Luckin Coffee has disclosed on Thursday that they made an internal investigation, and its chief operating officer fabricated their sales in 2019 by 2.2 billion yuan ($310 million).
The shares plummeted by 80% after they released the filing.
The Chief Operating Officer, Jian Liu, and other employees who were reporting to him were engaging themselves in misconduct and are now suspended.
The company will be taking legal action for people who took part in it and are responsible for those conducts. Jian could not be found anymore for an interview.
Luckin is a two and a half-year-old company and has goals to overtake Starbucks in China, the top coffee chain currently in the country.
The investors are not relying on their previous financial statements and earnings, which were released for nine months. They announced earlier that heir net sales for the first nine months of 2019 were 2.9 billion yuan ($413 million).
In their statement, “As a result, investors should no longer rely upon the company’s previous financial statements and earnings releases for the nine months ended September 30, 2019, and the two quarters starting April 1, 2019, and ended September 30, 2019, including the prior guidance on net revenues from products for the fourth quarter of 2019, and other communications relating to these consolidated financial statements.
The company said that its investigation is still at its initial stage, and its independent auditor does not verify estimates of the fabrication of sales. Kirkland & Ellis will do their counseling and FTI Consulting for forensic accounting expertise.
Back in January, the Muddy Waters Research said that they found something fraudulent with their business.
On its official Twitter page, it said, MW is short $LK. We received an unattributed 89-page report alleging $LK is a fraud: “number of items per store per day was inflated by at least 69% in 2019 3Q and 88% in 2019 4Q, supported by 11,260 hours of store traffic video” We view the work as credible.
However, Luckin replied and said that the seller’s report was false and misleading. The founder of Muddy Waters said Luckin shows precisely why we need short sellers in the market. We believed this report was credible when we read it, and that’s why we took a position.
This is again a wake-up call for U.S. policymakers, regulators, and investors about the extreme fraud risk China-based companies pose to our markets.”
In May, Luckin started its trade on the Nasdaq, and since then, making it to the public market, it gave the company a market value of $1.3 billion. Furthermore, the company has tried a customer-based format and offering excellent discounts to the market.
For January of this year, it already has more than 4,500 branches in China, a few hundred more than Starbucks in the country. Starbucks, on the other hand, responded to its competitiveness and opened more cafes in China for quick picks and delivery and less on seating capacities in their cafes.