Cereal and snack-maker Freedom Foods is being investigated by the corporate regulator ASIC for a series of “significant” accounting problems.
- The company will have lost its chairman, CEO and CFO, in quick succession, by early next year
- Freedom published an “insider trading” policy, when it confirmed ASIC was investigating the business
- Deloitte found some executives, between 2014-2019, had paid themselves extra (without getting board approval)
The beleaguered company has also revealed that its earnings would be hurt by $590 million in write-downs.
In a series of announcements made after the market had closed on Monday, the company said a profit of $11.6 million in the 2018-19 financial year had become a $145.8 million loss.
It said the loss widened in the past financial year to $174.5 million.
Also, two of Freedom’s board members — chairman Perry Gunner and non-executive director Trevor Allen — will retire in late January, close to its next annual general meeting.
Their departure will come just five months after former chief executive Rory Macleod, and then-chief financial officer Campbell Nicholas, were forced to quit.
In the wake of their removal, Michael Perich was appointed interim CEO; the Perich family are Australia’s largest dairy farming family, and own 54 per cent of Freedom Foods.
Freedom shares have been suspended from trading since June.
The company’s shares last traded at about $3, having peaked at $7 in September 2018.
Shareholders find news hard to chew
Freedom’s board received a frosty reception from shareholders at a hastily convened webcast on Monday evening, following the news.
Callers questioned company oversight and the scope of the $590 million write-down, of which $372.8 million is linked to asset values being slashed.
It was explained that Freedom has incurred enormous costs building machinery to handle its new product lines, but did not put it down as an “expense” in its books.
The company also wrote down its goodwill and brands by $75.9 million.
It also had to write down $60.1 million due to “out-of-date, unsaleable and obsolete inventory”.
“These accounting treatments contributed to decisions on new products and expansions that were based on unrealistic assessments of market opportunities and margin assumptions that were not realised,” Freedom said in a statement.
“As a result, too many group products were sold at prices that did not fully recover their costs.”
‘Good money after bad’
Mr Perich said it was a deeply disappointing set of results for Freedom Food Group, its people and its shareholders.
“The results reflect the significant costs of past accounting and operational matters — matters we have identified with the assistance of independent experts and are taking steps to remedy,” he said.
To fix its balance sheet, the company is asking shareholders to stump up $280 million through a capital raising.
The request didn’t go down well during Monday’s webcast.
“Why should I throw good money after bad?” asked one frustrated shareholder.
Mr Gunner said Freedom’s problems were due to its “fast” pace of growth, and the board was keen to address those issues by simplifying the business.
Curiously, the company also decided to publish its updated “Securities Trading Policy” to the public on Monday.
The policy contained a section that bans insider trading, which is already illegal under Australian law.
Under its policy, “Restricted persons” (defined as employees) cannot deal in shares of the company if they have “inside information”.
Nor can they buy or sell shares of Freedom during “closed trading periods”.
Basically, they have to wait for at least one day after the company’s results are announced to the ASX.
Alarm bells rang in March when it was discovered that some of Freedom’s executives had been giving themselves extra payments, over several years, without authorisation from the board.
Mr Gunner said the company did not find out until after this had occurred.
“During the year ended 30 June 2020, the board identified matters regarding the operation and administration of the group’s equity incentive plan (EIP),” the company’s external auditor Deloitte wrote in its report.
“The matters included the granting of previously undisclosed employee share options and/or extension of the expiry date of share options by management between September 2014 and September 2019.”
An audit by Deloitte and a forensic accounting investigation by PwC have discovered some “significant” accounting problems for the company, dating back a few years.
In addition to the internal probe, Freedom now has to contend with an external regulator in ASIC, which can wield its power in punitive ways.
Freedom said that ASIC had formally requested documents from the company as part of its investigation, and that it was cooperating with the regulator.