How governance tipples gave Top Shelf investors a hangover

When man-about Melbourne Adem Karafili took to the lectern at a trendy hotel conference in the inner suburb of Prahran he had the confidence of a man who had no idea what the next few months would hold for the company he led, Top Shelf International.

At that point Karafili, a former executive at Swisse Wellness and at that time executive chairman of Top Shelf, still had the support of many shareholders in the boutique spirit maker behind brands NED whisky, Grainshaker Vodka and Act of Treason Agave.

It was no mean feat for the suave businessman given Top Shelf had been a disappointment to its shareholders since listing on the stock exchange in December 2020 at $2.21 a share and was then trading at just 25 cents.

At that extraordinary general meeting, Top Shelf was again seeking a new injection of $30 million from investors – its third capital raising since listing – to prop up its business and keep the loss-making group’s lender at bay after breaching its covenants for having too little cash on hand.

The cash injection would take the total of money pumped into the group by investors since 2020 to $122 million. Along with the market capitalisation erosion, shareholders had burned close to $180 million on the boutique business.

“We’re whizzing through,” Karafili said as he read through the resolutions while looking over the sweeping views of Port Philip Bay and the Melbourne CBD skyline. The meeting was over in less than 15 minutes.

What would happen after that meeting would quickly work to sour the relationship between Karafili and some of Top Shelf’s shareholders.

Within days of the capital raising closing, Top Shelf would reveal in an ASX announcement that it was the subject of a review by the market operator, the ASX, over governance issues tied to the capital raising and at risk of censure over its self-confessed breaches.

A month later, Top Shelf would also include in the notes of its 2023 accounts that its revenue for the year prior was $5 million, or 20 per cent, lower. That meant the revenue growth of around 30 per cent between 2021 and 2022 was actually just a 5 per cent uplift.

“My blood actually boiled,” says one investor in the group who asked not to be named due to their wider business links. “I don’t think I had been that angry before.”

By October, Karafili had stepped aside from any form of executive position at the company, but remained a director of Top Shelf. At the group’s annual general meeting later that month shareholders would vote against resolutions relating to his incentives by as much as 90 per cent against, while all other resolutions, including the group’s remuneration and rewards to chief executive Trent Fraser, sailed through. It was a brutal moment for a man more used to success.

The troubles at Top Shelf are another example of an ASX hopeful that holds so much promise but has so far failed to deliver for many of its shareholders.

It’s also an instance where the sum of a company’s governance and strategy mistakes – all relatively small beer in business circles – can make an uninviting whole.

Now the group is hoping that a new strategy, cost-cutting and an improved marketing approach that includes a scaled-down sponsorship spend championed by Fraser, can help turn the tide.

A lot to distil

One sign of Top Shelf’s marketing misfires is found in an unexpected place. At a beer barn in the increasingly gentrified inner-city suburb of Northcote, called, confusingly, Welcome to Thornbury (the next suburb over) lies an abandoned spirit still that was once part of Top Shelf’s marketing strategy.

After its listing, Top Shelf set up The Distiller bar as part of the venue in 2021. The bar was shuttered after a little more than 12 months.

The expensive venture was part of Top Shelf’s high-gloss, scattergun approach to marketing its products. Grainshaker sponsored the twilight polo at St Kilda beach and the Portsea Classic swim in 2023. Ned whisky remains the “official whisky” of Supercars and the company continues to support the Australian Turf Club.

At the time shareholders thought the marketing activity, while a bit frivolous, would help to build brand recognition of the group’s products that had been carefully developed by the company’s team of distillers. But by the time Fraser replaced co-founder Drew Fairchild as CEO in April 2023, that strategy had been drastically downscaled as part of the company’s strategic review.

The group’s buzzwords for its products – “Fearless” for Ned, “Exuberant” for Grainshaker and “Rogue” for its Agave products – remained, but now exuberant was spelled correctly in its company presentations.

The long road ahead

Top Shelf was established in 2014 when its founders Fairchild and Jason Redfern decided to create an Australian whisky that could hit the middle market drinkers who like their whisky smooth but not highbrow – and often mixed with cola. Karafili joined as a director in 2018, giving the group a more experienced and well-known leader to drum up investor support. Soon the group had a vodka brand and premixed vodka drinks in its mix of products and more recently has added Act of Treason agave to its brands.

In February 2022, the company had scored a major win, announcing Coles’ network of liquor stores would stock some of its products. The day before the company announced its July 2023 capital raising, it told investors it had secured ranging at “select” Dan Murphy’s and BWS stores.

Outside of retailer deals, Grainshaker is also used in some pubs as a house vodka, as is Ned whisky.

Some industry veterans wonder if there is enough scale in these arrangements to generate the consistent sales growth institutional investors expect of an ASX-listed company.

One former long-time director of a major alcohol company, who asked to speak anonymously so he could talk freely, said: “Boutique spirits and beers are such an evocative area of investment. But running these companies up to scale is actually a lot harder than it looks. For everyone who succeeds in this industry there are a hundred who are capable but they just don’t do that well.”

“It’s such a competitive business and those retailers and venues often expect big discounts.”

Capital raising hangover

The other challenge the company is facing is healing its relationship with its shareholder base and the ASX.

Top Shelf has been the subject of two lengthy ASX query letters regarding its capital-raising, where Karafili was allocated millions more shares than what he was entitled to without shareholder approval.

The company said in answers to the ASX query that it had initially intended to ask shareholder approval to increase the allocation of shares to Karafili but withdrew the resolution ahead of the meeting without telling the lead managers of its raising, the group’s largest shareholder, Melbourne investment house Salter Brothers, who declined to comment for this story.

Top Shelf told the ASX the mistake was the result of Karafili misinterpreting a complicated spreadsheet regarding his allocation. The company also revealed Karafili did not complete a due diligence questionnaire drafted by Salter Brothers to check whether the raising was in line with ASX rules. Karafili, then executive chairman, was the chairman of the committee set up to oversee the raising. An independent expert appointed by Top Shelf late last year at the request of the ASX shares this view of events.

Karafili did not respond to requests for comment.

The ASX declined to comment on where its review into Top Shelf was up to or whether it would be censured over its breach.

A spokesperson for the ASX said: “The listing rules serve the interests of listed entities, shareholders and investors through governing the conduct of entities while listed on ASX. The rules set out the requirements for being a listed entity, including continuous disclosure obligations, which is crucial for shareholders and investors in assisting them make timely and informed investment decisions.”

This masthead sent Top Shelf a list of detailed questions about its revenue downgrade in the notes of its accounts, its bingle with the ASX, and whether it plans to again tap investors for more money.

A spokesperson for the company said: “TSI self-reported the breach of ASX Listing Rule 10.11, which was an administrative oversight that led to the allocation of shares to a director. The issue was reported to the ASX when discovered and has been rectified. The company also commissioned an independent expert report into the matter which is publicly available.”

“The company has implemented significant changes and improvements over the last 12 months to reset its financial performance. We are pleased that the impact of these measures is now being reflected in our results, including the quarterly report that was released earlier this week.”

That quarterly result showed that the group had improved its EBITDA (earnings before interest, tax, depreciation and amortisation) loss from an $11.6 million loss in the first half of 2023 to a loss of $5.5 million in the first half of 2024. The company also revealed that at December 31 it had $2.8 million of cash left after its $30 million capital raising in July, after using $10 million of the proceeds to pay down its debt over the half. To pump $10 million more cash into the business, it has also agreed to sell its agave farm land and distillery assets to an entity related to a significant shareholder and company director, with the right to buy it back. It is hoped this transaction will ease Top Shelf’s refinancing discussions with its lender over its current $25 million debt facility.

Whether this transaction will set Top Shelf up for a positive future is unclear. The group’s 2023 accounts includes a “material uncertainty” warning about the company’s ability to continue as a going concern in the future.

On or off the bumpy wagon?

Some shareholders are happy to stay along for the bumpy ride.

Nick Burton Taylor, the former chairman and chief executive of major beef producer Australian Agriculture Company and a Top Shelf Investor with 3.5 per cent of shares, is one of those people.

“I’ve been on the down escalator with this one, but I feel like we’ve reached the mezzanine floor,” says Burton Taylor.

“The group has done a good job to recalibrate its governance and its strategy. You’ve got to remember they are a start-up business and start-up businesses require patience.”

“In companies that are growing fast, anyone who went in not expecting a moment or two of troubles did not go in with eyes wide open. They’ve ’fessed up to the issues they’ve had to confront. They’ve addressed their cost base, they’ve addressed their packaging plant issues, they’ve got better distribution.”

Whether the company will descend further down the escalator is unclear, but there is hope its recent trading update, a board refresh and strategy change can lead Top Shelf to more cheers than jeers from its investors.

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