,” Justice Jackman said.
ASIC’s proceedings against Mr Macleod and Mr Nicholas are ongoing.
