In this illustration, Oatly Oat Milk can be seen in Chicago, Illinois on May 20, 2021.

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Activist short seller Spruce Point Capital Management has accused Oatly of dubious accounting practices and misleading consumers and investors about its sustainability practices.

The company, which has taken a short position on the oat milk maker, called on Oatly’s board of directors to hire an independent forensic accountant to open an investigation into its claims.

The stock, which fell nearly 3% in pre-trading hours before the news, hit an all-time low of $ 19.84 per share on Wednesday. Shares rebounded slightly, falling just 2% in morning trading.

Oatly was founded in Sweden in the 1990s but only reached the US five years ago. Since then, it has contributed to the surge in demand for oat-based milk substitutes, especially among coffee drinkers, and made its public debut in the U.S. about two months ago. The stock is up 4.5% since it went public, bringing it to a market value of $ 12.5 billion as of Tuesday’s close.

However, the Spruce Point report claims that Oatly misled investors by omitting or manipulating key facts in its prospectus and an investor presentation in June, arguing that the company will never achieve profitability.

“We don’t think any of that is in the narrative right now,” said Ben Axler, Spruce Point’s founder and chief investment officer, in an interview. “We think this is a strong sell and the stock price could be 70% overvalued.”

Axler has previously taken short positions on other consumer goods companies such as Church & Dwight and Boulder Brands. Short sellers borrow stocks and then sell them by betting that the stock will go down. According to S3 Partners, about 1% of Oatly’s float, or the number of stocks available on the market, will be sold short as of Tuesday.

When an Oatly spokesman was reached by CNBC, he had no immediate response to Spruce Point’s allegations.

Accounting allegations

Spruce Point claims that Oatly overstated both its earnings and margins to investors.

The short seller’s report cites the company’s latest investor presentation, which showed estimated U.S. sales of $ 12 million for 2018. The company said that both Nielsen and Swedish Umgas Magazine reported that Oatly’s net sales in the U.S. were only $ 6 million in 2018.

Spruce Point also cited the company’s filings with Companies House, the UK agency that stores information on limited liability companies.

“At Oatly, we have seen periods of wide variation in sales and receivables growth rates,” the report said. “This is a classic sign of potential accounting gimmicks and is often cited as a warning sign for predicting accounting scandals.”

Additionally, Spruce Point claims that Oatly is overvaluing its gross margin. The company does not include outbound shipping and handling costs in its calculations and does not state that its gross profit presentation is inconsistent with that of other food companies. The report claims that Oatly’s gross margin is actually 6.4% lower when logistics and shipping are factored in.

The company also claimed to find anomalies in Oatly’s capital expenditure between its cash flow statement and its balance sheet additions.

Spruce Point argued that the company was not transparent to investors about the key metrics involved in accounting and auditing. For example, Oatly allegedly went through three chartered accountants in six years, a fact that was not disclosed in its filing for publication.

“In our experience, this is highly unusual,” the report says. “… While the rotation of auditors is positive, we think three auditors in six years are excessive given the accounting anomalies we have identified in terms of sales, gross margins, inventories and capital expenditures.”

Oatly’s current auditor is Ernst & Young, according to a recent filing with the Securities and Exchange Commission.

The report found that CFO Christian Hanke’s biography on the company’s investor relations website made no mention of his role as head of financial reporting for Stratus Technologies from 1999 to 2005. During this time, the company had to report its financial results for fiscal 2004 and the first quarter of fiscal 2005. Hanke announced the position on its LinkedIn page.

In addition, Oatly appointed Frances Rathke to chair the Audit Committee. During her tenure as Chief Financial Officer, Treasurer, and Chief Accounting Officer of Green Mountain Coffee Roasters, the SEC investigated the company’s accounting practices and forced the company to reissue its financial results. Rathke’s biography on Oatly’s website does not include her previous role as the coffee company’s chief accounting officer. Her LinkedIn page describes her time with the company.

Claims about greenwashing

Oatly has also branded itself to consumers and investors as a more sustainable option than cow’s milk or other dairy-free alternatives. But Spruce Point claims the company gave a misleading impression of its green credentials known as greenwashing and put its global expansion ahead of its mission.

Examples include the company’s June 2021 investor presentation, which uses data based on a 2013 study that was updated three years later. The data does not include the impact of the company’s expansion into Asia or the United States.

Spruce Point also claims that Oatly plucked the data by omitting that its water usage is higher than that of making cow’s milk. The company’s 2019 sustainability report also showed that the New Jersey plant used 55% more water per liter of oat base than its plants in Sweden and the Netherlands.

For several quarters, the New Jersey facility has been violating the environmental protection agency, according to the report. The infringement or infringements are not disclosed on the EPA website

In addition, through a request under the Freedom of Information Act in Millville, New Jersey, the hedge fund received documents showing issues with the facility’s wastewater in 2019, but the company has not yet opened a treatment plant.

“They had very high volumes of wastewater as a by-product, but they have known since 2019 and they are still in the process of dealing with it,” said Axler.

The report also points to Oatly’s transportation as the main source of its environmental impact. According to Spruce Point, the company sources its oats from western Canada and then ships them to its New Jersey facility. For the expansion into Asia, Oatly sources its oats from Sweden.