The Corporate Law Group

No Luckin Coffee (pun intended)

Luckin Coffee is a 2 1/2 year old coffee company that manages over 4,500 outlets, many “pick up” locations, in China.  Its first stores were opened in January, 2018 in Beijing and Shanghai.  In October, 2018, a year after founding, it had 1,300 stores in China.

Luckin raised $200 million in a Series A offering in July, 2018, 10 months after founding.   To grow that fast it spent three times what it was earning.  At one point Luckin charged Starbucks of attempts to monopolize in China.  Starbucks dismissed the claim as a publicity stunt and Luckin eventually withdrew the case.

Lucking listed its ADRs on NASDAQ in 2019 and started trading at $17 a share, hitting a high of around $39 a share.  It also announced that it planned to open 2,500 stores in the next year and announced several “self-service” and vending machine sales strategies, touting itself as using a technology-driven coffee retail model. 

In January this year, a firm that specializes in short selling published an anonymous 89 page report on twitter that claimed Luckin had falsified financial and operational data, supposedly backed up by hundreds of hours of video footage. 

On April 2 Luckin announced that it had formed a special Board committee and hired independent investigators because issues were raised in its year-end audit, and that its COO Jian Liu had fabricated over $300 million in 2019 sales.  Luckin stock lost ¾ of its value.  Trading was halted and hasn’t opened again yet.  Chinese regulators announced an investigation.  Luckin’s Chairman Lu Zhengyao defaulted on a margin loan and Goldman seized his stock.  On April 21 an independent director and audit committee member quit.

Luckin is doubtless trying to figure out what its sales actually were and working to amend its periodic reports (if anyone there wants to keep going).  They’ve been filing 6-Ks (current reports for ADRs) telling the world that they can’t make their required filings (of course, blaming the coronavirus, not their fraud).

Takeaways?

  1. Focus on building a great company and innovating if you want to do business for more than a year or two.
  2. Let the numbers and performance fall where they may.  Learn from mistakes and try to make things better.
  3. Don’t lie.