Bankruptcy Looks Likely for Luckin Coffee

Luckin Coffee (NASDAQ:LK) dug itself quite a hole. Will LK stock ever get out of it?

LK stock

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Allegations of fraud sent the coffee stock from a high of $51.38 to less than $5 in just a few days.

Weeks ago, allegations that the company fabricated financial and operating numbers surfaced. “Right after its USD 645 million IPO, the Company had evolved into a fraud by fabricating financial and operating numbers starting in 3rd quarter 2019. It delivered a set of results that showcased a dramatic business inflection point and sent its stock price up over 160% in a little over 2 months,” read an anonymous 89-page report.

Famous short seller Muddy Waters Research then shared that report.

Shortly after, Luckin Coffee called the allegations “misleading and false” and said that “Luckin Coffee firmly stands by its business model and is confident in benefiting from the strong growth of China’s coffee market in the future. Luckin Coffee’s pioneering business model has enabled the Company to become the leading and fastest growing player driving coffee consumption in China.”

However, it now appears there was plenty of truth in those allegations, leading to a recent trading halt.

Stay far away from LK stock here. With mounting legal woes, Luckin may be headed to bankruptcy.

Luckin Coffee Allegedly Fabricated Sales Data

In recent weeks, Luckin shared that an investigation revealed its former COO fabricated sales by about $310 million.

“The investigation found that Jian Liu, Luckin’s chief operating officer, and several employees who reported to him, had engaged in misconduct, including fabricating sales. Liu and the employees implicated in the misconduct have been suspended, and Luckin said it will take legal action against those responsible,” notes CNBC contributor Amelia Lucas. “Luckin said the internal investigation is at a preliminary stage and its estimate of the fabricated sales has not been verified by its independent auditor.”

Luckin Coffee even said earnings for the nine months ended Sept. 30 aren’t reliable — after reporting net sales of $413 million for the period.

Going forward, there’s even more for investors to dislike. As InvestorPlace’s Faisal Humayun reported, Luckin will adjust its sales lower. With that in mind, it’s clear the company can’t truly rival Starbucks (NASDAQ:SBUX).

Humayun also writes that even if Luckin manages to survive this crisis, profitability looks far away. I have to agree.

LK Stock Could Face Delisting from the Nasdaq

Investors haven’t been able to trade LK stock in weeks.

The only change has been the halt status, which went from”news pending” to “additional information requested.” From this point on, if the company fails to satisfy Nasdaq requirements for trading, the exchange could delist LK stock. Perhaps it would then end up trading over the counter (OTC).

However, that would be the least of its concerns. Luckin Coffee could also face class-action investor lawsuits, and potentially, bankruptcy.

To make matters worse, Chairman Charles Zhengyao Lu defaulted on a $518 million margin loan to a host of banks. As collateral, almost 611 million shares of LK stock have “been pledged to secure the Facility, including shares additionally pledged by an entity controlled by the family trust of Ms. Jenny Zhiya Qian, the Company’s CEO.”

Again, while LK stock could trade again after a Nasdaq halt, I would stay far away from the stock. It could easily be headed to bankruptcy.

Allegations of fraud, delisting, class-action lawsuits and a real possibility of bankruptcy make LK stock the top name to avoid.

Ian Cooper, an contributor, has been analyzing stocks and options for web-based advisories since 1999. As of this writing, Ian Cooper did not hold a position in any of the aforementioned securities.

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