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Clarification Announcement
ADRENNA PROPERTY GROUP LIMITED
(Registration Number 1998/012245/06)
Share Code: ANA ISIN: ZAE000163580
“Adrenna” or “the Company”
CLARIFICATION ANNOUNCEMENT
Shareholders are referred to the ‘Audited Condensed Consolidated Results for the Year Ended
28 February 2019 and Related Party’ announcement (“the Results Announcement”) released
on SENS on 26 June 2019 wherein the auditor’s decision to issue a qualified opinion based on
management’s decision not to impair the loan granted to the East Sydney Day Hospital (Pty)
Ltd (“ESDH”) despite the ESDH being technically insolvent as well as various reportable
irregularities were disclosed. Further clarification on management’s decision not to impair the
ESDH loan and the reportable irregularities is provided below:
ESDH
Background
In September 2018 the Company had entered into an agreement with ESDH, a company
operating a private hospital in Sydney Australia, in terms of which the Company would, subject
to shareholder approval, make an investment of AUD2 million (two million Australian dollars), by
means of subscribing for 2 million convertible, redeemable preference shares in ESDH company
which, on conversion, would entitle it to a 15% shareholding in the ESDH. In anticipation of this
subscription, Adrenna advanced AUD2 million (two million Australian dollars) ESDH as an
interest-bearing loan (“ESDH Loan), until such time as the required shareholder approval for the
preference shares had been obtained. As announced on 20 May 2019, the preference share
agreement has subsequently been terminated by mutual consent and the investment will
remain as a loan subject to the loan terms agreed at the time of the advancement of the cash.
The reason for the termination of the agreement was the difficulty in obtaining the relevant
historical financial information (in a format) for inclusion in the circular to shareholders in
accordance with the JSE Listings Requirements as well as the inordinate costs associated
therewith, which far outweighed the benefits of the original transaction.
Accounting Classification of ESDH Loan
Adrenna obtained an accounting opinion (the Opinion) from a JSE accredited IFRS Advisor with
regards to the classification of the financial asset in terms of International Financial Reporting
Standards (IFRS). The Opinion concluded that the AUD 2 million payment represents a financial
asset in terms of IFRS 9 Financial Instruments, specifically a hybrid contract with both a loan and
an option. Given that the financial asset has an equity conversion option, the Opinion
concluded that its repayment does not comprise Solely Payments of Principal and Interest
(SPPI) and therefore it is classified at Fair Value Through Profit or Loss (FVPL) in terms of IFRS 9.
Historical Financial Performance of ESDH
ESDH posted EBITDA losses for the years ended 30 June 2016 and 2017, but an EBITDA profit was
recorded for the year ended 30 June 2018 mainly due to non-recurring income which included
an AUD4.8m debt that was forgiven and an AUD3.7m profit on the sale of assets. Whilst ESDH
management expect to report a revenue decline in respect of the financial year ended
30 June 2019 due to delays in new doctor recruitment, total revenue is expected to grow
significantly in 2020 supported by the commissioning of a High-Density Unit facility, the
construction of a Hybrid theatre extension and the commissioning of an outsourced radiology
department as well as additional beds.
Fair Valuation under IFRS
IFRS 13 Fair Value Measurement defines fair value as the price that would be received to sell an
asset or transfer a liability in an orderly transaction between market participants at the
measurement date. IFRS 13.58-59 states that in many cases the transaction price will equal the
fair value and that entities shall take into account factors specific to the transaction noting the
following situations as examples of when the transaction price might not equal fair value at
initial recognition (listed under IFRS 13.B4): related party relationships, financial difficulty, unit of
account, principal market, valuation techniques, cost of funds, service costs, risk premium and
profit margin.
In concluding that the ESDH loan is considered to be representative of fair value both at initial
recognition and at the year end, management took the following factors into account:
• although the ESDH loan is deemed to be a related party loan for JSE Listings
Requirements purposes, Adrenna and ESDH do not have a related party relationship that
would impact the conclusion of the terms based on a conflict of interest;
• whereas ESDH has had a recent history of losses, the financial difficulties are not
considered significant enough to have resulted in a fire sale of equity;
• financial difficulty, unit of account and principal market considerations do not influence
the perception of fair value;
• having considered the cost of funds, service costs, the risk premium and profit margins
associated with similar loan transactions, management is satisfied that the terms of the
loan can be deemed to be in line with the pricing of similar commercial arrangements
that apply a cost-plus pricing model.
As stated in the Results Announcement and as detailed in the Annual Financial Statements,
based on the initial advice undertaken by a JSE Accredited IFRS Advisor and the application of
funds for the expansion of ESDH, with future profits expected, the Board had a different view on
the recoverability of the loan to ESDH compared to the auditors, which resulted in the
qualification of the audited results in this specific regard.
REPORTABLE IRREGULARITIES (“RI”)
The RI’s reported on by the Company’s independent external auditors were as follows:
• Non-compliance with the Companies Act, No. 71 of 2008 (“Companies Act”), in relation
to the advancing of loans to related parties, in accordance with section 45 of the
Companies Act, 2008 (Act 71 0f 2008); and
• Non-compliance with certain aspects of sections 9 and 10 of the JSE Listings
Requirements regarding shareholder approval of related party loans.
The loans referred to above are loans to ESDH, and Adrenna Resources (Pty) Ltd (“Adrenna
Resources”) as detailed in the Results Announcement.
Details of the related parties to the above loans are as follows:
• Mr R Fertig, a director of and shareholder in both Adrenna and ESDH; and
• Adrenna Resources, which is deemed to be a related party as Messrs R Fertig and B
Kaiser (the company secretary) are on the board of Adrenna Resources.
SHAREHOLDER APPROVAL
As disclosed in the Results Announcement, the ESDH Loan and the loan to Adrenna Resources
(“the Loans”) will require ratification and/or approval by Adrenna shareholders, excluding the
related parties and their associates, in General Meeting.
A circular detailing the Loans and incorporating a fairness opinion prepared by an
Independent Expert, is in the process of being prepared.
BY ORDER OF THE BOARD
Johannesburg
16 July 2019
SPONSOR
Arbor Capital Sponsors Proprietary Limited
Date: 16/07/2019 10:06:00
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