This article is republished with permission from Retail Frontier, ID: lingshouqianyanshe.
Betting agreement? Performance pressure? Food safety issues? The road to IPO on the ChiNext board for the online brand "Three Squirrels" is fraught with difficulties.
The popular online snack brand Three Squirrels suddenly announced the suspension of its IPO review on October 20, just six months after submitting its prospectus in April this year!
On October 30, Pintu Business Review saw from the CSRC official website that the latest review status for Three Squirrels' planned ChiNext IPO is "suspended review." The reason for Three Squirrels' suspension falls under category four, which means the issuer voluntarily requested suspension, or other reasons prevent the review from proceeding normally.
Subsequently, a Three Squirrels spokesperson responded: "The IPO suspension is due to the resignation of the signing lawyer."
Pintu Business Review, through information released by the CSRC, found that the law firm for Three Squirrels' IPO is Beijing Zhonglun Law Firm, with signing lawyers Sang Shidong and Du Wei, who have indeed left the firm. Three Squirrels stated that once new signing lawyers are found, the review will continue.
Is the suspension of Three Squirrels' IPO truly a case of being "betrayed" by its lawyer teammates, or is it a root cause planted by its eagerness to go public? Or is it due to the reported betting agreement with investors regarding the "listing timeline"?
Betting Agreement Adds Insult to Injury
According to media reports, Three Squirrels had signed an agreement with investors regarding the "listing timeline." If after two months (December 17, 2017) Three Squirrels' IPO remains suspended, the agreement will automatically take effect, granting investors special rights such as repurchase rights, co-sale rights, liquidation preference, anti-dilution rights, and veto rights over major matters.
Pintu Business Review interviewed several senior industry insiders, who all indicated that in the investment world, there is a phenomenon where betting agreements on "listing timeline" are not as simple as described in the prospectus. "When a company enters the listing process, agreements that affect equity stability and business performance are generally required to be terminated." Private equity or venture capital firms may submit a document to the CSRC indicating the termination of the betting agreement, but privately they sign a "conditional reinstatement" agreement with the company. "Typically, it is agreed that if the company fails to list within a specified time, it must repurchase the investor's shares or pay a penalty."
In other words, under the pressure of the betting agreement, if Three Squirrels fails to go public, it will suffer significant losses.
Huge Revenue Pressure
Founded in February 2012, Three Squirrels achieved the top position in the nut category online during its first Double 11 shopping festival. At the beginning of this year, it announced that its sales exceeded 5 billion yuan and profits exceeded 240 million yuan. In April, with these "impressive" results, it submitted a prospectus to the Shenzhen Stock Exchange, officially declaring its sprint to the ChiNext board.
Since its inception, Three Squirrels has attracted significant attention, receiving multiple rounds of investment from capital such as IDG and FreeS, with a valuation of 4 billion yuan.
However, during its IPO sprint, it has been repeatedly questioned about profit data and criticized for "walking the line" in issuance. Many industry insiders believe that Three Squirrels' move to list on the ChiNext board is a short-term speculation to attract various funds.
With profits lower than peers, revenue pressure, and food safety issues, coupled with today's IPO suspension, it appears to outsiders that Three Squirrels' eagerness to go public has sown the seeds of its own problems.
Through the prospectus submitted on April 21, the mystery behind Three Squirrels, which has repeatedly created sales miracles, is unveiled. According to the prospectus, Three Squirrels achieved operating revenues of 924 million yuan, 2.043 billion yuan, and 4.423 billion yuan in 2014, 2015, and 2016, respectively. In 2015, net profit was 8.9739 million yuan, and in 2016, profit reached 240 million yuan.
Having topped the nut snack rankings for years, Three Squirrels' rapid rise in revenue and sales is largely attributed to its online e-commerce channels.
However, with the fading of the e-commerce dividend, Alibaba's support for brands has shifted from online to offline, from "online brands" to more traditional brands. Additionally, more than 80% of consumer goods sales in China still occur offline, among other reasons, causing the entire online traffic operation model to hit a bottleneck.
As a popular online brand that once seized the opportunity of brand traffic and internet transformation, Three Squirrels has also begun to overtake on curves, implementing an omni-channel plan. A Three Squirrels spokesperson stated that it has opened 17 physical stores in places like Zhejiang.
But moving offline is not easy for snack e-commerce brands. Lack of physical market experience, high commercial real estate rents, and high decoration and labor costs are "pain points" that lead to large capital investment and long return cycles. Whether it will be profitable in the future, when, and the scale of profitability are all highly uncertain.
In short, Three Squirrels' offline physical store path is not as rosy as imagined. One of the conditions for ChiNext listing is that the applicant company must have been profitable for the last two consecutive years, with cumulative net profit of no less than 10 million yuan in the last two years; or profitable in the last year, with operating revenue of no less than 50 million yuan in the last year.
That is to say, performance is an important indicator for the ChiNext sprint, which means Three Squirrels cannot see a serious decline in performance during the waiting period. If there is a decline, there is a risk of IPO termination. Therefore, many industry insiders speculate that the suspension of IPO review may slow down Three Squirrels' omni-channel advancement.
Through inquiries, reporters learned that Double 11 accounts for a significant proportion of Three Squirrels' annual revenue: In 2016, Three Squirrels' total revenue across all channels was 5 billion yuan, and on Double 11 alone, it achieved 508 million yuan, accounting for 10% of the annual performance. As a result, the upcoming Double 11 has become a lifeline for Three Squirrels to protect its IPO and stabilize revenue.
Food Safety Issues Trigger IPO Suspension
In addition to the revenue pressure, regarding the reason for Three Squirrels' voluntary suspension of review, many external analyses believe that the suspension is related to the food safety issues that Three Squirrels has previously encountered.
As a snack brand that has always been trusted by consumers, recent frequent food safety issues have caused its reputation to fall from grace and have also hindered Three Squirrels' path to listing.
Among them, the Anhui Provincial Food and Drug Administration recently reported the results of the investigation and handling of the excessive mold in Three Squirrels' pistachios. The official investigation stated that Three Squirrels produced food that did not meet food safety standards and failed to inspect purchased food raw materials as required, resulting in the confiscation of illegal income of 2,505.89 yuan and a fine of 50,000 yuan for Three Squirrels Co., Ltd.
In August this year, the National Food and Drug Administration announced that Three Squirrels' pistachios were found to have mold levels exceeding the national standard by 1.8 times. Subsequently, Three Squirrels suspended production and recalled the non-compliant products, and law enforcement officers sealed and detained the recalled products.
In response, Three Squirrels believed that the cause was likely improper control of storage and transportation conditions after the products left the factory, leading to mold growth and resulting in the non-compliance of samples taken during circulation.
Additionally, a report by The Beijing News stated that between July 2016 and February 2017, Three Squirrels was sued by 14 consumers in court, demanding refunds and compensation of 3 to 10 times the amount, mainly due to disputes over products not meeting national food safety standards and violations of the advertising law, with total claims amounting to about 2.16 million yuan.
However, the aforementioned Three Squirrels spokesperson declined to comment on the claim that food safety issues led to the IPO suspension.
In summary, given the current situation, the failure or delay of Three Squirrels' IPO will result in significant losses. Under the pressure of the betting agreement, can Three Squirrels complete the agreement within the specified time? Even if it passes this hurdle, will its path to listing be smooth? Can it find answers to the hidden dangers behind lower gross margins than peers, profitability challenges, and food safety issues?
If the "betting agreement" is true, then time is running out for Three Squirrels. Founder Zhang Liaoyuan, who aspires to build a squirrel empire, must first clear the obstacles on the road to listing.
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