Two private-equity firms have invested US$250 million in scandal-ridden Chinese coffee chain Luckin – an announcement which may have been timed to distract attention from the sudden appointment of a new auditor.
An affiliate of Centurium Capital has agreed to invest $240 million in shares through a private placement, with a second investor, Joy Capital, putting another $10 million into the business. According to a Luckin filing, the investors have the right to purchase an additional $150 million in shares under certain circumstances.
The fresh funds will be used in part to settle a $180 million fine with the US Securities and Exchange Commission, which last December found Luckin guilty of “defrauding investors by materially misstating the company’s revenue, expenses and net operating loss”.
The same day of the investment announcement, Luckin reported that its auditor Marcum Bernstein & Pinchuk (MBP) had been replaced by Hong Kong’s Centurion ZD CPA & Co, with immediate effect.
MBP had earlier stated that it was unable to complete the audit of Luckin’s finances because it had not gathered sufficient independent third-party data “or conducted sufficient audit procedures”.
However Luckin said in a filing that the two companies “have no disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure”.
Last year, Luckin confessed to intentionally fabricating more than $300 million in sales, leading to the firing of its chairman and CEO and massive fines from regulators in China and the US. The company was subsequently delisted from the Nasdaq and the US division filed for Chapter 15 bankruptcy in New York last February.
Luckin says it has introduced a range of measures internally to ensure there is no repeat of the misreporting and will now work with the new auditor to finalise annual reports for 2019 and 2020 as quickly as possible.
Luckin was once touted as a potential threat to Starbucks’ domination of the Chinese cafe market. By 2019, just two years after it was founded, its network had grown to 4500 stores and it was targeting 10,000 outlets by the end of this year. Then the fraud scandal hit.