Lack of disclosure by Aspen and Enviro-Hub disadvantaged their minority investors

TWO small Singapore-listed companies trying to make it big in Malaysia's booming glove-making industry have drawn regulatory scrutiny over the last few weeks - one for announcing a big commercial win prematurely, and the other for disclosing a significant business milestone belatedly.

In the latter case, recycling group Enviro-Hub Holdings said on June 7 that its Malaysian associate company Pastel Glove had received "510 (k)" regulatory clearance from the US Food and Drug Administration (FDA) for its nitrile medical grade examination gloves on May 13.

When queried by Singapore Exchange Regulation (SGX RegCo) about the time gap between its announcement and its notification from the US FDA , Enviro-Hub explained that it held back the announcement until it was able to verify that its clearance status was reflected on the FDA database.

The company added this was to "avoid prematurely announcing the Section 510(k) clearance and risk announcing misleading information inadvertently".

Enviro-Hub's cautious approach might seem justifiable after Aspen (Group) Holdings landed in hot water for announcing a major contract win by its glove unit that was subsequently not consummated.

Aspen announced on April 13 that it had secured a US$210 million supply deal with Honeywell International. But it retracted that announcement on April 24.

Yet, going by what the two companies have said, there is a difference between the two cases.

Enviro-Hub had received notification from the US FDA about its 510 (k) status. By contrast, Aspen had not received actual confirmation from Honeywell that the supply deal had been consummated.

Aspen said in its retraction announcement that it had executed and delivered what it believed to be the final agreement with Honeywell on April 12, and invoiced Honeywell for the first payment of US$10 million the same day.

Aspen understood the "effective date" of the agreement to be April 12, and believed that Honeywell's execution of the agreement was imminent. Hence, it announced the deal the following day.

Whatever the case, the issue at hand is not just about whether Enviro-Hub and Aspen were diligent in ensuring the veracity of their announcements. It is also about the seeming lack of common sense at both companies in making disclosures.

Enviro-Hub hikes stake in glove unit

On May 18, five days after Enviro-Hub became aware of its 510(k) clearance and decided not to immediately disclose it, the company held an EGM to obtain permission from its shareholders to diversify into healthcare products -- specifically, personal protection equipment like rubber gloves.

The resolution received 100 per cent support of shares voted at the EGM.

Then, three days later, on May 21, Enviro-Hub announced that it had entered into a term sheet to acquire the 75 per cent of Pastel Glove that it doesn't already own for S$46.8 million.

Enviro-Hub acquired 25 per cent of Malaysia-based Pastel Glove in January through an equity investment of US$0.125 million plus an interest-free shareholder loan of US$4.875 million.

The S$46.8 million consideration for the remaining 75 per cent of Pastel Glove will be satisfied by S$23.4 million in cash payments and the issue of 292.5 million new Enviro-Hub shares priced at S$0.08 each.

This is a significant transaction. Enviro-Hub has 1.24 billion shares in issue, and a market capitalisation of about S$119 million.

Given the imminent EGM and deal to acquire the remaining 75 per cent of Pastel Glove, the 510(k) clearance from the US FDA was a material development, as it would have impacted the market's perception of Pastel Glove's value, of which 25 per cent is already owned by Enviro-Hub.

Enviro-Hub said on June 7 that "only 20 per cent of the gloves in the market have obtained the 510(k) FDA certification".

The company added that its glove unit will "be able to sell its medical grade nitrile gloves in the US, which typically commands an average selling price of about 10-15 per cent higher than normal gloves due to the limited supply of medical grade gloves in the market".

Clearly, Enviro-Hub should have disclosed the US FDA clearance as soon as it received notification, perhaps with a caveat that it was waiting for its status to be reflected in the FDA database.

Without that knowledge, minority shareholders of Enviro-Hub may have been at a disadvantage versus the insiders.

Shares in Enviro-Hub closed at S$0.076 on May 12, the day before Enviro-Hub received the US FDA notification. They had climbed to S$0.086 by June 7, when the notification was disclosed.

Enviro-Hub closed at S$0.093 yesterday.

Aspen's Honeywell deal called off

On the other hand, the problem at Aspen is that the company did not immediately make it clear that the supply deal with Honeywell was dead in the water.

On April 24, when it retracted its announcement about the supply agreement, the company merely said that Honeywell had not consummated the deal. It offered no reasons for why this had happened; and no explanation of whether this meant the deal was off or merely delayed.

On April 29, in its response to queries from SGX RegCo, Aspen revealed that it became aware that the deal had not been consummated on April 14. Aspen said it did not immediately announce this because it first needed to clarify the reasons for the non-consummation of the deal.

Yet, Aspen still did not reveal these reasons. Instead, the company stated the agreement was not subject to any "express conditions precedent", and that Honeywell had submitted Aspen's initial invoice for processing.

As this column noted two weeks ago, this created the impression the ball was in Honeywell's court.

It was only after a second round of queries from SGX RegCo that Aspen finally came clean. On June 4, responding to those queries, Aspen said discussions with Honeywell about the supply deal had been called off.

Aspen said it did not announce this earlier because it had wanted to engage Honeywell in another discussion after a "cooling-off period".

Minority investors of Aspen were clearly put at a disadvantage by the company not immediately disclosing that supply deal had been called off.

Shares in Aspen closed at S$0.265 on April 9, before trading was halted for the announcement of the Honeywell supply deal. The stock closed at S$0.205 on June 4, just before Aspen finally stated explicitly that the deal was off.

Aspen closed at S$0.183 yesterday.

SGX RegCo should closely examine the recent announcements by Aspen and Enviro-Hub and determine if the two companies have properly observed their continuous disclosure obligations.