China's Luckin Coffee shares plunge after 'fake' sales report emerges

After vehemently denying reports of ‘inflated’ sales figures, China’s Luckin Coffee Inc. finally announced the formation of a special committee to investigate the issue raised during the audit of the consolidated financial statements. Starbucks competitor accepted that one of the company’s top executives and other employees fabricated transactions, which has led to a slump in the shares of Luckin Coffee.

The coffeehouse company has suspended its chief operating officer Jian Liu and several other employees reporting to him. Luckin Coffee said that the preliminary stage of the internal investigation indicates fabrication of sales from the second quarter of 2019 to the fourth quarter of 2019 amounting to around 2.2 billion yuan ($310 million).

“Certain costs and expenses were also substantially inflated by fabricated transactions during this period,” said the company in a statement.

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'Don't rely on financial statements'

The Nasdaq-listed company warned the investors that they should not rely on the previous financial statements and earnings releases for the nine-months period ending in September 2019. After the company released the findings of the preliminary investigation, the stocks of Starbucks challenger nosedived around 10 per cent on Nasdaq.

“The investigation is ongoing and the Company will continue to assess its previously published financials and other potential adjustments,” said Luckin Coffee.

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Company’s Board of Directors has formed a special committee to oversee the internal investigation, which is comprised of three independent directors of the Board, Sean Shao, Tianruo Pu and Wai Yuen Chong, with Shao serving as its chairman. The committee has recommended certain interim remedial measures including the suspension of its COO. The Chinese company said that the Board has accepted the recommendation and have implemented them with respect to the currently identified individuals and parties involved in the fabricated transactions.

“The Company will take all appropriate actions, including legal actions, against the individuals responsible for the misconduct,” said Luckin Coffee in the statement.

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(With agency inputs/image credit: pixabay)