Chinese coffeehouse chain Luckin Coffee said on Friday that it has filed for Chapter 15 bankruptcy in New York to seek protection as the company restructures its financial obligations.
Luckin Coffee- Challenger To Starbucks
Founded in 2017, Luckin Coffee positioned itself as a challenger to leading US coffee chain Starbucks. The Chinese chain had around 3,898 stores along with another 894 “partnership” stores as of November 30.
The coffee was sold at massive discounts, cheaper than Starbucks, and sold from takeaway kiosks, consequently pulling in customers. The company aimed to reach 10,000 locations by the end of 2021. Sales jumped 35.8% in the quarter ended September 30 as compared to the same quarter last year.
Nasdaq Debut
The Xiamen-headquartered company made its debut on the Nasdaq in May 2019 with a market value of $4.2 billion and financially backed by BlackRock and Singapore’s sovereign wealth fund. Another $1.1 billion were raised through a secondary offering in early January. The highest trading price was slightly over $50 per share with a market value of $12 billion.
Accounting Fraud
Unfortunately for Luckin, it could not stay long on the Nasdaq. It ended up being delisted just over a year later when it was found to be involved in accounting fraud. The U.S Securities and Exchange Commission found that the company had intentionally and materially fabricated over $300 million in revenue from April 2019 through January 2020.
Penalty
According to the SEC, the numbers of revenue, expenses, and operating loss were distorted to mislead investors into believing that the company was growing exceptionally well. Luckin Coffee had to pay a $180 million penalty to the SEC to settle the accounting fraud charges. Stocks plunged 90% before being delisted by the Nasdaq.
Luckin Coffee ultimately fired CEO Jenny Zhiya Qian and chief operating officer Jian Liu after its internal investigations. Less than a year later, the company has now filed for Chapter 15 bankruptcy in the US.
Chapter 15 Bankruptcy
Chapter 15 bankruptcy enables a foreign debtor to file for bankruptcy in the US court system. It performs a fair administration of foreign insolvencies while protecting the interests of all parties, including the creditors and debtor.
What It Means For Luckin
For Luckin Coffee, this means the company is secure from lawsuits by US creditors as it restructures in China. Meanwhile, all its coffee shops will remain open and the Chapter 15 petition will not have any material impact on the company’s daily operations.
The coffee chain’s fallout has revived scrutiny of Chinese firms listed on the US exchanges without sticking to guidelines that require their audits to be inquired by American regulators. It also triggered new concerns for global investors about China’s corporate governance.
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