Nio (NYSE:NIO) is functionally insolvent. It cannot pay its bills and has likely run out of money. The reason we know this is because so far in October it has not closed any financing that was previously announced. You should sell any Nio stock you now own before the company is taken over by its creditors.
A Seeking Alpha article published on Oct. 9, “Nio Inc: The End is Near,” clearly explains all the reasons why NIO is insolvent. The article explains that cash burn has been about $500 million a quarter and that the end of Q2 NIO had only $503 million in cash.
In addition, Nio has announced two cash financings that have not ever closed. This included a $200 million convertible note that was due to close at the end of September. So far in October, there is no news on that financing.
Nio is not required to issue cash flow statements. So there is no actual knowledge of what the quarterly cash flows have been. The article points out that even Nio’s bonds now trade at just 30 cents on the dollar. If the bonds are trading so far below par, the article points out, that implies that Nio stock is now deemed worthless by bondholders.
Financial Insolvency Apparent
On Oct. 8, Nio provided a delivery update. There was no information whatsoever on the state of the company’s finances. Nio did not indicate whether the $200 million convertible notes from its founder and Tencent (OTCMKTS:TCEHY) had closed or not.
Without this information, it is impossible to see how Nio is financing itself. The article cited above points out that Nio runs its business at negative gross margins. That means the more electric vehicles it produces the more its cash flow losses grow.
On June 30, 2019, over three months ago, Nio’s financial statements show it had just $503 million in cash and securities. But its interest-bearing debt was $215 million in short-term debt and $948.9 million in long-term debt. In addition, there was $42.5 million in the current portion of long-term debt. This does not include other trade payables, including operating leases, taxes payable, trade payables, etc.
Given that in Q2 Nio lost $478 million, and this likely occurred in Q3 as well, it is hard to see how the company has any cash left now. This company is likely, therefore, insolvent.
Implications for Nio Stock Shareholders
The U.S. is in a trade war with China. The last thing that the government or any official body will be willing to do is to bail out equity holders on the NYSE of Nio stock.
For this reason, I highly suggest that you do not wait to see what will happen next. For example, even if Nio were to pull off some sort of financing at this point, it is not likely to benefit the Nio stock price.
First of all, any new financing will likely be some sort of debt issuance with collateral over the majority of Nio’s valuable assets. Second, there would likely be warrants or convertible features that would highly dilute, cram-down, or even eliminate the common stock of existing Nio stockholders. Third, the most likely situation is that the company will be sold. There is no guarantee that the price would be higher than the existing price.
Moreover, as I pointed out in my previous articles on Nio stock, once the company is deemed insolvent, the directors are under no obligation to look out for the interests of Nio stock shareholders. They must take care of debt holders and creditors at that point.
Bottom Line for Nio Stock Holders
You should get out of Nio stock now if you own it. Do not look to average down. It is useless to wait for a higher price. There is likely no buyer of the whole company. If you feel like a deer in the headlights, sell NIO. Do not procrastinate. In fact, do not even try to short the stock. You might get into a situation you do not understand and you don’t want to be subject to the whims of a situation that has all kinds of red flags.
As of this writing, Mark Hake did not hold a position in any of the aforementioned securities.