Sometime in early 2019, the then-financial controller of the manufacturer behind plant-based and dairy beverage brand Milklab, Stephanie Graham, paid a visit to two warehouses leased by the company.

Unbeknown to anyone other than a select few senior executives at Freedom Foods Group (now known as Noumi), these warehouses in Victoria’s Shepparton and Mooroopna were housing a secret stash of expired, rejected or otherwise obsolete stock. Graham snapped some photos of the rotten stock and shared them with chief executive Rory Macleod and chief financial officer Campbell Nicholas.

On November 6 that year, Nicholas visited the warehouses himself. “I have just walked through all the hidden factories at shepparton – holy holy crap!” he said in a text to Graham.

“yep, photos don’t do it justice”, Graham texted back.

No one else would find out about the warehouses until more than half a year later. Neither Macleod nor Nicholas, who abruptly resigned and went on leave within 24 hours of one another in June 2020, would be around to deal with the spectacular corporate implosion that followed, which, more than four years later, continues to this day.

Forced to redo years of accounting, Freedom Foods ultimately revealed more than half a billion dollars’ worth of useless stock that would crash its share price when it emerged from a nine-month trading halt.

Adding to some half a dozen lawsuits that would follow, ASIC earlier this year sued the company, Macleod and Nicholas in the Federal Court for breaching their director duties.

Last Monday, Justice Ian Jackman (brother of Wolverine star Hugh) handed down a $5 million penalty, marking the close of a dark chapter for the business.

‘The omission of the relevant information from the financial reports was deliberate, or at least reckless, conduct by Mr Macleod and Mr Nicholas.’

Federal Court judge Ian Jackman

But contained within Jackman’s judgment and a court document obtained by this masthead are fresh details about the messy milk implosion that have not been publicised until now.

The ‘CEO Instructions’

The volume of stock that should have been written off had been steadily mounting since 2018. But Macleod and Nicholas, in their roles as chief executive and chief financial officer respectively, had put in place a policy in June that year – referred to in court documents as the “CEO Instructions” – that stock was not to be thrown out or written off without their permission, as outlined in the judgment.

Because of this policy, no disposals or write-downs occurred. Instead, stock that was unsellable – due to quality, expiration date or for any other reason – was being stowed in leased warehouses and recorded in the inventory software system as “non-nettable” instead of being classified as the correct sub-category.

As a result of omitting the write-downs, Freedom Foods had effectively inflated its numbers to the market. The value of its inventory – disclosed as $120.2 million – had been overstated by $31.8 million in its 2019 financial report, and the following year by $36.6 million (disclosed as $122.3 million).

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It wasn’t just obsolete stock that was being recorded improperly. The Federal Court judgment found Macleod and Nicholas had fudged details about a big order of lactoferrin, a protein found in human and animal milk that helps fight bacterial infections. Lactoferrin was a very-high-margin product for Freedom Foods (margins of at least 94 per cent), and Singaporean dairy ingredient business Interfood had placed a sizeable $US7.8 million ($11.8 million) order for 4000 kilograms at $US1950 per kilogram. The order was subject to a sample approval, failing which a customer had the right to cancel the order.

Freedom Foods billed Interfood 16 times for a total sum of $US6.8 million between July and December 2019. But Freedom Foods had not received sample approval, so Interfood never paid any invoices.

Freedom Foods recorded the invoice amounts in its accounts anyway, yet neglected to record any cost of goods sold.

Its disclosed revenue for the 2020 half-year was overstated by $9.8 million and disclosed profits exaggerated by $8.5 million.

“It was information that Mr Macleod and Mr Nicholas ought reasonably to have come into possession of, as officers of [Freedom Foods Group], particularly in light of the fact that they each received regular accounts receivable reports and knew that no payment had been received in respect of the Lactoferrin invoices and Mr Nicholas had been informed that lactoferrin sales with a profit-and-loss impact of -$9,309,375 had not shipped,” Justice Jackman stated in his judgment.

The unravelling

Over the years, some staff tried to raise the issue but attempts to gain approval to write off stock were always unsuccessful. Nicholas received inventory reports between September and December 2019 highlighting nearly $30 million in non-sellable inventory, according to a statement of facts agreed upon by both ASIC and Noumi, obtained by this masthead.

By 2020, the accumulating piles of excess stock were starting to catch up to the pair. A committee that was established in mid-February to review inventory issues included Macleod and Nicholas as committee members. It met five times between March and May that year.

Things came to a head during a board meeting on May 28. For the first time, directors heard from Macleod that $37 million worth of inventory was “at risk”, $20 million of which was expired, some of which could be reprocessed, and some of which was “phantom” stock – it didn’t exist.

“The board expressed its concern that this issue – known by senior management but not by the board – was not stated in previous audit reports,” said the statement of agreed facts.

Directors called for an internal audit, an external review and a comprehensive review of information systems, and asked Macleod to undertake a sweeping review of stock and provide further details.

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The share price closed at $4.36 that day.

On May 29, Freedom Foods gave an update to the ASX outlining write-downs of $25 million. Shares dipped to $3.72. Roughly a month later, on June 23, Nicholas resigned as chief financial officer.

Macleod was effectively shown the door. “Following that resignation, Mr Macleod was asked by [chairman] Mr [Perry] Gunner and [board member] Mr Tony Perich to reflect on his future employment with Freedom Foods. Mr Macleod then went on leave,” said the statement of agreed facts.

The bad news kept coming. On June 24, some members of management presented to the board a new write-down figure of $37 million and said none of it was reworkable. The company slid into a trading halt at a stock price of $3.01.

The board met again the following day. An even bigger write-down figure was presented, $52.2 million, that became $60 million after disposal costs and a contingency amount were factored in. The board also found out about the faked lactoferrin numbers, and the possibility that its half-year results were inflated.

Restated figures contained in Freedom Foods’ 2020 full-year results showed the real write-down figure was $590 million; $11.6 million in reported profits for 2019 became losses of nearly $146 million.

‘Deliberate, or at least reckless’

How significant was the impact of the cover-up? When Freedom Foods resumed trading on March 22, 2021, after a nine-month halt, Justice Jackman pointed out it opened at a devastating 20¢ and closed the trading session at 53¢, representing an 82.4 per cent plummet.

The Federal Court judge described the contraventions as serious and the omissions as “deliberate, or at least reckless, conduct by Mr Macleod and Mr Nicholas”.

“FFG’s failure to disclose the relevant information to the market forms part of a course of conduct that spanned eight months and two financial reporting periods. It therefore cannot be said to be isolated, or a momentary lapse in judgment,” he stated.

The company’s board of directors bear responsibility too, he indicated.

“It should therefore be inferred that the company did not have adequate processes in place to ensure that material information flowed to the board and that its continuous disclosure policy, though notionally in existence, was ineffective.”

What now?

The outstanding question is also one we may never get an answer to: why Macleod and Nicholas hid so much unsellable stock.

On June 25, 2020, then-executive chairman Perry Gunner fronted irate investors in a call full of questions he didn’t have answers to, with one accusing him of being “asleep at the wheel”.

“Directors can only act on the information they’re provided with,” he told investors. “This is fairly raw; we learned about a lot of this today. Clearly there are further investigations under way.”

Despite current chief executive Michael Perich’s efforts to execute a turnaround strategy, the company’s share price of 11¢ demonstrates it is still struggling to convince the sharemarket it’s a good investment.

Plant-based milk sales are still ticking up, increasing 11.4 per cent in the fourth quarter to $47.4 million thanks to stronger supermarket and export sales. Milklab remains a strong brand in the market, with both oat and almond milk demonstrating growth.

But Noumi is still expecting to report a net loss for the 2024 financial year, following a $47 million loss the year before. The $5 million penalty, which to other companies may seem like a pittance, makes the hole in Noumi’s profits even bigger.

Lawsuits are expensive: Noumi’s dispute settlement with a former supplier and Almond Breeze producer, Blue Diamond, has cost it $48 million and $860,000 in legal costs. It also had to settle with French tea and coffee company Sunday Collab International for $400,000 after former world surf champion Joel Parker accused Noumi of walking away from an alleged deal.

Discussions with Phi Finney Macdonald and Slater + Gordon, the law firms representing two shareholder class actions that have been rolled into one, continue. The class actions also seek to prosecute Noumi’s former auditor Deloitte, which is in turn countersuing Noumi.

Noumi’s 2023 financial year results contained a going concern note.

“Due to the uncertainty surrounding the outcomes of the above litigations, the quantum of compensation, penalties and/or costs for which the group may be liable, and whether the group will have access to sufficient funds to pay these amounts, a material uncertainty exists which may cast significant doubt on the group’s ability to continue as a going concern.”

As ASIC is still pursuing Macleod and Nicholas individually, its case is ongoing. Their lawyers have been contacted for comment.

The new board of directors is keen to move on.

“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,” said Noumi chair Genevieve Gregor.

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