Agreed maxybro, the ASX are indeed on the right track IMO, demanding answers of SKN Directors in relation to the underwriting agreement.
IMO, this is only the first round of ASX Queries as the release of this document does not mean the ASX is satisfied. This is SKN response only, the ASX will review and continue the questioning.
Let's explore why.
IMO the ASX lab result questions were superfluous, and the ASX's real concerns are the following elements,
"2. Please provide details of what (if any) due diligence enquiries were undertaken by or on behalf of SKN in relation to State Securities and its sole director prior to entering into the Underwriting Agreement" + a series of detailed questions 2.1, 2.2 and 2.3 relation to due diligence.
SKN answers did not answer individually but provided a general answer to all, and IMO the answers they gave were shamefully appalling.
Let's look at their due diligence,
"Direct enquiries of State Securities and its website" - ok first step is obvious no issue.
"Search of ASIC register" - ok second step is appropriate
"Google searches with no adverse findings identified" - WTF? If this is true then the Directors are imbeciles and clearly they are not. This would leave the ASX with the only logical assertion based on this answer, IMO, the information SKN Directors gleaned from the google search means they knew exactly who they were dealing with, an alleged money launderer and person of interest to VIC Police.
"Advice from Mr Meletsis as the sole director and shareholder of State Securities" - WTF? How did this conversation go? Ummm,
SKN Director: "Will you have the $10.5m in December" Mr Meletsis: "Yes" SKN Director: "Yep, good enough for me" CLICK - End Conversation
What an absolute joke, the above points are what SKN Directors did as part of their due diligence as they themselves have described in their answers to the ASX aware letter. The Directors of SKN, by their own admission, clearly failed to determine if State Securities P/L had the financial wherewithal to complete the transaction in December and if the Director of State Securities was of good character. This piece of the puzzle is critical, please take note.
The above clear lack of due diligence is, IMO, just laying out the canvas. In order to understand the full picture the ASX have drilled into the detail of the Options underwriting agreement, specifically,
"4. Please explain why, as described in paragraph C.b. above, are there no provisions in the Underwriting agreement entitling State Securities to terminate the Underwriting Agreement upon the occurrence of certain events, as would be standard in an underwriting agreement of this nature?"
In essence, SKN's answer was "Such certainty was critical for SKN and is often seen in contracts relating to transactions which do not complete for an extended period of time" - So basically the Underwriter agreed to no get out clauses - very unusual, but lets try to understand why the Underwriter is not concerned.The ASX digs further,
"5. Please explain why, as described in paragraph C.c. above, there is provision in the Underwriting Agreement for shortfall shares to be transferred to State Securities upon the exercise of Options without State Securities having paid SKN to exercise those Options and for the amount payable to exercise any such Options to be a debt owed by State Securities to SKN (‘Debt’)?"
Bingo! The ASX is asking SKN Directors why, in the detail of the contract, SKN has agreed that the Underwriter does actually not have to pay for the options!and the money up to $10m owed by State Securities is a debt owed. The answer SKN gave IMO, was at best, a nothing answer, thinly designed to give the ASX the run around. But the ASX is now heating up to the crux of the issue.
"6. As ASX reads the Underwriting Agreement, State Securities is entitled to: - dispose of the SKN shares it is issued on the exercise of the Options; and - to be paid its underwriting fee, without actually paying for the Options, leaving the amount due to be paid for the Options outstanding as a Debt . Does SKN agree with this reading? If so, please comment on the appropriateness of this provision from SKN’s perspective?"
SKN's answer is effectively "this clause provides SKN with optionality" - OMFG, the ASX are very clear on their line of questioning and it is obvious what the ASX is driving at, and it is the following IMO,
Hypothetically, if as a Director, you wanted to create the illusion that your ASX listed company will be funded at some future point with underwritten options how would you best go about it so Investors then have this information with the understanding that in fact the company will be funded. How would you achieve this outcome with a view solid future funding is a significant pillar for Investors ensuring share price rise? How would you construct the Underwriting agreement such that the Underwriter did not have to actually pay for the Options but received as a minimum a fee?
The ASX has clearly outlined this scenario via their questions IMO
SKN's answers are appalling and thinly disguised excuses IMO
The ASX will continue to drill down on this line of questioning IMO because they have to ensure there was no pre-meditated fraud with relation to the construction of the underwriting agreement and the real intent, additionally, to ensure that SKN did not deliberately mislead Investors in their announcements and supporting construction of documentation.
I for one am astounded at the ASX's line of questioning and the, IMO, ridiculously appalling answers delivered by SKN Directors.
At a minimum the above IMO, demonstrates gross incompetence and at worst, well lets see where ASX take it.
(20min delay)