Niu(US:NIU)2019-04-25 10:10PART I Item 3. Key Information This section presents selected financial data for Niu Technologies from 2016 to 2018, showing significant revenue growth alongside persistent net losses A. Selected Financial Data The company's net revenues grew significantly from RMB 354.8 million in 2016 to RMB 1,477.8 million in 2018, while net losses also increased, reaching RMB 349.0 million in 2018 Selected Consolidated Statements of Comprehensive Loss Data (in thousands RMB) | Indicator | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Net revenues | 354,810 | 769,368 | 1,477,781 | | Gross (loss)/profit | (12,777) | 54,698 | 198,625 | | Operating loss | (226,460) | (144,272) | (317,448) | | Net loss | (232,721) | (184,663) | (349,027) | | Net loss per ordinary share (Basic and diluted) | (22.35) | (7.02) | (5.30) | Selected Consolidated Balance Sheets Data (in thousands RMB) | Indicator | As of Dec 31, 2016 | As of Dec 31, 2017 | As of Dec 31, 2018 | | :--- | :--- | :--- | :--- | | Cash | 91,121 | 111,996 | 569,060 | | Total assets | 388,535 | 503,632 | 1,185,252 | | Total liabilities | 349,223 | 591,023 | 614,845 | | Total shareholders' (deficit)/equity | (213,194) | (325,236) | 570,407 | Selected Consolidated Statements of Cash Flow Data (in thousands RMB) | Indicator | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Net cash (used in)/provided by operating activities | (123,054) | 80,063 | 7,779 | | Net cash used in investing activities | (59,950) | (55,929) | (103,590) | | Net cash provided by financing activities | 225,012 | 2,415 | 555,383 | D. Risk Factors The company identifies numerous risks across business, corporate structure, China-specific, and ADS-related categories, including brand dependence, net losses, VIE uncertainties, and a dual-class share structure - Business success is highly dependent on maintaining the premium 'NIU' brand, innovating new products to meet changing consumer preferences, and managing the offline distribution network of city partners and franchised stores182025 - The company has a history of net losses, reporting a net loss of RMB 349.0 million (US$50.8 million) in 2018, and cannot guarantee future profitability32 - A material weakness in internal control over financial reporting was identified, related to a lack of sufficient personnel with U.S. GAAP and SEC reporting knowledge7779 - The company's corporate structure relies on contractual arrangements with a Variable Interest Entity (VIE), which may not be as effective as direct ownership and faces substantial uncertainties regarding interpretation and application of PRC laws, including the new Foreign Investment Law119123125 - A dual-class voting structure gives holders of Class B ordinary shares four votes per share, concentrating significant voting power with key executives (Messrs. Yan Li, Token Yilin Hu, and Carl Chuankai Liu), which limits the influence of Class A shareholders and ADS holders222223225 Item 4. Information on the Company This section details the company's history, business operations, organizational structure, and properties, focusing on its smart e-scooter products and omnichannel retail model A. History and Development of the Company Niu Technologies, founded in 2014, launched its first e-scooter in 2015, established a VIE structure, and completed its Nasdaq IPO in October 2018 - The company was founded in 2014 and launched its first N-series smart e-scooter in June 2015266 - A Variable Interest Entity (VIE) structure was established in May 2015 to operate its website and app in China due to foreign ownership restrictions268270 - The company completed its initial public offering on Nasdaq on October 19, 2018, raising net proceeds of approximately US$55.2 million272 B. Business Overview Niu Technologies provides smart urban mobility solutions with N, M, and U series e-scooters, utilizing an omnichannel retail model and data analytics, while navigating PRC regulations - The company's product portfolio consists of three main smart e-scooter series: N, M, and U, with plans to launch two or more new models or series each year275280281 - Niu employs an omnichannel retail model, integrating online sales with an offline network of 760 franchised stores across 178 cities in China and 22 distributors in 27 countries as of December 31, 2018275382 - The NIU app is a core part of the user experience, providing real-time data, diagnostics, and access to services, with over 660,000 registered users as of year-end 2018276279 - The company leverages its proprietary big data platform, NIU Inspire, to analyze user and scooter data for product development, performance tuning, and targeted marketing, having collected data from approximately 1.9 billion kilometers of riding distance as of December 31, 2018320321323 - The company's products are subject to new PRC safety standards (GB11761-2018) effective April 15, 2019, which required re-engineering of some models or reclassification as electric motorcycles, necessitating a manufacturing cooperation agreement with a licensed motorcycle manufacturer6162413 C. Organizational Structure The company uses a Cayman Islands holding company with a WFOE and VIE structure, controlled by contractual arrangements, to operate its PRC business and comply with foreign investment restrictions - The company uses a VIE structure to operate its online business in the PRC, with contractual arrangements enabling control over Beijing Niudian455457 - Key contractual agreements include Powers of Attorney from VIE shareholders, an Equity Pledge Agreement, an Exclusive Business Cooperation Agreement for service fees, and an Exclusive Option Agreement to purchase the VIE's equity457459461463 - PRC legal counsel opines that the VIE structure is valid and enforceable, but acknowledges substantial uncertainties in the interpretation and application of PRC laws, which could subject the company to severe penalties if deemed non-compliant465466 D. Property, Plant and Equipment The company leases all its facilities, including headquarters in Beijing, a lab in Shanghai, and manufacturing and maintenance sites in Changzhou Leased Facilities | Location | Square Meters | Primary Use | Lease Expiration Date | | :--- | :--- | :--- | :--- | | Beijing | 1,397 | Office | May 12, 2019 | | Shanghai | 638 | Office | March 31, 2021 | | Shanghai | 346 | Office | November 14, 2021 | | Changzhou | 12,000 | Manufacturing Facility | December 31, 2019 | | Changzhou | 5,238 | Maintenance Facility | April 30, 2021 | Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial condition and operations, highlighting rapid revenue growth, improved gross margin, widening net loss due to share-based compensation, and a material weakness in internal controls A. Operating Results Net revenues surged by 92.1% to RMB 1,477.8 million in 2018, driven by increased e-scooter sales, while net loss widened to RMB 349.0 million due to higher share-based compensation Financial Performance Summary (2017 vs. 2018, in millions RMB) | Metric | 2017 (RMB million) | 2018 (RMB million) | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenues | 769.4 | 1,477.8 | +92.1% | | Gross Profit | 54.7 | 198.6 | +263.1% | | Gross Margin | 7.1% | 13.4% | +6.3pp | | Net Loss | 184.7 | 349.0 | +89.0% | - The number of smart e-scooters sold increased by 79.2% from 189,467 in 2017 to 339,585 in 2018, driven by sales network expansion in China and overseas479521 - Share-based compensation expenses significantly impacted profitability, rising from RMB 62.5 million in 2017 to RMB 265.9 million (US$38.7 million) in 2018519 - A material weakness was identified related to a lack of sufficient financial reporting and accounting personnel with appropriate knowledge of U.S. GAAP and SEC reporting requirements513514 B. Liquidity and Capital Resources The company's liquidity is supported by IPO proceeds and debt financing, with RMB 569.1 million cash on hand, despite a significant decrease in operating cash flow in 2018 - As of December 31, 2018, the company held RMB 569.1 million (US$82.8 million) in cash600 - Net cash provided by operating activities decreased significantly from RMB 80.1 million in 2017 to RMB 7.8 million in 2018599613 - The company raised net proceeds of approximately US$55.2 million from its IPO in October 2018601 Working Capital Turnover Days | Metric | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Accounts Receivable Turnover | 11 | 7 | 8 | | Accounts Payable Turnover | 47 | 50 | 53 | | Inventory Turnover | 48 | 40 | 33 | Item 6. Directors, Senior Management and Employees This section details the company's eight-member board, executive compensation (RMB 3.7 million in 2018), share incentive plans, and employee base of 413, with sales and marketing as the largest group - The board of directors consists of eight members, with Dr. Yan Li serving as Chairman and CEO633667 - In 2018, aggregate cash compensation for executive officers was approximately RMB 3.7 million, and for non-executive directors was RMB 0.4 million644 - The company has two share incentive plans: the Amended and Restated 2016 Plan and the 2018 Plan, to grant awards like options and restricted share units to employees and directors645658 - As of December 31, 2018, the company had 413 full-time employees, with 48.0% in sales and marketing and 21.5% in research and development684685 - As of March 31, 2019, Glory Achievement Fund Limited was the largest shareholder with 39.7% of total ordinary shares and 28.0% of voting power; directors and executive officers as a group held 24.0% of shares and 46.4% of voting power692 Item 7. Major Shareholders and Related Party Transactions This section outlines major shareholders and related party transactions, including VIE contractual arrangements, joint liability guarantees for bank borrowings, and private placements of preferred shares - The company's relationship with its VIE and its shareholders is governed by a series of contractual arrangements, which constitute the primary related party transactions696 - Certain beneficial owners and shareholders of the VIE provided joint liability guarantees for a RMB 20.0 million short-term bank loan obtained by a subsidiary in February 2018703 - On March 26, 2018, the company issued 5,137,859 Series B preferred shares for approximately US$25.5 million and 10,119,329 Series A-3 preferred shares upon the conversion of a 2016 convertible loan705706 Item 8. Financial Information This section confirms the inclusion of consolidated financial statements, states no material legal proceedings, and outlines a dividend policy to retain earnings for business expansion - The company is not currently a party to any material legal or administrative proceedings708 - The company has no present plan to pay cash dividends and intends to retain future earnings to operate and expand the business709711 Item 10. Additional Information This section provides supplementary details on the company's dual-class share structure, Cayman Islands tax status, potential PRC resident enterprise classification, and U.S. PFIC considerations - The company has a dual-class share structure: Class A ordinary shares have one vote per share, while Class B ordinary shares have four votes per share; Class B shares are convertible into Class A shares, but not vice-versa718719721 - The company is an exempted company in the Cayman Islands and is not subject to income, gains, or withholding taxes there745 - There is a risk that PRC tax authorities could classify the company as a PRC resident enterprise, which would subject it to a 25% tax on its global income and potentially require withholding tax on dividends paid to non-PRC shareholders749751 - For U.S. federal income tax purposes, the company does not believe it was a Passive Foreign Investment Company (PFIC) for 2018 but notes that the determination is factual and made annually, with risks of becoming a PFIC in the future761763 Item 11. Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks include interest rate risk (limited), foreign exchange risk due to RMB/USD fluctuations (RMB depreciated 5% in 2018), and inflation - Interest rate risk is currently limited as short-term bank borrowings are at fixed rates783 - The company faces foreign exchange risk as its business is denominated in RMB while its ADSs are traded in USD; the RMB depreciated by approximately 5% against the USD in 2018784785 PART II Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds This section details the use of proceeds from the company's October 2018 IPO, which raised approximately US$55.2 million, with funds intended for manufacturing, R&D, and distribution network expansion - The company raised approximately US$55.2 million in net proceeds from its initial public offering in October 2018799 - As of the report date, the net proceeds from the IPO had not yet been used799 - Intended use of proceeds includes upgrading manufacturing facilities, R&D, and expanding the distribution network800 Item 15. Controls and Procedures Management concluded disclosure controls were effective, but identified a material weakness in internal control over financial reporting due to insufficient U.S. GAAP and SEC reporting expertise, with remedial measures underway - Management concluded that disclosure controls and procedures were effective as of December 31, 2018802 - A material weakness in internal control over financial reporting was identified, relating to a lack of sufficient personnel with U.S. GAAP and SEC reporting expertise804806 - Remedial measures include hiring a CFO and other experienced financial staff, and plans to upgrade financial systems and establish formal internal control policies807 PART III Item 18. Financial Statements This section contains the audited consolidated financial statements for 2016-2018, prepared under U.S. GAAP, including the independent auditor's report and detailed notes Report of Independent Registered Public Accounting Firm KPMG Huazhen LLP issued an unqualified opinion on Niu Technologies' consolidated financial statements for 2016-2018, affirming fair presentation in conformity with U.S. GAAP - The independent auditor, KPMG Huazhen LLP, provided an unqualified opinion on the company's consolidated financial statements for the years 2016, 2017, and 2018820 Consolidated Financial Statements The consolidated financial statements show significant asset growth to RMB 1,185.3 million in 2018, positive shareholders' equity, and widening net loss, with a shift to financing cash inflow Consolidated Balance Sheet Highlights (in thousands RMB) | Account | Dec 31, 2017 | Dec 31, 2018 | | :--- | :--- | :--- | | Assets | | | | Total current assets | 407,689 | 1,119,743 | | Total assets | 503,632 | 1,185,252 | | Liabilities & Equity | | | | Total current liabilities | 578,499 | 597,000 | | Total liabilities | 591,023 | 614,845 | | Total mezzanine equity | 237,845 | — | | Total shareholders' (deficit)/equity | (325,236) | 570,407 | Consolidated Statements of Comprehensive Loss Highlights (in thousands RMB) | Account | 2016 | 2017 | 2018 | | :--- | :--- | :--- | :--- | | Net revenues | 354,810 | 769,368 | 1,477,781 | | Gross (loss)/profit | (12,777) | 54,698 | 198,625 | | Operating loss | (226,460) | (144,271) | (317,448) | | Net loss | (232,721) | (184,663) | (349,027) | Notes to the Consolidated Financial Statements The notes detail accounting policies, including the VIE structure, revenue recognition for bundled services, share-based compensation, and the conversion of preferred shares upon IPO - The company's VIE, Beijing Niudian, is consolidated based on a series of contractual agreements that give the company effective control and economic benefits840841 - Revenue from e-scooter sales is recognized upon acceptance by distributors or customers; revenue is allocated between the product and the bundled mobile app service, with the service portion deferred and recognized over the free service period894897898 - Total share-based compensation expense was RMB 78.3 million, RMB 62.5 million, and RMB 265.9 million in 2016, 2017, and 2018, respectively; the 2018 expense was significantly impacted by accelerated vesting for resigned executives and a share transfer between executives101110141023 - Immediately prior to the IPO in October 2018, all outstanding Series Seed, A, and B preferred shares were converted into Class A ordinary shares on a one-for-one basis10011005