On May 20, 2021, in Chicago, Illinois, Oatly oat milk is featured in this picture illustration. Scott Olson is a writer and a musician. | Photo credit: Getty Images Oatly has been accused of dubious accounting methods and misleading consumers and investors about their sustainability policies by activist short seller Spruce Point Capital Management. Oatly’s board should employ an independent forensic accountant to launch an investigation into its allegations, according to the business, which has taken a short position against the creator of oat milk. The stock dropped 6% after falling almost 3% in premarket trade prior to the news. Oatly was founded in Sweden in the 1990s, but it wasn’t until five years ago that it made its way to the United States. Since then, it’s fueled a surge in demand for oat-based milk substitutes, mainly among coffee drinkers, and it just debuted on the New York Stock Exchange two months ago. As of Tuesday’s close, the stock had gained 4.5 percent since its initial public offering, giving it a market worth of $12.5 billion. Spruce Point’s analysis, on the other hand, contends that Oatly deceived investors by omitting or distorting crucial data in its prospectus and a June investor presentation, and that the company will never be profitable. The report will be released on Wednesday morning. In an interview, Spruce Point founder and Chief Investment Officer Ben Axler remarked, “We don’t think any of this is in the narrative at the time.” “We believe this is a strong sell, with the stock price potentially being 70% overvalued.” Axler has taken short positions in consumer packaged goods firms such as Church & Dwight and Boulder Brands in the past. Short sellers borrow stock and then sell it, believing that it will fall in value. As of Tuesday, around 1% of Oatly’s float, or the amount of shares accessible on the market, was shorted, according to S3 Partners. An Oatly spokeswoman did not have an immediate comment to Spruce Point’s charges when contacted by CNBC. Allegations of accounting fraud Oatly allegedly misrepresented its revenue and margins to investors, according to Spruce Point. The company’s recent investor presentation, according to the short seller’s report, indicated expected 2018 U.S. revenue of $12 million. According to both Nielsen and Umgas Magazine, a Swedish newspaper, Oatly’s net U.S. sales in 2018 were under $6 million. Spruce Point also mentioned the company’s registrations with Firms House, a British government institution that keeps track of limited companies’ details. The report stated, “At Oatly, we find times of considerable divergence in revenue and accounts receivable growth rates.” “This is a classic symptom of possible accounting fraud and is frequently listed as a top red flag for predicting accounting scandals.” Spruce Point also claims that Oatly is exaggerating its gross margin. The corporation fails to disclose that its gross profit presentation is not comparable to that of other food companies because it excludes outward shipping and handling costs from its calculations. When logistics and shipping are taken into account, the research claims that Oatly’s gross margin is actually 6.4 percent lower. The business also claimed to have discovered discrepancies in Oatly’s capital expenditures between its cash flow statement and balance sheet additions. Spruce Point claimed that the corporation hasn’t been forthcoming with investors about important accounting and auditing numbers. For example, Oatly is said to have gone through three auditors in the last six years, a fact that was not disclosed in its first public offering documents. “This is quite unusual in our experience,” the report stated. “… While we feel that auditor rotations are beneficial, we believe that three auditors in six years is excessive in light of the accounting inconsistencies we’ve seen in sales, gross margins, inventory, and capital expenditures.” According to a recent filing with the Securities and Exchange Commission, Oatly’s current auditor is Ernst & Young. According to the research, Chief Financial Officer Christian Hanke’s profile on the company’s investor relations website does not mention his time as Stratus Technologies’ manager of financial reporting from 1999 to 2005. During that time, the company’s financial figures for fiscal 2004 and the first quarter of fiscal 2005 had to be restated. On his LinkedIn page, Hanke mentions his work. In addition, Frances Rathke was named chair of Oatly’s audit committee. The SEC investigated Green Mountain Coffee Roasters’ accounting methods throughout her tenure as chief financial officer, treasurer, and chief accounting officer, compelling the business to restate its financial records. On Oatly’s website, Rathke’s biography does not include her previous position as the coffee company’s chief accounting officer. Her LinkedIn page contains information on her experience at the company. Greenwashing claims To both consumers and investors, Oatly has positioned itself as a more sustainable option than cow’s milk or other nondairy alternatives. Spruce Point, on the other hand, claims that the corporation has been greenwashing by exaggerating its environmental credentials and putting its global expansion ahead of its goal. It provides as an example the company’s June 2021 investor presentation, which incorporates data from a 2013 research that was updated three years later. The influence of the company’s development into Asia and the United States is not included in the data. Spruce Point further claims that Oatly cherry-picked data by ignoring the fact that its water use is higher than that of cow’s milk production. In addition, according to the company’s 2019 sustainability report, its New Jersey plant used 55 percent more water per liter of oat base than its operations in Sweden and the Netherlands. According to the study, the New Jersey factory has been in violation of the Environmental Protection Agency for several quarters. The infraction or violations are not identified on the EPA’s website. Furthermore, the hedge fund got data from Millville, New Jersey, through a Freedom of Information Act request, showing difficulties with the plant’s wastewater in 2019, although the corporation has yet to establish a wastewater treatment facility. “They’ve had very significant levels of wastewater as a consequence,” Axler said. “But they’ve known since 2019, and they’re still dealing with it.” Oatly’s transportation is also cited as a key cause of environmental effect in the report. Spruce Point finds its oats in Western Canada and sends them to its facilities in New Jersey, according to the firm. Oatly is sourcing its oats from Sweden in order to expand into Asia./n
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