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Did NIO Just Do a Last-Ditch Deal to Make Payroll?

By John Rosevear - Feb 13, 2020 at 1:40PM

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The timing of its $100 million financing deal raises a big question.

In yet another sign that Chinese electric-car maker NIO (NIO 4.47%) is perilously low on cash, the company delayed its January payroll while it awaited the proceeds of a debt issue.

Bloomberg reported that NIO's chairman told employees their January paychecks would arrive six days late, on Feb. 14 instead of Feb. 8, because of challenges related to the outbreak of the novel coronavirus (COVID-19). 

But that news follows a disclosure that the company is raising $100 million via an issue of convertible notes that it expected to close on Feb. 10. The timing suggests that NIO didn't have the cash to meet payroll. In probably related news, NIO's January sales were down 11.5% from a year ago.

Taken together, this draws a picture that should worry investors. Here's what we know.

A blue NIO ES6, an upscale electric crossover SUV.

NIO sold just 105 of its flagship ES8 SUVs in January. Image source: NIO Inc.

About that $100 million raise

On Feb. 6, NIO announced that it had placed a total of $100 million in convertible notes with two "unaffiliated Asia based investment funds," in deals that it expected to close on or about Feb. 10. 

The notes mature in a year, but they don't pay interest. Instead, after six months, they can be converted into NIO shares at a rate of $3.07 per share. 

NIO's American depositary shares closed at $4.08 on Feb. 6.

About the payroll delay

Bloomberg reported that NIO's chairman and CEO, William Li, told employees that the company would pay January salaries six days late -- on Feb. 14 instead of Feb. 8 -- because of difficulties related to the outbreak of COVID-19 in China. 

Li also encouraged employees to take their annual bonuses in restricted stock units instead of cash. 

About NIO's January sales results

On Feb. 10, NIO said that it delivered 1,598 vehicles in January, down 11.5% from the year-ago month. It attributed the decline to the earlier timing of the Chinese New Year holiday in 2020 versus 2019, exacerbated because the holiday break was extended due to the coronavirus outbreak. 

That's a reasonable explanation for the decline, and not something that should ordinarily worry investors. But if NIO was counting on the cash from a good January to make payroll in early February, it might have been caught short. 

Add it up: NIO is almost out of cash

Let's review the timeline:

  • NIO announced the convertible placement on Feb. 6, two days before payroll was due.
  • NIO told employees that January paychecks would be delayed from Feb. 8 to Feb. 14.
  • The convertible deal was expected to close on or about Feb. 10. 

We also know that NIO has been trying to arrange financing for months, that at least a couple of financing deals fell through, and that it had just $274.3 million in cash remaining as of Sept. 30, down from $1.123 billion at the end of March. 

Long story short: I think NIO found itself in an acute cash crunch and needed to do a quick financing deal in order to make payroll. A disappointing January sales result may have exacerbated the situation. Auto investors eyeing NIO's stock should proceed very carefully. 

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