What Is the Coffee Basis of Luckin's SEC Settlement and What Comes Next

Luckin Coffee agreed to pay $187.5 million to settle SEC charges tied to a 2.2 billion yuan fraud, after the Muddy Waters short-selling report and its Nasdaq suspension. The settlement acknowledges some allegations while avoiding a longer court fight that would have kept the SEC investigation open. Centurium Capital has since completed its equity acquisition, and Lu Zhengyao is fully out.

The coffee basis of the figure is striking: at roughly 15 to 16 yuan per cup on the Luckin app before price increases, covering the fine would take about 75 million cups. With the frequent 3.8-fold discount coupons that dropped a cup to 5 or 6 yuan, the count would climb toward 200 million lattes, before any costs. The agreement may also clear the way for a future US relisting.

Luckin Coffee reached a $187.5 million settlement agreement with the SEC, a hefty fine equivalent to the profits from selling tens of millions of cups of coffee. From the Muddy Waters short-selling report to admitting to 2.2 billion yuan in fraud, and then to being suspended on Nasdaq, how did Luckin's capital myth shatter? How did Lu Zhengyao's role in this affect investor confidence? With Centurium Capital completing its equity acquisition, Lu Zhengyao is completely out, and can Luckin usher in a rebirth in 2022? This article will provide an in-depth analysis of the causes and consequences of this capital storm and explore Luckin's future financing and listing path.

The $187.5 million settlement is an agreement reached by Luckin Coffee with the SEC in accordance with U.S. legal procedures, reflecting a characteristic of the American judicial system. This means Luckin Coffee acknowledged some of the allegations but avoided prolonged litigation and the SEC's prosecution costs. Of course, this price is by no means small. If calculated based on the average price of 15 to 16 yuan per cup of coffee on the Luckin app at that time (before the price increase), it would need to sell about 75 million cups to cover it, and this does not even include costs.

If costs are not considered, at that time Luckin often distributed 3.8-fold discount coupons, so a cup of coffee actually sold for only 5 to 6 yuan; by that calculation, it would have to sell about 200 million lattes... If it really wanted to "break even," various expenses would still have to be deducted, so how many cups would have to be washed... Of course, Luckin could not fill this settlement amount by selling coffee alone.

Luckin's settlement with the SEC may be paving the way for relisting. Although there were earlier reports that Luckin was studying a plan to relist in the United States, the company subsequently denied it.

In fact, if Luckin did not settle with the SEC, besides being unable to trade on the stock market, the SEC would still file a lawsuit against it. The settlement gives both sides a way out and ends the investigation as soon as possible: first, to "save face" and maintain credit in the capital market; second, Luckin's development still requires substantial market financing, so it has to value the financing value of American investors and end this game according to the rules.

Lu Zhengyao first completed the listing of his first company through CAR Inc. With this experience and connections in financial circles, he created Luckin's myth again. Qian Zhiya, executive vice president of CAR Inc., independently founded Luckin Coffee. From founding to listing, it took only a few years. On the surface, it seemed unrelated to CAR Inc. and Lu Zhengyao, but it was precisely the power of capital that gave Luckin the confidence for crazy subsidies and crazy expansion, once making it a capital myth.

However, the good times did not last long. On January 31, 2020, Muddy Waters, a short-selling institution targeting Chinese concept stocks, released an 89-page report investigating the actual revenue of Luckin Coffee stores, arguing that Luckin acquired a large number of customers through subsidies and committed financial fraud to conceal losses. Muddy Waters used 92 full-time and 1,200 part-time personnel, collected 25,000 receipts, and concluded that Luckin's order volume, average customer spend, and advertising expenses were all seriously exaggerated, deceiving a large number of investors. In other words, most investors' money became Luckin's cheap coffee.

On February 3, 2020, Luckin denied fraud, saying the Muddy Waters report had no factual basis and was highly misleading. On April 2, before the U.S. stock market opened, Luckin Coffee announced that an internal investigation showed that the COO and some of his subordinates had engaged in certain misconduct starting from the second quarter of 2019, and that sales related to fabricated transactions amounted to about 2.2 billion yuan. This meant Luckin ultimately admitted to the allegations in the investigation report. On June 29, 2020, Luckin Coffee was officially suspended from trading on the Nasdaq Stock Exchange.

After the financial fraud incident was exposed, judging from statements from all parties, management adjustments, and capital changes, all signs pointed to Lu Zhengyao, which also showed that he was the ultimate controller of this incident, and the Muddy Waters report also confirmed that this was a business model that could not withstand scrutiny.

2022 will be a year for Luckin to start anew. On January 27, Centurium Capital announced that the buyer consortium led by it had completed the acquisition of equity from some shareholders of Luckin Coffee, which means that from the perspective of equity relations, Lu Zhengyao and the former Luckin management have completely exited.

Image source: Internet

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The above content is compiled by CoffeeHunters, a coffee news website.