Luckin Coffee has called in liquidators to oversee a corporate restructuring and negotiate with creditors to salvage its business, less than four months after shocking the market with a US$300 million accounting fraud.

The start-up company named Alexander Lawson of Alvarez & Marsal Cayman Islands and Tiffany Wong Wing Sze of Alvarez & Marsal Asia to act as “light-touch” joint provisional liquidators (JPLs) under a Cayman Islands court order, it said in a regulatory filing in New York. The move was in response to a winding-up petition by an undisclosed creditor, it added.

The appointments will create a stable platform to allow the company and its advisers to negotiate and restructure its financial obligations, the Xiamen, Fujian-based coffee chain said in the filing. It hired Houlihan Lokey as financial advisers to implement a workout with creditors.

Luckin’s stock has lost about 90 per cent or US$11 billion in market value since the scandal broke out in early April, prompting regulators to take steps to delist the company from the Nasdaq stock exchange barely 14 months after its debut.

Touted as China’s Starbuck, Luckin Coffee’s business model was built on outselling its rivals by expanding its outlets at breakneck speed and offering deep discounts to build followers. With a large latte priced at 24 yuan, about 20 per cent cheaper than what it costs at its Seattle-based rival, the chain quickly built up a network that reached 3,680 stores by September 2019 versus 1,189 a year earlier.

If the numbers were to be believed, it sold 34.6 million cups of freshly brewed coffee in the quarter to September 30, and counted 30.7 million of transacting customers.

The fraud has heightened scrutiny of Chinese companies listed in American bourses, often making them favourite targets of US-based short-sellers. It also stoked a broader spat between regulators amid fragile US-China relations.

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An independent committee probing the fraud has discovered that several top executives fabricated 2.12 billion yuan (US$300 million) of sales in 2019, leading to the firing of chief executive Jenny Qian Zhiya and chief operating officer Liu Jian in May, among others.

A boardroom fight erupted earlier this month, ending with the company dropping co-founder Charles Lu Zhengyao as chairman on July 12. Lu, whose offshore family trust Haode Investment controls 37.2 per cent of the voting power in Luckin Coffee, is being chased by lenders led by Credit Suisse and Wall Street banks seeking to recoup their loans.

Lu is said to have lost control of Haode after a court in the British Virgin Islands granted on July 9 an application by banks to wind up the investment vehicle and appointed KPMG to liquidate its assets, the Wall Street Journal reported on July 14.

Luckin Coffee said it will continue to operate under the control of the board of directors with the supervision of the liquidators. It held about US$780 million of unrestricted cash and cash equivalents as of June 30, with most them located in mainland China, it said in the SEC filing. The amount has not been audited due to the scandal.

Much of the cash was generated from investors who bought into its high-flying statistics. Its cash hoard was primarily fattened by US$159 million of net proceed from the sale of preferred shares in April 2019, and US$657 million from its IPO and stock placement a month later.

The coffee chain listed US$223 million in total liabilities on September 30.

These numbers, however, remained unaudited.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP’s Facebook and Twitter pages. Copyright © 2020 South China Morning Post Publishers Ltd. All rights reserved.

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