Nio Inc (NYSE:NIO) the Chinese electric vehicle (EV) company is faltering. Not only were its July deliveries disappointing (down 38% from June) but there is no indication of whether NIO stock has enough cash to survive its massive cash burn.
Here is what we know about Nio’s cash position. Five months ago NIO stock had just U.S. $1.123 billion on its balance sheet. The company lost $390 million on a net income basis in its first quarter. That works out to $130 million per month! Five months later, the cash burn could theoretically have reduced the cash balance by roughly $650 million, or 57% of its cash.
Three things bother me about this.
- As is usual for most Chinese listed ADRs in the U.S., Nio does not produce any quarterly cash flow statements. The SEC does not require this of foreign companies. So the actual cash burn may greater than $130 million per month. We don’t know the exact cash burn rate at NIO.
- Deliveries since Q1 have been down dramatically. That means the cash burn has likely increased dramatically.
- Not only do we not know when the June quarter earnings statement will be released, it will still not tell us what the NIO’s current cash balance is right now. NIO had $1.34 billion in short and long-term debt as of March 31, and additional $353 million in short and long-term operating lease liabilities. So it owes at least $1.7 billion, not including normal trade liabilities.
That means its cash is $473 million and interest bearing liabilities are $1.7 billion, as of right now, without further information from the company. Considering that the company is burning cash, this is a classic definition of insolvency.
Implications of Insolvency
Directors in most non-U.S. western countries cannot declare bankruptcy at the point when cash runs out. They have to declare bankruptcy when they as directors know that the company is insolvent and has no ability to pay its bills. This means that they are responsible for defending creditors’ interests rather than shareholders’ once they suspect that that company is insolvent. Otherwise they could be accused of “trading while insolvent,” which is a common fraud in most non U.S. commercial codes.
I don’t know whether China has such a legal commercial code constraint. It may be that the directors of the company, albeit less one of the founders, are scrambling to find funding.
One of the reasons why a director would resign is to avoid being accused of a fraud when a company is put into insolvency or “administration” by one of its large creditors. Is that why the co-founder left earlier this month?
Investors in NIO Stock Need to Be Realistic
On the one hand, the possibility of insolvency may not necessarily mean that NIO stock is worthless. That would depend on whether the company can find a suitor willing to not only pay off its debts but also pay something to the NIO stock shareholders.
On the other hand, if they wait until the directors or a large creditor put the company into insolvency or administration, Nio’s stock would then be worthless. Then a suitor for the company could negotiate with all the creditors to buy the assets it wants, and not have to worry about the debts or shareholders.
Considering that auditors do not have to audit quarterly statements, it may be that Nio has some time while it holds on for dear life. But NIO stock holders might want to take action now.
Everything Depends on the June Quarterly Statements
If Nio does not deliver its June end statements within the next week or so, speculation will begin to mount that there is a problem with the company’s funding issues.
If the company can show that it has the ability either as of August month end to fund its continuing losses then the idea that the company is likely insolvent can be put to bed.
Nio is an extremely speculative stock in a country with bankruptcy laws that are unfamiliar to Americans. Not to mention China is currently tangled in a trade war with the U.S. If Nio is running out of money, which it likely is, what do you think you ought to do?
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities.