Luckin Coffee Inc. stock was up nearly 7% for the week as of early Friday after the company announced $250 million in new investments and a new auditor, Centurion ZD CPA.
said Thursday that Centurium Capital has agreed to a private placement of $240 million in senior convertible preferred shares, and Joy Capital has agreed to a $10 million private placement of senior preferred shares.
The closing of these transactions will be dependent on a restructuring of Luckin’s $460 million in 0.75% convertible senior notes that are due in 2025.
“Luckin Coffee plans to use the proceeds of the investment to facilitate the company’s proposed offshore restructuring and fulfill its obligations under its recently announced settlement with the U.S. Securities and Exchange Commission,” the company said in the announcement.
“The transactions allow the company to focus its balance sheet on the continued execution of its business plan, focused on growing the core coffee business and achieving its long-term growth targets.”
Centurion ZD CPA has succeeded Marcum Bernstein & Pinchuk LLP as Luckin’s auditor because “MarcumBP believes that it has not gathered sufficient independent third-party data or conducted sufficient audit procedures to complete the audit in light of certain areas identified in the company’s information technology general controls during the year ended December 31, 2019,” according to Luckin’s announcement.
“The previous auditor appears to have resigned due to its inability to complete the audit. We have never seen a change in auditor for this reason.”
— Quo Vadis Capital President John Zolidis
Luckin says there are “no disagreements” and the two accounting firms will exchange information to complete the audit for the year ending Dec. 31, 2019. Luckin will also work with Centurion to file annual reports for the years ending Dec. 31, 2019 and Dec. 31, 2020. “as soon as possible.”
In early 2020, allegations that Luckin was fabricating financial and operating numbers began to surface. In April 2020, the stock plunged 75% after the company formed a special committee to investigate financial misconduct amounting to more than US$310 million.
Quo Vadis Capital calls the dual investment and new auditor announcements “unusual.”
“The previous auditor appears to have resigned due it its inability to complete the audit,” wrote Quo Vadis President John Zolidis in a note.
“We have never seen a change in auditor for this reason.”
Zolidis also notes that Luckin has managed to raise capital without having audited financials for 2019 or 2020.
“The equity issuance is positive news from the perspective that it provides incremental protection against as-yet unresolved shareholder lawsuits and ongoing DOJ investigations,” Zolidis said.
Still, the company has business model problems that these latest announcements don’t solve.
Luckin Coffee shares are up 6.8% for the week and are trading at around just under $9. Quo Vadis says the company still faces issues with “balance sheet risk, cash burn, as well as highly limited visibility on operations.”
Quo Vadis rates Luckin Coffee sell.
Luckin stock is up 4.5% for the year to date while the S&P 500 index
has gained 11.2% for the period.