What is a material fact?

What is a material fact?

Not being a hotcopper member myself, I ask that people send me good stuff they see on there. I got this hilarious one overnight:

I don’t assert that there is anything wrong with Fantastic Furniture or AFR here, but there is a certain humour in having to source a quote from a known fraud (Fantastic’s parent company is Steinhoff) for use in reporting on another company.

Whatever, does Getswift really have a problem or not?

I opined ‘yes’ in Getswift Gets Swifted over the weekend. After some double checking I think it is pretty obvious that Getswift has failed to reveal material facts to the market.

I have taken the following information straight from ASX listing rules Chapter 3: Continous Disclosure, and the Guidance Note 8 which assists Chapter 3. Stick with me, the story comes after the legal treacle.

What do the listing rules say?

3.1: Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.

That’s straightforward.  How do you define ‘material’?

What is material?

Section 677 of the Corporations Act defines material effect on price or value. As at 1 May 2013 it said for the purpose of sections 674 and 675 a reasonable person would be taken to expect information to have a material effect on the price or value of securities if the information would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, or buy or sell, the securities.

It should be noted that the test in section 677 is an objective one and even if company officers honestly believe the information is not market sensitive, it will not avoid a breach of Listing Rule 3.1 if that view is ultimately found to be incorrect.

The key word here is ‘influence’. According to Guidance Note 8, the information must be likely to play a material role in an investor’s decision to buy or sell a security (i.e., Getswift shares). Day traders are excluded from the definition of ‘investors’.

Material information can include (among other things):

• The entry into, variation, or termination of a material agreement
• The fact that the entities earnings will be materially different from market expectations

 

The ASX would suggest that entities apply the guidance on materiality in Australian Accounting and International Finance Reporting Standards, that is: 

• Treat an expected variation in earnings compared to its published guidance equal to or greater than 10% as material… (..unless there is evidence or convincing argument to the contrary).

 

Getswift doesn’t do formal published guidance, however I would argue that the forecast delivery numbers combined with indicative $ per delivery amount to the same thing. You can form your own opinion on that. Some examples in Guidance Note 8 suggest that a company needs to provide an update for a material change in earnings, and also that a material change in analyst consensus estimates even if a company does not provide guidance may need to be reported.

An example:

I am going to use the Fruit Box contract here because it is quantifiable, but remember that there are problems with several of Getswift’s contracts according to AFR.

On 24 Feb 2017, Getswift signed a contract for 7m deliveries over 3 years with Fruit Box. This works out to be about 2.3m deliveries per year. At the time, management was talking generally (not in this specific announcement) about getting $0.29 per delivery.

Even using figures of $0.25 and $0.13 per delivery, to account for a wide range of possible prices, the contract is still clearly material in my opinion.

7m deliveries @ $0.25 / $0.13 per delivery = the total value of the contract is around $1.75m / $0.91 million.

Divide by 3 to get a single year’s contribution = $0.58m / $0.3m in expected revenues per year.

Getswift’s annualised revenues at the March 2017 quarter were not disclosed, but annualised receipts from customers were $0.2m, and annualised delivery numbers were 2m. (I multiply actual figures by 4 to get annualised figures).

Getswift’s annualised revenues at the October 2017 quarter (the most recent quarterly) were $1.02m, and annualised deliveries were 4m.

Getswift lost somewhere around half a year to one year’s worth of then-current revenues with this contract. Fruit Box’s estimated contribution of ~$0.3m-$0.6m/year and 2.3m deliveries per year is huge in context of Getswift’s sales and delivery numbers at the time. According to AFR, which quoted Getswift managing director Joel MacDonald:

“In relation to The Fruit Box Group, Mr Macdonald said “it’s not material now“, after saying the contract had been pulled immediately after GetSwift made the statement to the market.“

In my opinion the contract cancellation at the time was very clearly material, and is still material today.

Compare GSW with OLI

Compare Getswift’s behaviour with today’s announcement from Oliver’s Real Foods (ASX: OLI). Oliver’s sold its Maryborough site for $0.2m less than it had previously forecast to the market, and it put out a market sensitive release about it. Oliver’s has $30m in annualised revenue. 

Oliver’s is only one tenth the size of Getswift’s market capitalisation, but it is doing 30x Getswift’s annual sales and it thought a $0.2m change was material. I actually think that the OLI announcement was probably not market sensitive, but it definitely shows up Getswift by contrast.

Even if you disagree, these questions (which draw on the Chapter 3 criteria) are also fairly indicative. If the answer to any of the following question is ‘yes’, then the information could be material:

Was Fruit Box material? 

• If Getswift had announced a big contract (relative to then-current sales) with Fruit Box, and then announced very shortly after that the contract was cancelled and had not progressed beyond a trial, would this have changed your degree of conviction in your investment?
• Would the loss of this Fruit Box contract and its ~$1m a year in revenue have resulted in a meaningful change to a change in your valuation of Getswift shares at the time?
• Would analysts following Getswift have had to make material changes to their valuation models following the loss of the Fruit Box contract, and would this lead to a change in consensus valuation for Getswift?
• Does the news change your current view of the company’s prospects or reduce your degree of confidence/ materially increase your uncertainty regarding its other contracts?
• Will the entity’s earnings in the period likely be materially different from market expectations?
• Would you have participated in either of the capital raisings if the company had disclosed that this contract was withdrawn?

 

I would submit that the answers are yes, yes, maybe, yes, yes, and ‘while it might not change the decision, it would definitely change our risk reward tradeoff and would be something serious we would have to factor in’ (and therefore be material).

Alternatively, here is a question matrix straight from ASX (page 3) which also makes it quite clear:

While there might be arguments to the contrary, and companies are allowed to argue exceptions to the rule, by these standards Getswift still appears to have at least one undisclosed, material piece of information on its hands. If Getswift had disclosed this in February last year, it might have interrupted the hype machine, but it wasn’t disclosed and the company has raised capital twice since then.

Was Commbank material?

Getswift also appears to have pulled a swiftie with the Commbank contract, when it first said in April 2017 that it would have a full national deployment in place in 2017. Then in December 2017 (after raising capital twice) Getswift said that both organisations would start marketing it in February 2018 and revenues would commence in mid-2018.

The AFR said that that was incorrect, with Commbank not approving of that announcement and the arrangement actually being in a pre-pilot stage.

Breach of the listing rules

In my opinion, Fruit Box definitely and Commbank possibly looks like a breach of the company’s continuous disclosure obligations. However so far, this situation only deals with the ASX listing rules. These are breached all the time. Breaches are serious but rarely have consequences.

The real concern is if the information that was withheld from the market might have had a material impact on the decision of ordinary shareholders to buy Getswift, and institutional investors to subscribe for a cool $99m worth of new shares in Getswift. In both circumstances, people have handed over very large sums of money into a situation where they may not have been fully informed. That could bring serious legal and regulatory ramifications, not just a slap & tickle from the market operator.

If you are one of those insto shareholders, or a Getswift shareholder that bought in post Fruit Box/Commbank, I imagine that you are chewing nails and spitting tacks right now. If you’re a class action lawyer, you’re probably sharpening your knives and/or rubbing your hands together with glee. And if you’re ASIC, I imagine you’re laying there wondering whether it’s time to get up off the couch.

As I said in my Getswift post on the weekend, much hinges on the materiality (or otherwise) of those contracts to Getswift. I also said that I think Getswift is in deep shit, and it’s not hard to see why.

Like many, I can’t wait to see what the company comes back with tomorrow.

I own shares in Oliver’s Real Foods. I have no investment position in Getswift. I do not intend to take an investment position of any kind in Getswift. This is a disclosure and not a recommendation.