Opaque Nisun’s Cash Problems Exposed With Massive New Share Sale
Online financing company’s stock plunged after it raised funds equaling more than 70% of its market value in a public offering of new shares and warrants
• Online financing company Nisun raised $77 million by selling new shares and pre-funded warrants at a heavy discount
• The transaction came after the company, which has a weak track record of disclosure, raised previous new funds as it struggled with anemic cash flow
By Warren Yang
For a listed company, Shanghai-based Nisun International Enterprise Development Group Co. Ltd. (Nasdaq: NISN) is extraordinarily opaque. One thing made clear by its latest publicized activity, however, is that it’s having a hard time generating enough cash to fund its operations.
Nisun, which describes itself as “a provider of innovative comprehensive solutions through the integration of technology, industry, and finance,” said last week that it raised $77 million via a public offering of new equity and pre-funded warrants. The company priced the new shares at $4 each, which represents a massive discount from the stock’s closing price of about $11 the day before the transaction.
Such wacky pricing was inevitable for an offer as dilutive as the one that Nisun pulled off. It issued about 19 million shares, almost doubling its share count from the end of last year. That means Nisun diluted shareholder equity by nearly half to raise a sum that amounts to more than 70% of its market capitalization and its total assets at the end of last year.
The strange behavior, and poor quality of its disclosure that we’ll describe shortly, aren’t unique to Nisun. Rather, such problems are relatively common with U.S.-listed Chinese companies, especially smaller ones like Nisun. Compounding the problem, China doesn’t allow the Public Company Accounting Oversight Board, which is tied to the U.S. securities regulator, to inspect accounting firms’ audits of Chinese companies. A U.S. law passed early this year seeks to change that, threatening to delist Chinese businesses whose auditors refuse to hand over their internal accounting records when illegal behavior is suspected.
But back to the strange case of Nisun. In announcing the new fundraising, the company was equally vague in stating what it intended to do with the booty, giving only the boilerplate language that it would use it for “general corporate purposes.”
Not surprisingly, Nisun shares plunged to a level close to the offer price immediately after the announcement, and have fallen further since then to close on Thursday at $3.20, which is 20% below the $4 price for the new shares. Not exactly the nicest Christmas present for its shareholders.
Nisun has turned to the equity market to raise cash as it struggles to perform that basic corporate function on its own. Last year, it generated a paltry $2.2 million in cash flow from continuing operations, while it spent $4.7 million on investment. The company made a net loss last year as operating expenses ballooned, even though its reported revenue almost doubled.
In an earlier attempt to plug its cash shortage, the company raised $6.5 million last year through a controversial private placement of new shares to institutional investors. It also received $15 million that year through loans and an additional equity contribution from Liu Bodang, who ultimately controls the company through a Cayman Islands entity.
A short seller later argued that the $6.5 million fundraising was a related-party transaction, but Nisun failed to disclose that fact as required. That and other claims of irregularity led shareholders to file a class action lawsuit against the company. Nisun announced last week that lawsuit was dismissed back in September, just a day after it announced completion of the latest $77 million fundraising.
While the lawsuit’s dismissal may vindicate Nisun to some extent, finding any information about the company through publicly available resources can be a daunting challenge for international investors. For starters, the company doesn’t have a website, although it had one before it changed its name from Hebron Technology Co. last year. The Hebron site, which still exists and doesn’t appear to be updating anymore, is pretty bare too, without essential material such as earnings reports.
Nisun’s earnings releases, which are distributed by an external public relations firm and filed to the Securities and Exchange Commission (SEC), are irregularly issued, sometimes with insufficient and inconsistent content. For example, it reported first-quarter results only in July, with no year-ago figures for comparison and no explanation for any of the numbers for this year. Nisun was also late in filing its annual report for 2020.
Nisun has a complex history, which could partly explain why it’s not rushing to win any awards for transparency. It was founded as Hebron Technology in 2012 and four years later acquired an equipment and engineering business called Hong Kong Xibolun Technology, which was controlled by Sun Anyuan, a former chairman and CEO of Nisun.
In 2019 it moved into financial services by buying Nisun International Enterprise Management Group (British Virgin Islands) Co., Ltd. It added to its financial credentials by acquiring more financing companies that year and in 2020. Reflecting the transformation, it changed its name in September 2021, and sold Xibolun to another entity controlled by Sun. The company has actually been publicly traded since 2016.
Figuring out what exactly Nisun does now takes some work as its standard self-description found in public announcements is too vague to provide much clarity. In the business overview section of its latest annual report, Nisun says it is “a technology-driven, integrated supply chain solutions and financial services provider focused on transforming China’s corporate finance industry,” with services spanning “from technology supply chain management, to technology asset routing, and digital transformation of technology and financial institutions.” New supply chain deals have also been a dominant theme in the company’s recent press releases. But the supply chain business accounted for a tiny fraction of its revenue in 2020.
Most of Nisun’s revenue actually comes from financing solutions for small- and medium-sized enterprises (SMEs) via its online platforms. But Nisun makes this business look secondary in its annual report.
Judging from pieces of publicly available information, Nisun is essentially a fintech company that connects SMEs seeking financing with institutional lenders. But it evidently wants to draw attention to its newer supply chain financing business, which it started early last year. That may be because supply chain financing, which basically helps businesses lengthen their own payment period for suppliers while finding ways to let those suppliers receive actual payments early, is less competitive and more promising as a new industry in China. Investors may have even liked that story, putting Nisun’s shares on a hot streak last year before they fizzled out this year.
Even after the bloodbath triggered by the new share sale, Nisun’s stock trades at a relatively high price-to-sale (P/S) ratio of about 2.5, based on its 2020 revenue. That’s higher than 1.4 for FinVolution Group (FINV.US), another online loan facilitator that has been profitable in the past three years. But given Nisun’s weak financials and its tendency to sweep facts it doesn’t want markets to notice under the rug, investors may still be too generous toward the company with their current valuation, even after the latest selloff.
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