No More Opaque Announcements, page-8

"We should get a recalibrated announcement this week.
It's obvious!"


I have given some further thought to your suggestion that the Board is this week going to make an announcement to the effect that everything financial for the company is going well and, for that reason, the company won't be seeking a capital raising between now and the next AGM at the end of the year.

Ordinarily, I would dismiss this as nonsense. There is no precedent for it happneing in any other company, for very good reason (see my explanation below). But you, oggy, are harping on about this like it's a foregone conclusion, as if you have been informed of something the rest of us haven't been. Given cmk's inference that you're "in the industry", I suspect you may well know something that we don't that has led to your emphatic calls drawing out attention to this inevitable announcement. We also know, from recent posts (not yours), that those "in the industry" have on a few occasions come into the possession of certain knowledge about the company that the market has not. So let us consider your proposition about this imminent announcement on a reasoned basis.

The starting point is ASX Listing Rule 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." So the threshold test in this instance, assuming the directors have indeed made the present decision not to organise a capital raising, is "would a reasonable person expect the company's current mindset not to organise a capital raising have a material effect on the price or value of the entity's securities?"

In ordinary circumstances, the answer to this question would be a resounding "NO!". That is because the company was vested with the discretion to resolve to organise a capital raising at the last AGM if they saw the need arising. It hasn't done so yet, and we're about half-way through the period in which the discretion could be exercised. However, a decision not to to exercise that discretion simply preserves the status quo of the company's financial affairs. So that kind of decision is forever continuous until the expiration of the discretionary power (the next AGM) and so there is no obvious material effect. It is only when the Board resolves to exercise that discretion, and engage in a capital raising, that Rule 3.1 will be triggered. A capital raising indicates a number of things, most notably the fact that company is short of funds and there's going to be a dilution of the share price (i.e. a negative material effect in most situations).

So what is the possibility, as contemplated by you oggy, that a decision not to exercise the discretionary power to engage in a capital raising might constitute a material event falling within Rule 3.1? I admit it is possible because there is rationale, which is justifiable, and here it is:

1. Following a trading halt, the company recently announced that it had entered into an unprecedented "game changing" license agreement relating to one of the company's technologies that has yet to be commercialized. It is the company's "second technology" to be commercialized (the "first technology" being the magnetic micro-array that was commercialized in late September 2014).
2. Due to confidentiality restrictions, the company was prohibited from disclosing much detail about the second technology licensing deal at all, other than it being with Procter & Gamble (who was also the first technology licensee) and that the payment structure was different - it included upfront fees as well as royalties.
3. The market did not react to this announcement as the board of directors expected (they probably anticipated the share price to go up rather than down). The share price did go up, very briefly, but has since continued a trend downward following the release of the disappointing 4C in circumstances where the market was expecting substantially more revenue flowing from the commercialization of the first technology.
4. The Board is in possession of information which they know will see the company reaping significant financial benefits within the next month. However, severely hampered by their confidentiality obligations with Procter & Gamble, their hands are tied in what they can tell the market. They attempted to say as much as they could in the announcement concerning the second technology in the announcement about it, but their exercise in semantic gymnastics was abysmal, leading to confusion and shareholder and market dissatisfaction with their ability to communicate even the most basic of information. The Board, in my humble opinion, actually exacerbated the market's anger about the company's state of affairs with this announcement rather than ameliorating it that latter probably being their intention.
5. So the Board discusses amongst themselves this very difficult issue - "we know we're on the road to financial success in the next six months because we've just signed all these deals and we know millions of dollars is going to come in the door but we can't tell the market and the market hates us right now ... what can we do? we can't tell them the details about anything because we've already got ourselves into sticky situations with our principal partner and we're not going to do that gain..."
6. The Board will need to make a formal resolution for it to trigger Rule 3.1, and here is the resolution that I would draft if I was on the Board: "Due to the current financial outlook of the company, the Board resolves that the company will not engage in a capital raising pursuant to the discretion vested in it at the AGM in 2016 for the remainder of the period during which that discretion vests." The effect of this resolution will be to completely eliminate the risk of a capital raising for at least six months. For this reason, the reasonable person might regard this as having a material (positive) effect on the price or value of the company's securities. Rule 3.1 is therefore triggered and we get your predicted announcement, oggy.

And so there lies the justification. Your suggestion, oggy, is indeed possible. To be quite frank, however, if history is anything to go by, the Board will not engage in this reasoning nor make the announcement, in my opinion.

J