Milklab owner Noumi fined $5m for historical failing to write off and declare expired inventory

Justice Ian Jackman ruled that that Noumi (ASX: NOU), formerly known as Freedom Foods Group (FFG) until November 2021, would need to pay a civil penalty of $5 million which is in line with the sum requested by the company and the plaintiff, the Australian Securities and Investments Commission (ASIC).

ASIC filed civil proceedings against the company in early 2023, as well as former managing director and CEO Rory Macleod and former CFO Campbell Nicholas whose cases are still before the courts.

In a statement of facts agreed upon by ASIC and Noumi, it is alleged that in June 2018 McLeod put in place a standing policy that only he could give authority for stock to be disposed of or written off, but no such permission was given over a nine-month period between 2019 and 2020.

"Obsolete, rejected or expired stock held by FFG increased from 2018. So much so, that from 2018, FFG leased additional warehouses in Shepparton and Mooroopna and some of the obsolete, rejected or expired stock was stored in those additional warehouses," an amended statement of agreed facts (ASAF) stated.

"From time to time, some FFG staff requested approval from Mr Macleod to write off stock, or raised the issue of obsolete stock. Mr Macleod did not provide approval to write off stock."

The ASAF also noted that some inventory recorded in the company's enterprise resource planning (ERP) software system did not exist, and was referred to by some staff as "virtual stock" or "phantom stock".

Justice Jackman determined that the company had contravened the act by failing to notify the ASX of FY19 information including 'Not Saleable Inventory' of approximately $31.77 million, while failing to write down the value of its disclosed inventories and not making sufficient or adequate provisions.

The judge also concluded that the company had overstated its disclosed revenue for FY19 by at least $9.8 million by failing to account for non-revenue information stemming from invoices that did not lead to payments.

These invoices relate to the group's high-margin lactoferrin product, which is a protein extracted from milk. In April 2019 the group received a lucrative purchase order from Singaporean company Interfood for 4,000kg of lactoferrin for a total price of US7.8 million.

The purchase order was subject to customer sample approval and regulatory approvals from China by June 2019, and if these weren't forthcoming the customer had a right to cancel the order.

These approvals were not obtained by the deadline and no payments were received, yet the company included the invoices in its accounts anyway. As a result, the company's HY20 financial report "did not give a true or fair view of the financial position and performance" of the company.

The court has ordered that the penalty be paid 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 also pay a contribution to ASIC’s costs of $50,000.

"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," says Noumi chair Genevieve Gregor, who has been in the role since March 2020.

"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."

ASIC Deputy Chair Sarah Court says 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," she says.

Investigations into the financial irregularities led to a trading suspension that lasted from mid-2020 to March 2022, after which shares plummeted by 83 per cent to $0.51. Since then they have shed a further 78 per cent of their value to their current trading level of $0.112.

The company reported a 10 per cent year-on-year increase in revenue in the June quarter to $155.6 million, with around a third of that figure coming from plant-based milks while the bulk came from its dairy and nutritionals lines.