52 Risks® Update (March 2021): Luckin Coffee’s not so lucky endgame amd Climate Change risk management and ESG really just sound business management
Last month, the NASDAQ-listed, Chinese coffee chain Luckin filed for bankruptcy. Once touted as a potential rival to Starbucks, bankruptcy is the end of a long and sorry saga involving accounting irregularities, continued lack of profitability and limited transparency on key business matters.
In December 2020, the SEC announced that Luckin agreed to pay a $US180 million penalty to settle accounting fraud charges. The SEC charged Luckin with defrauding investors by mis-stating its revenue, expenses and net operating loss to appear to have been more profitable and growing faster than it actually was. Luckin fraudulently recorded more than US$300 million in sales. You can read more about Luckin on Forbes here and here.
For lenders and investors, reading the fine print is imperative. Luckin’s last equity raising in January 2020 detailed a long list of risks for investors under the usual Risk Factors section. Whilst accounting irregularities and management misconduct aren’t listed (of course) the other risks that manifested themselves were more or less accurately recorded. The first three risks, in order, were:
- ‘#1 Our limited operating history may not be indicative of our future growth or financial results and we may not be able to sustain our historical growth rates.
- #2 We have incurred significant net losses since our inception and we may continue to experience significant net losses in the future.
- #3 We require a significant amount of capital to fund our operations and respond to business opportunities. If we cannot obtain sufficient capital on acceptable terms, our business, financial condition and prospects may be materially and adversely affected.’
You can read the full list of Risk Factors here.
Luckin’s business risks map readily to the following risks in the 52 Risks® framework: Management Risk, Business Model Risk, Employee Misconduct Risk, Fraud Risk, Revenue Risk, Expense Risk, Loan Agreement Default Risk and Financial Leverage Risk. As always, you can read more about the 52 Risks® framework at www.52Risks.com.
Climate change risk management and ESG really just sound business management
Earlier this month, I joined the UK-based RiskMinds’ Climate Change Risk and ESG virtual summit. It was a great experience facilitating a round table on the impact of climate change risk on an organisation’s strategy. It is becoming evident that addressing climate change risk and implementing ESG strategies is just plain, sound business management. Key questions we discussed were:
- Where does an organisation start, when assessing the impact of climate change on its businesses, if it hasn’t done any meaningful work to date?
- What time horizon should companies start looking at – given the impact of climate change covers many time horizons ?
- How should an assessment of climate change risk interact with the strategic planning cycle ?
For those beginning the journey to understand and address the impact of climate change on a business, the Task Force for Climate-Related Financial Disclosures has an excellent resources hub and I recommend starting in the strategy section.