What's up guys and welcome back to wall street millennial on this channel, we cover everything related to stocks and investing we've covered a lot of cases of corporate fraud from enron to the italian milk conglomerate parmela. Typically, once a fraud is exposed as a fraud, they go bankrupt and the common shareholders lose everything, luck and coffee looked like it would suffer. A similar fate after is exposed that they inflate their 2019 revenue by more than 300 million dollars. That made it one of the biggest and most high profile chinese fraud cases in recent history.

Their stock price started free-falling towards zero and they de-listed from the nasdaq in early 2020 unable to secure financing to cover their cash burn. They were also forced to file for chapter 15 bankruptcy protection. It appeared that lucken would be forced to shut down much like enron. Their legacy would only exist in the corporate fraud history books, but shockingly lucan is still operating thousands of retail locations all over china.

To this day, and instead of losing everything, their shareholders have actually experienced a massive comeback. While shares were delisted from the nasdaq in 2020, they still trade on the over-the-counter markets under the ticker symbol, lk and cy, and are up more than 900 percent from the lows. Its current price of 14 dollars per share is within striking distance of its ipo price of 17. That means that if you bought shares at the ipo, you would only be down 17, despite the fact that the company has been exposed as a fraud, if you're unfamiliar with the luck and coffee fraud make sure to check out our video explaining it link in the Description below, basically, they fabricated about 1 3 of their revenue in 2019 to make the stock look more attractive to american investors.

In this video we'll focus on explaining how the company was somehow able to make a comeback despite the fraud, revelations and bankruptcy in april of 2020, the famous short seller, carson block shared an anonymous short report on twitter, claiming that looking coffee had inflated its revenue by More than 80 in 2019, despite initially denying any wrongdoing, the company's own internal investigation into the matter, concluded that more than 300 million dollars worth of their 2019 sales were fake. This is about one-third of their total reported sales. The revelation caused the stock to immediately fall 80 percent and be de-listed from the nasdaq. They fired their co-founder and ceo jenny chan, as well as other senior executives who were involved in the fraud.

The sec eventually fined them 180 million dollars for intentionally misleading investors and issuing more than 800 million dollars of near debt inequity under these false pretenses. While all this was happening, lucking continued to operate its thousands of stores across china, but their operations were unprofitable and unable to raise more capital from investors. It looked like they had run out of money quickly in february of 2021. They finally did run out of cash and filed for chapter 15 bankruptcy to protect against lawsuits from its us-based bondholders after a bankruptcy proceeding, the stock price usually goes to zero, as the court gives ownership of all the firm's assets to the bondholders.

So it's not surprising that looking coffee shares fell by more than 50 in the weeks following the bankruptcy, but inexplicably they've actually made a comeback and are currently sitting near their 52-week highs. Surprisingly, they were able to restructure their debt without giving up control of the company under the deal. Existing bondholders will be given some cash, some new bonds expiring in one to five years, as well as some newly issued equity shares in the company. They say that this will compensate them for more than 90 percent of their initial par value.

While this does dilute the equity somewhat, it doesn't completely wipe out the existing shareholders. This bankruptcy settlement was much more favorable to the equity holders than most people had expected and allowed the stock to rally up to fourteen dollars per share. Importantly, it also allows them to continue operating their stores for at least another year when the newly issued bonds mature about a month later, even more good news came for the company. They were able to raise 240 million dollars from chinese private equity, firm centurion capital by issuing preferred equity shares with their debt restructured and hundreds of millions of dollars of new cash in the bank.

They have at least a couple of years of runway to make a turnaround. You might find it odd that a company like looking coffee can make a comeback after it was proven to be a fraud. Compare this to other high profile frauds like theranos and enron, which saw their operations completely shut down after they were exposed in the case of theranos. Their technology was all fake and they didn't have a real business model.

There was no restructuring because there was nothing to restructure, the business was worthless and investors lost everything. Locking coffee is a different type of fraud, while they did falsely overstate their revenue and profitability, they do have a real business. They have thousands of stores that sell real coffee to real customers, and while it is worth a lot less than investors originally thought it at least has some positive value. It's not in anybody's interest to see the company shut down its stores, because there's a chance that they can eventually become profitable and allow investors to make back at least some of their losses.

In september of 2021, they finally released their financial statements for 2020.. They got a new auditor and say that everyone involved in the fraud has been fired from the company. They also restated their 2019 financials to adjust for the fraud. Obviously, he has to take their numbers with a large grain of salt, given their track record in 2020.

Their net loss exploded to almost 1 billion dollars, mostly as a result of fines and settlements that they had to pay relating to the fraud, but their operating loss actually improved to negative 414 million dollars from negative 514 million dollars the year before, based on their results. For the first half of 2021, we can calculate their full year run rate. They look on track to increase revenue by 58 percent and their losses are improving to be almost break. Even they credit.

This increase in profitability to their partnership franchise model, independent operators can become a partner and open up their own luck and coffee stores as a partner. They get access to luckn's brand app and supply chain. In exchange, they pay luck in a percentage of their revenue. The franchise model is very good for the parent company because it allows them to rapidly expand their store count with minimal capital investment.

The franchisee is responsible for setting up the location and buying the equipment. This capital light business model is what allowed mcdonald's to grow into the behemoth that it is today, throughout 2020 luckin closed down, hundreds of their unprofitable self-operated stores to conserve cash, but they steadily increased their number of franchise partnership stores, which allowed their total store count to Rise, if you believe these numbers, it might make sense that the stock has rebounded. Obviously, that's not a sure thing by any means for all we know, the numbers could still be fake and the people buying the stock today are just getting duped. Just like the people who bought it in 2019, only time will tell, but one interesting point to note is that they only filed their 2020 annual report in september of 2021.

before then, there is no way of knowing how their business had done in 2020 or 2021. Yet most of the stock price appreciation happened before the report was filed. That means that investors were bidding up the stock 900 without any public information about their revenue or earnings. It's possible that people were just buying.

This talk blindly, hoping that the results would be good, but it's also possible that buyers had contacts in china who could see how the stores were doing by counting how many people walked into the stores. And finally, it could be the case that insiders were buying the stock because they knew what the results would be before they were announced because the stock now trades on over-the-counter markets. There is significantly less regulatory scrutiny and thus a far greater opportunity for insider trading. The story of luck and coffee goes to show that a comeback is often possible, even when it looks like a business is doomed.

It also shows that the stock market has a very short memory. If a company is able to post a few quarters of strong earnings, investors will forget about the past problems and buy the stock. For example, in the late 90s waste management engaged in a massive accounting fraud where they oversay their profits by 1.8 billion dollars. The stock dropped more than 50 on the news, but after the ceo was replaced and they settled the lawsuit with the sec, the stock price steadily climbed upwards and is now 320 higher than it was prior to the fraud all right guys that wraps it up.

For this video, what do you think about looking coffee's comeback? Do you believe their restated financials? Let us know in the comments section below, if you enjoyed this content, make sure to hit the like button and subscribe. So you don't miss future videos in the meantime. Thank you so much for watching and we'll see in the next one wall, street millennial signing out.