Luckin Coffee files for bankruptcy seven months after delisting from Nasdaq

Top line

China-based coffee chain Luckin Coffee, which has slowly recovered its business months after being delisted from the Nasdaq over an accounting scandal, filed for bankruptcy in the United States on Friday amid the crisis. tormented by his C suite and financial difficulties.

Highlights

Friday, Luckin Coffee Joint Provisional Liquidators (JPL) – those who investigate the activities of the company in order to protect and recover assets – have filed for Chapter 15 bankruptcy protection with the United States Bankruptcy Court, with the aim to protect themselves from legal action against American creditors.

The company said its outlets remain open.

The bankruptcy filing comes about seven months after Luckin’s shares were delisted from the Nasdaq – after just a year of trading on the stock exchange – when it was discovered that the company’s previous management had inflated sales numbers by some. $ 300 million.

from China Ministry of Finance also punished Luckin for accounting fraud, with an undisclosed fine last year.

Luckin’s drama sparked unrest at the top – president Charles Lu was dismissed from his post last July, although he remains a shareholder

Key context

Once seen as a potential rival to global giant Starbucks, Luckin has slowly started to recover its business activities since the accounting scandal erupted last summer. the Motley fool reported that, according to unaudited results viewed by JPLs, Luckin generated 35.8% year-over-year revenue growth to approximately $ 177 million in the quarter ending September 2020. While that appears to be an impressive increase, it pales in comparison to the 500% annual revenue growth the chain reported before the fraud scandal (numbers which were themselves monitored by regulators). Luckin also closed unprofitable and underperforming sites. Of its 4,792 stores, nearly a quarter (23%) are now managed by third parties, easing the burden of Luckin’s capital spending. Luckin remains unprofitable, but 60% of its self-managed stores broke even last November. However, JPL expects profitability to slowly improve as the impact of the pandemic is mitigated and more customers visit stores. JPL also found around $ 742.7 million in cash on Luckin’s balance sheet in November – though the company continues to burn cash at an unknown rate and also faces repayment of $ 460 million in convertible notes owed. in 2025.

Surprising fact

JPL discovered that former Luckin chairman Charles Lu created two trusts last March to fund his other company, UCAR, a Chinese rideshare provider. These trusts received around $ 185 million in total – and now Luckin’s new management want the money back because the existence of these trusts violated shareholder trust. UCAR would not have responded to Luckin’s requests

Tangent

In January, new CEO Jinyi guo was accused of “corruption, abuse of power to root out dissidents and weak ability to run the business” in a letter allegedly written by Charles Lu and former CEO Jenny Qian, which they forced others to leaders to sign.

Further reading

Fall From Grace: Former billionaire Luckin Coffee CEO fired amid fraud scandal (Forbes)

Luckin Coffee founder in China is $ 1 billion poorer after company announces fraud investigation (Forbes)

Luckin Coffee problems may only just begin after financial investigation revealed (Forbes)

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