A Year After Splashy IPO, Missfresh Looks Well Past Its 'Sell Date'

Key Takeaways:

• Missfresh announced a major reshuffle of its top ranks, including the resignation of both of its co-CFOs, one of whom was also among three board members to resign
• The changes came as the company faces a cash crunch caused by swelling losses, big debt and massive back wages owed to former employees

By Warren Yang

What a difference a year makes.

It was just over a year ago that Missfresh Ltd. MF was a rising startup with a multibillion-dollar market value. Now, the pioneer of quick online grocery delivery services in China is facing an existential crisis that has reportedly seen it lay off most of its staff, as its stock slides deep into the penny realm and fast approaches worthlessness. Now the company has just taken the latest step to try and right its fast-sinking ship by announcing a major board and executive reshuffle.

Founded in 2014, Missfresh is likely facing a long and difficult path to recovery – if it survives at all. The company will first need to demonstrate its ability to someday operate profitably before anyone will dare to give it more money. It could try to tide itself over in the short term by selling assets, which would not only generate new cash but also help it streamline operations and cut costs.

If and when it does manage to get some much-needed funds, the company may also need to hit the reset button on its business model to show investors how it thinks it can become sustainably profitable at some point. Investors who lack patience – which looks like most at the moment – may be well advised to simply swallow their losses and walk away for now.

The latest domino to fall in Missfresh’s rapid demise came at the end of last week when the company said three of its board members resigned. One of those was co-CFO Wang Jun, while the company’s other co-CFO Xi Chen, who only joined at the start of last year, also stepped down. Following the appointment of two new independent directors, Missfresh’s website now lists only three board members, including founder and CEO Xu Zheng. That’s two less than it had around the time of its IPO in June last year.

This means Missfresh essentially installed a completely new board, though the retention of its CEO as the only executive director may not sit well with any remaining investors who would probably like to see a total refresh at the company.

Missfresh, which prides itself on being able to deliver fresh produce and other groceries within an hour, has been burdened from the start by a very heavy cost structure needed to provide speedy services, vastly dwarfing its revenue. The company’s margins are also eroded by intense competition from the likes of Dingdong DDL, as well as internet giants like Pinduoduo PDD and Meituan (3690.HK).

Making things worse, the company admitted in early July that it had overstated its revenue for the first nine months of last year. The revelation followed a review of transactions for its next-day delivery business by an independent audit committee that began in April. The three board members who just stepped down include Zhu Hansong, who headed the committee as an independent director. Missfresh hasn’t released any financial results since the July-September quarter last year.

The company said it terminated all employees involved in the fraudulent transactions, while noting the guilty parties didn’t include its CEO or either co-CFO. Following the fraud revelation, Missfresh is now facing the usual barrage of lawsuits accusing it of inflating its finances in the run-up to its IPO.

Employees behind the fraud weren’t the only ones fired. The company has also reportedly laid off most of its staff, leaving behind a mountain of unpaid wages and other unpaid debt.

Failed rescue

As its problems snowballed, the company seemed to catch a small break later in July, when the conglomerate Shanxi Donghui Group agreed to provide it with about 200 million yuan ($29 million) in cash. But two weeks later Missfresh said the deal remained up in the air, and to date it appears the funds have yet to arrive. That forced Missfresh to suspend its main grocery delivery business, which accounted for about 85% of its revenue in the first nine months of last year.

Missfresh says its ability to resume the business, known for its drivers with pink pouches on the back of their scooters, will depend on financing. But even if it does receive funding, it’s far from clear how long the company could resume operations under its current business model.

In the two years to the end of 2020, Missfresh’s cash holdings fell by more than half to about $141 million in dollar terms, even though it raised new funds in 2018 and 2020 to feed its cash-burning operations. In the first quarter of last year, Missfresh raised another $362 million. And the company also generated about $273 million from its IPO, which valued it at $2.5 billion.

With Tencent (0700.HK) among its major shareholders, Missfresh has raised a total of $1.8 billion from investors to date, including from tech-focused funds run by Tiger Global and Goldman Sachs. Zhu, the independent director who just resigned, and co-CFO Chen both worked at Goldman Sachs for well over a decade. 

The company’s woes are reminiscent of coffee chain operator Luckin Coffee LKNCY, another former highflying cash-burner that later admitted to fabricating hundreds of millions of dollars in fake sales. But whereas Luckin has managed an unlikely turnaround after a near-brush with death that included a bankruptcy filing, it’s uncertain if Missfresh can do the same due to the lack of a profitable business model anywhere in sight. 

The company’s capital shortage will only get worse from here because its revenue will take a huge hit with cessation of its main business, significantly curtailing its ability to generate cash on its own. Even if the promised investment from Shanxi Donghu comes through – which seems uncertain at this point – it likely won’t be enough to sustain Missfresh’s business for long. The company is also looking to raise about $100 million by selling its intelligent fresh market business, which provides services for fresh produce sellers, such as digitalization of their stores, according to a Bloomberg report in July.

Missfresh’s shares rose about 2% on Monday, the first trading day after its announcement of the boardroom changes. But the stock price is now so low, ending Modany at just $0.12 versus an IPO price of $13 — that the shares have likely become the play toy of day traders who like to dabble in bankrupt company stocks. Some of those traders could make some money over big percentage swings as the company fights for its survival. But at least for now, Missfresh is unlikely to attract any serious investors to its shares.