Chinese coffee company Luckin Coffee will be completely delisted by Nasdaq over a month after trading of its shares was halted due to an accounting scandal.
In a regulatory filing, Luckin Coffee said Nasdaq informed the company on May 15 of its plans to delist the shares, just over a month afer trading was halted due to an accounting scandal involving its top executives.
In Monday's filing, the coffee company said it will be requesting a hearing with Nasdaq about the delisting notice. Luckin Coffee's share will remain on the Nasdaq stock market until the hearing date.
The hearing is expected to take place within the next 30 to 45 days.
Signs of Fraud
In January 2020, Muddy Waters Research said that it bet against the stock due to the fraud and a “fundamentally broken business.”
Luckin responded by calling the short seller’s report “misleading” and “false.”
“Luckin shows exactly 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,” Muddy Waters founder Carson Block wrote in a statement sent to CNBC.
“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.”
Accounting Scandal
On April 2, the coffee company announced that it suspended chief operating officer (COO) Jian Lu after discovering he and several of his direct reports “had engaged in certain misconduct, including fabricating certain transactions.”
The fabricated reports amounted to around 2.2 billion yuan or approximately $310 million from the second quarter to the fourth quarter of 2019.
The disclosure of the regulatory filing led to over 80% crash in premarket trading. Shares have been reportedly down nearly 72%, sweeping away nearly $5 billion from its market value.
Based on the investigation, Luckin’s COO and the employees he supervised, had connived to carry out a misconduct, including altering sales records. Liu and the employees involved in the impropriety have been suspended. Luckin Coffee said it will pursue legal action against those responsible.
Firing of CEO and COO
Luckin Coffee fired both its chief executive officer (CEO) Jenny Zhiya Qian and COO Liu after they were found to have fabricated sales reports.
A filing by Luckin with the US Securities and Exchange Commission (SEC) indicated that Liu was the one who designed the scheme. The company appointed Jinyi Guo, a senior vice president and board director, as acting CEO.
Company Outlook
After the investigation was announced, Luckin Coffee's shares fell by as much as 75% in early April and has not traded since.
Luckin’s stock was trading at $4.39 a share before it was halted for trading, which was almost 75% below its $17 IPO price. This also respresented an over 90% decline from its January peak of just above $51.
KeyBanc Capital Markets downgraded Luckin stock when the fake data news broke.
“Following our conversation with the Company, we believe earnings visibility will be limited for the foreseeable future and it will take management several years to repair their credibility,” analysts led by Eric Gonzalez wrote.
“Previously released financial statements and guidance can no longer be relied upon by investors, which likely calls into question the Company’s overall liquidity.”
Nasdaq's delisting notice further solidifies rumors of an eventual bankruptcy by the coffee company.
