UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,WASHINGTON, D.C. 20549
FORM 20-F
(Mark One)
☐ | REGISTRATION STATEMENT PURSUANT TO SECTION |
OR
For the fiscal year ended
December 31 2018., 2021.
OR
For the transition period from to
OR
Date of event requiring this shell company report. . . . . . . . . . . . . . . . . . .report.………………………………
For the transition period from to
Commission file number: 001-38369
ZEPP HEALTH CORPORATION
Huami Corporation
(Exact Name of Registrant as Specified in Its Charter)
N/A
(Translation of Registrant’s Name Into English)
Cayman Islands
(Jurisdiction of Incorporation or Organization)
Huami Global Innovation Center
Building H8, B2, Zhong’an Chuanggu Technology Park
No. 2800, Chuangxin900 Wangjiang West Road
Hefei, 230088
People’s Republic of China
(Address of Principal Executive Offices)
David Cui,Leon Cheng Deng, Chief Financial Officer
Huami Global Innovation Center
Building H8, B2, Zhong’an Chuanggu Technology Park
No. 2800, Chuangxin900 Wangjiang West Road
Hefei, 230088
People’s Republic of China
Phone: +86 551-65837200+86 0105940 3268
Email: david.cui@huami.comir@zepp.com
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| | |||
Title of Each Class |
| Trading Symbol(s) | Name of Each Exchange On Which Registered | |
American depositary shares (each representing four Class A ordinary shares Class A ordinary shares, par value US$0.0001 per share) Class A ordinary shares, par value US$0.0001 per share* |
|
|
| New York Stock Exchange |
*Not for trading, but only in connection with the listing of the American depositary shares on the New York Stock Exchange.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:
As of December 31, 2018,2021, there were (i) 57,303,093133,992,912 Class A ordinary shares issued and outstanding, par value US$0.0001 per share (excluding the 510,3965,762,444 Class A ordinary shares issued to the depositary bank for bulk issuance of ADSs reserved for future issuances upon the exercise or vesting of awards granted under the 2015 Share Incentive Plan and the 2018 Share Incentive Plan)Plan and the 2,656,164 treasury shares in the form of ADSs that we repurchased under our share repurchase program), and (ii) 184,376,679117,208,247 Class B ordinary shares issued and outstanding, par value US$0.0001 per share.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐ Yes ☒ No
Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer☐ |
| Accelerated filer☒ |
| |
Non-accelerated filer☐ |
| Emerging growth company | ☒ |
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards†standards† provided pursuant to Section 13(a) of the Exchange Act.☒
†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☐ | ||||
U.S. GAAP☒ |
| International Financial Reporting Standards as issued by the International Accounting Standards Board ☐ | Other | ☐ |
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐Item 17☐Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐Yes ☒ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No
TABLE OF
CONTENTS
i INTRODUCTION Unless otherwise indicated and except where the context otherwise requires, in this annual report on Form 20-F:
1
FORWARD-LOOKING STATEMENTS This annual report on Form 20-F contains forward-looking statements that relate to our current expectations and views of future events. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigations Reform Act of 1995. You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:
You should read this annual report and the documents that we refer to in this annual report and have filed as exhibits to this annual report completely and with the understanding that our actual future results may be materially different from what we expect. Other sections of this annual report discuss factors which could adversely impact our business and financial performance. Moreover, we operate in an evolving environment. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements. You should not rely upon forward-looking statements as predictions of future events. The forward-looking statements made in this annual report relate only to events or information as of the date on which the statements are made in this annual report. Except as required by law, we undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or to reflect the occurrence of unanticipated events. Unless otherwise noted, all translations from Renminbi to U.S. dollars and from U.S. dollars to Renminbi in this annual report are made at a rate of 2
PART I Not applicable. Not applicable. ITEM 3. KEY INFORMATION Our Holding Company Structure and Contractual Arrangements with our VIEs Zepp Health Corporation is not a Chinese operating company but a Cayman Islands holding company with no equity ownership in its consolidated variable interest entities, or VIEs. We conduct our operations in China through (i) our PRC subsidiaries and (ii) our VIEs with which we have maintained contractual arrangements and their subsidiaries in China. PRC laws and regulations impose certain restrictions or prohibitions on foreign ownership of companies that engage in developing substantial proprietary technology to produce consumer health and fitness devices. Accordingly, we operate these businesses in China through our VIEs and their subsidiaries, and rely on contractual arrangements among our PRC subsidiaries, our VIEs and their nominee shareholders to control the business operations of our VIEs. Our VIEs are consolidated for accounting purposes, but are not entities in which our Cayman Islands holding company, or our investors, own equity. Revenues contributed by our VIEs accounted for 99.8%, 97.9% and 83.5% of our total revenues for the years ended December 31, 2019, 2020 and 2021, respectively. As used in this annual report, “we,” “us,” “our company,” “our,” or “Zepp” refers to Zepp Health Corporation, its subsidiaries, and, in the context of describing our operations and consolidated financial information, our VIEs in China, including Anhui Huami Information Technology Co., Ltd. and Huami (Beijing) Information Technology Co., Ltd., and other subsidiaries. Investors in our ADSs are not purchasing equity interest in our operating entities in China but instead are purchasing equity interest in a holding company incorporated in the Cayman Islands. 3 The following chart illustrates our company’s organizational structure, including our principal subsidiaries and consolidated affiliated entities as of the date of this annual report:
Notes:
4 A series of contractual agreements, including loan agreement, equity pledge agreement, exclusive option agreement, exclusive consultation and service agreement, shareholder voting proxy agreement and power of attorney, have been entered into by and among our subsidiaries, our VIEs and their respective shareholders. Terms contained in each set of contractual arrangements with our VIEs and their respective shareholders are substantially similar. Despite the lack of legal majority ownership, our Cayman Island holding company is considered the primary beneficiary of our VIEs and consolidates our VIEs and their subsidiaries as required by Accounting Standards Codification topic 810, Consolidation. Accordingly, we treat our VIEs as our consolidated entities under U.S. GAAP and we consolidate the financial results of our VIEs in our consolidated financial statements in accordance with U.S. GAAP. For more details of these contractual arrangements, see “Item 4. Information on the Company—C. Organizational Structure.” However, the contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs and we may incur substantial costs to enforce the terms of the arrangements. Uncertainties in the PRC legal system may limit our ability, as a Cayman Islands holding company, to enforce these contractual arrangements. Meanwhile, there are very few precedents as to whether contractual arrangements would be judged to form effective control over the relevant VIEs through the contractual arrangements, or how contractual arrangements in the context of a VIE should be interpreted or enforced by the PRC courts. Should legal actions become necessary, we cannot guarantee that the court will rule in favor of the enforceability of the VIE contractual arrangements. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delay or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIEs, and our ability to conduct our business may be materially adversely affected. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We rely on contractual arrangements with our VIEs and their shareholders for a large portion of our business operations, which may not be as effective as direct ownership in providing operational control” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—The shareholders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.” There are also substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules regarding the status of the rights of our Cayman Islands holding company with respect to its contractual arrangements with our VIEs and their nominee shareholders. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of our VIEs is found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. If the PRC government deems that our contractual arrangements with our VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change or are interpreted differently in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our Cayman Islands holding company, our PRC subsidiaries and VIEs, and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with our VIEs and, consequently, significantly affect the financial performance of our VIEs and our company as a whole. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations” and “—Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law.” We face various risks and uncertainties related to doing business in China. Our business operations are primarily conducted in China, and we are subject to complex and evolving PRC laws and regulations. For example, we face risks associated with regulatory approvals on offshore offerings, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy, as well as the lack of inspection by the Public Company Accounting Oversight Board, or the PCAOB, on our auditors, which may impact our ability to conduct certain businesses, accept foreign investments, or list on a United States or other foreign exchange. In addition, since our auditor is headquartered in the mainland of China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not inspected by the PCAOB. As a result, our ADSs may be delisted under the Holding Foreign Companies Accountable Act. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections. These risks could result in a material adverse change in our operations and the value of our ADSs, significantly limit or completely hinder our ability to continue to offer securities to investors, or cause the value of such securities to significantly decline or become worthless. For a detailed description of risks related to doing business in China, “Item 3.D. Key Information—Risk Factors—Risks Related to Doing Business in China.” 5 PRC government’s significant authority in regulating our operations and its oversight and control over offerings conducted overseas by, and foreign investment in, China-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. Implementation of industry-wide regulations in this nature may cause the value of such securities to significantly decline or become worthless. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.” Risks and uncertainties arising from the legal system in China, including risks and uncertainties regarding the enforcement of laws and quickly evolving rules and regulations in China, could result in a material adverse change in our operations and the value of our ADSs. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.” Cash Flows through Our Organization We have established stringent controls and procedures for cash flows within our organization. Each transfer of cash between our Cayman Islands holding company and a subsidiary, our VIEs entities or the subsidiaries of our VIEs is subject to internal approval. The cash inflows of the Cayman Islands holding company were primarily generated from the proceeds we received from our public offerings of ordinary shares and other financing activities. The following table sets forth the amount of the transfers for the periods presented.
For details of the financial position, cash flows and results of operations of our VIEs, see “Financial Information Related to the VIEs.” Except the transactions described above, for the years ended December 31, 2019, 2020 and 2021, no assets other than cash were transferred between the Cayman Islands holding company and a subsidiary or a VIE, no subsidiaries or VIE paid dividends or made other distributions to the holding company, and no dividends or distributions were paid or made to U.S. investors. We plan to continue to determine the amount of service fee and payment method with our VIEs and their shareholders through bona fide negotiation, and settle fees under the contractual arrangements accordingly in the future. In April 2022, our Cayman Islands holding company declared and distributed cash dividends with the amount of approximately US$6.3 million to its shareholders and ADS holders, which was funded by surplus cash on our balance sheet. Other than the cash dividends paid in April 2022, we currently intend to retain our available funds and any future earnings to operate and expand our business. 6 As a Cayman Islands holding company, we may receive dividends from our PRC subsidiaries. Under the the Enterprise Income Tax Law of the PRC, or the EIT Law, and its implementation rules, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign enterprise investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Dividends paid by our wholly foreign-owned subsidiary in China to our intermediate holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the China-HK Taxation Arrangement. Effective from January 1, 2020, if our Hong Kong subsidiary satisfies all the requirements under such arrangement, the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. It could obtain such entitlement by itself at the time of making tax returns, or at the time of making withholding declarations via withholding agents. At the same time, the Hong Kong entity shall collect, gather and retain relevant materials for future reference in accordance with applicable rules, and shall accept the follow-up administration of tax authorities. However, we cannot assure you that we will be able to enjoy the preferential withholding tax rate of 5% under the China-HK Taxation Arrangement. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business” for more details. If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Risk Factors—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.” For purposes of illustration, the following discussion reflects the hypothetical taxes that might be required to be paid within China, assuming that: (i) we have taxable earnings, and (ii) we determine to pay dividends in the future.
Notes:
The table above has been prepared under the assumption that all profits of our VIEs will be distributed as fees to our WFOE under tax neutral contractual arrangements. If, in the future, the accumulated earnings of our VIEs exceed the service fees paid to our WFOE (or if the current and contemplated fee structure between the intercompany entities is determined to be non-substantive and disallowed by Chinese tax authorities), our VIEs could make a non-deductible transfer to our WFOE for the amounts of the stranded cash in our VIEs. This would result in such transfer being non-deductible expenses for our VIEs but still taxable income for our WFOE. Such a transfer and the related tax burdens would reduce our after-tax income to approximately 50.6% of the pre-tax income. Our management believes that there is only a remote possibility that this scenario would happen. 7 Under PRC laws and regulations, we are subject to restrictions on foreign exchange and cross-border cash transfers, including to U.S. investors. Our ability to distribute earnings to the holding company and U.S. investors is also limited. We are a Cayman Islands holding company and we may rely on dividends and other distributions on equity paid by our PRC subsidiary, which in turn relies on consulting and other fees paid to us by our VIEs, for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. When any of our PRC subsidiary incurs debt on its own behalf, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Our subsidiaries’ ability to distribute dividends is based upon their distributable earnings. Current PRC regulations permit our PRC subsidiaries to pay dividends to their respective shareholders only out of their accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries and our VIEs and their subsidiaries is required to set aside at least 10% of its after-tax profits each year, if any, to fund a statutory reserve until such reserve reaches 50% of its registered capital. Each of such entities in China is also required to further set aside a portion of its after-tax profits to fund the employee welfare fund, although the amount to be set aside, if any, is determined at the discretion of its board of directors. These reserves are not distributable as cash dividends. In addition, our PRC subsidiaries, our VIEs and their subsidiaries generate their revenue primarily in Renminbi, which is not freely convertible into other currencies. As a result, any restriction on currency exchange may limit the ability of our PRC subsidiaries to pay dividends to us. For more details, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our initial public offering and our ADS offering in April 2019 to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.” Permissions Required from the PRC Authorities for Our Operations We conduct our business primarily through our subsidiaries and VIEs in China. Our operations in China are governed by PRC laws and regulations. As of the date of this annual report, our PRC subsidiaries, VIEs and their subsidiaries have obtained the requisite licenses and permits from the PRC government authorities that are material for the business operations of our holding company, our VIEs in China, including, among others, the Business License, the ICP License, the Network Culture Operation License, the Insurance Brokerage License, etc. Given the uncertainties of interpretation and implementation of relevant laws and regulations and the enforcement practice by relevant government authorities, we may be required to obtain additional licenses, permits, filings or approvals for the functions and services of our platform in the future. Any failure to obtain or delay in obtaining such permissions or approvals, or a rescission of any such approval if obtained by us, would subject us to sanctions by the applicable PRC regulatory authorities. These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our offshore offerings into China or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our ADSs. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.” 8 Furthermore, in connection with offering and listing in an overseas market, we, our PRC subsidiaries and our VIEs, under the Discussion Draft of the Administrative Measures for the Filings of Overseas Offering and Listing by Domestic Enterprises for Public Comments, issued by the China Securities Regulatory Commission, or the CSRC on December 24, 2021, as well as its relevant regulations and regulatory rules, may be required to fulfill filing procedures and obtain approval from the CSRC, and under the Measures for Cybersecurity Review, which is effective on February 15, 2022, as well as its relevant laws, regulations and regulatory rules, may be required to go through cybersecurity review by the Cyberspace Administration of China, or the CAC. As of the date of this annual report, we have not received or were denied such requisite approval by the CSRC, nor have we been subject to any cybersecurity review made by the CAC. If we fail to obtain the relevant approval or complete other filing procedures, we may face sanctions by the CSRC or other PRC regulatory authorities, which may include fines and penalties on our operations in China, limitations on our operating privileges in China, restrictions on or prohibition of the payments or remittance of dividends by our subsidiaries in China, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ADSs. For more detailed information, see “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—The approval of the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval” and “—We collect, store, process and use personal information and other user data, which subjects us to laws, governmental regulations and other legal obligations related to privacy, information security and data protection, and any actual or perceived failure to comply with such legal obligations could harm our brand and business.” Selected Financial Data | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Our Selected Consolidated Financial Data
The following selected consolidated statements of operating data for the years ended December 31, 2016, 20172019, 2020 and 2018,2021, selected consolidated balance sheet data as of December 31, 20172020 and 20182021 and selected consolidated cash flow data for the years ended December 31, 2016, 20172019, 2020 and 20182021 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statements of operating data for the yearyears ended December 31, 2015,2017 and 2018, the selected consolidated balance sheet data as of December 31, 20152017, 2018 and 20162019 and selected consolidated cash flow data for the yearyears ended December 31, 20152017 and 2018 have been derived from our audited consolidated financial statements that are not included in this annual report. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP.
3
9
You should read the selected consolidated financial information in conjunction with our consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. Our historical results are not necessarily indicative of our results expected for future periods.
| | | | | | | | | | | | |
| | Years Ended December 31, | ||||||||||
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | ||
|
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| US$ |
| | (in thousands, except for per share data) | ||||||||||
Selected Consolidated Statements of Operating Data: | |
| |
| |
| |
| |
| |
|
Revenues(1) |
| 2,048,896 |
| 3,645,335 |
| 5,812,255 |
| 6,433,363 |
| 6,250,109 |
| 980,778 |
Cost of revenues(2) |
| 1,554,194 |
| 2,705,885 |
| 4,344,512 |
| 5,100,698 |
| 4,944,467 |
| 775,895 |
Gross profit |
| 494,702 |
| 939,450 |
| 1,467,743 |
| 1,332,665 |
| 1,305,642 |
| 204,883 |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
| |
Research and development(3) |
| 153,827 |
| 263,220 |
| 430,822 |
| 538,009 |
| 515,081 |
| 80,827 |
General and administrative(3) |
| 114,880 |
| 213,973 |
| 248,462 |
| 261,805 |
| 258,346 |
| 40,540 |
Selling and marketing(3) |
| 44,026 |
| 96,538 |
| 181,975 |
| 358,655 |
| 438,273 |
| 68,775 |
Total operating expenses |
| 312,733 |
| 573,731 |
| 861,259 |
| 1,158,469 |
| 1,211,700 |
| 190,142 |
Operating income |
| 181,969 |
| 365,719 |
| 606,484 |
| 174,196 |
| 93,942 |
| 14,741 |
Other income and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain from investments |
| 2,373 |
| 261 |
| 1,822 |
| — |
| 13,507 |
| 2,120 |
Gain from deconsolidation of a subsidiary | | — | | — | | — | | 56,522 | | — | | — |
Interest income |
| 3,003 |
| 11,595 |
| 33,478 |
| 46,118 |
| 16,686 |
| 2,618 |
Interest expense | | — | | — | | — | | (22,623) | | (44,884) | | (7,043) |
Gain from fair value change of long-term investments |
| — |
| 7,860 |
| — |
| 12,325 |
| — |
| — |
Impairment loss from long-term investments |
| — |
| (7,590) |
| (2,600) |
| — |
| — |
| — |
Other income/(loss), net |
| 4,555 |
| 8,768 |
| 13,186 |
| (929) |
| 27,418 |
| 4,302 |
Income before income tax |
| 191,900 |
| 386,613 |
| 652,370 |
| 265,609 |
| 106,669 |
| 16,738 |
Provision for income taxes |
| (27,611) |
| (52,036) |
| (77,887) |
| (31,154) |
| (10,745) |
| (1,686) |
Income before income/(loss) from equity method investments |
| 164,289 |
| 334,577 |
| 574,483 |
| 234,455 |
| 95,924 |
| 15,052 |
Income/(loss) from equity method investments |
| 2,806 |
| 1,743 |
| (1,112) |
| (4,749) |
| 41,028 |
| 6,438 |
Net income |
| 167,095 |
| 336,320 |
| 573,371 |
| 229,706 |
| 136,952 |
| 21,490 |
Less: net (loss)/income attributable to non-controlling interest |
| (587) |
| (3,726) |
| (1,825) |
| 953 |
| (851) |
| (134) |
Net income attributable to Zepp Health Corporation |
| 167,682 |
| 340,046 |
| 575,196 |
| 228,753 |
| 137,803 |
| 21,624 |
Net income per share attributable to ordinary shareholders of Zepp Health Corporation: |
|
|
|
|
|
|
| |
| |
| |
Basic income per ordinary share |
| 0.68 |
| 0.54 |
| 2.35 |
| 0.92 |
| 0.55 |
| 0.09 |
Diluted income per ordinary share |
| 0.65 |
| 0.51 |
| 2.24 |
| 0.88 |
| 0.52 |
| 0.08 |
|
| Years Ended December 31, |
| |||||||||||||||||
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| |||||
|
| (in thousands, except for per share data) |
| |||||||||||||||||
Selected Consolidated Statements of Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1) |
|
| 896,458 |
|
|
| 1,556,476 |
|
|
| 2,048,896 |
|
|
| 3,645,335 |
|
|
| 530,192 |
|
Cost of revenues(2) |
|
| 785,867 |
|
|
| 1,280,324 |
|
|
| 1,554,194 |
|
|
| 2,705,885 |
|
|
| 393,555 |
|
Gross profit |
|
| 110,591 |
|
|
| 276,152 |
|
|
| 494,702 |
|
|
| 939,450 |
|
|
| 136,637 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses(3) |
|
| 61,553 |
|
|
| 132,304 |
|
|
| 153,827 |
|
|
| 263,220 |
|
|
| 38,284 |
|
General and administrative expenses(3) |
|
| 69,984 |
|
|
| 102,644 |
|
|
| 114,880 |
|
|
| 213,973 |
|
|
| 31,121 |
|
Selling and marketing expenses(3) |
|
| 19,168 |
|
|
| 27,821 |
|
|
| 44,026 |
|
|
| 96,538 |
|
|
| 14,041 |
|
Total operating expenses |
|
| 150,705 |
|
|
| 262,769 |
|
|
| 312,733 |
|
|
| 573,731 |
|
|
| 83,446 |
|
Operating (loss)/income |
|
| (40,114 | ) |
|
| 13,383 |
|
|
| 181,969 |
|
|
| 365,719 |
|
|
| 53,191 |
|
Other income and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain from investments |
|
| — |
|
|
| — |
|
|
| 2,373 |
|
|
| 261 |
|
|
| 38 |
|
Interest income |
|
| 255 |
|
|
| 754 |
|
|
| 3,003 |
|
|
| 11,595 |
|
|
| 1,686 |
|
Gain from fair value change of long-term investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,860 |
|
|
| 1,143 |
|
Impairment loss from long-term investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,590 | ) |
|
| (1,104 | ) |
Other income |
|
| 1,109 |
|
|
| 14,726 |
|
|
| 4,555 |
|
|
| 8,768 |
|
|
| 1,275 |
|
(Loss)/income before income tax |
|
| (38,750 | ) |
|
| 28,863 |
|
|
| 191,900 |
|
|
| 386,613 |
|
|
| 56,229 |
|
Income tax benefit/(expense) |
|
| 897 |
|
|
| (3,088 | ) |
|
| (27,611 | ) |
|
| (52,036 | ) |
|
| (7,568 | ) |
(Loss)/income before loss from equity method investments |
|
| (37,853 | ) |
|
| 25,775 |
|
|
| 164,289 |
|
|
| 334,577 |
|
|
| 48,661 |
|
(Loss)/Income from equity method investments |
|
| — |
|
|
| (1,829 | ) |
|
| 2,806 |
|
|
| 1,743 |
|
|
| 254 |
|
Net (loss)/income |
|
| (37,853 | ) |
|
| 23,946 |
|
|
| 167,095 |
|
|
| 336,320 |
|
|
| 48,915 |
|
Less: net loss attributable to non-controlling interest |
|
| — |
|
|
| — |
|
|
| (587 | ) |
|
| (3,726 | ) |
|
| (542 | ) |
Net (loss)/income attributable to Huami Corporation |
|
| (37,853 | ) |
|
| 23,946 |
|
|
| 167,682 |
|
|
| 340,046 |
|
|
| 49,457 |
|
Net (loss)/income per share attributable to ordinary shareholders of Huami Corporation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)/income per ordinary share |
|
| (1.22 | ) |
|
| (0.22 | ) |
|
| 0.68 |
|
|
| 0.54 |
|
|
| 0.08 |
|
Diluted (loss)/income per ordinary share |
|
| (1.22 | ) |
|
| (0.22 | ) |
|
| 0.65 |
|
|
| 0.51 |
|
|
| 0.07 |
|
Notes:
(1) | Includes |
(2) | Includes |
10 |
|
4
(3)Share-based compensation expenses were included in operating expenses. Our share-based compensation expenses were the result of (i) our grants of options, restricted shares and restricted share units under our share incentive plans to our employees, and (ii) the share restriction agreements entered into among our founders and our preferred shareholders in relation to our private financing transactions in January 2014 and April 2015. For the years ended December 31, 2017, 2018, 2019, 2020 and 2021, we recorded share-based compensation expenses of RMB51.5 million, RMB55.3 million, RMB17.8 million, nil and nil, respectively, in relation to the vesting of the restricted shares of our founders under the share restriction agreements.
The following table presents our selected consolidated balance sheet data as of the dates indicated.
| | | | | | | | | | | | |
| | As of December, 31 | ||||||||||
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | ||
|
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| US$ |
| | (in thousands) | ||||||||||
Selected Consolidated Balance Sheet Data: | |
| |
| |
| |
| |
| |
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
| 366,336 |
| 1,441,802 |
| 1,803,117 |
| 2,273,349 |
| 1,468,499 |
| 230,440 |
Restricted cash | | 3,185 | | 10,010 | | 874 | | 2,401 | | 41,040 | | 6,440 |
Accounts receivable (net of allowance of nil, nil and 814 as of December 31, 2019, 2020 and 2021, respectively) |
| 32,867 |
| 58,925 |
| 188,940 |
| 298,038 |
| 537,084 |
| 84,280 |
Amount due from related parties (net of allowance of nil, nil and nil as of December 31, 2019, 2020 and 2021, respectively) |
| 578,454 |
| 656,399 |
| 1,421,170 |
| 860,213 |
| 295,614 |
| 46,388 |
Inventories |
| 249,735 |
| 484,622 |
| 893,806 |
| 1,217,537 |
| 1,249,327 |
| 196,047 |
Total current assets | | 1,295,360 | | 2,857,456 | | 4,392,452 | | 4,827,866 | | 3,930,953 | | 616,852 |
Non-current assets: |
|
|
|
|
|
|
| |
| |
| |
Property, plant and equipment, net |
| 28,755 |
| 40,042 |
| 64,350 |
| 124,619 |
| 133,873 |
| 21,008 |
Total assets |
| 1,465,517 |
| 3,258,481 |
| 5,174,743 |
| 5,903,719 |
| 6,085,501 |
| 954,950 |
Current liabilities: |
|
|
|
|
|
|
| |
| |
| |
Accounts payable |
| 707,782 |
| 1,064,106 |
| 1,999,951 |
| 1,951,335 |
| 1,317,306 |
| 206,714 |
Short-term bank borrowings |
| 30,000 |
| 20,000 |
| — |
| 504,671 |
| 358,000 |
| 56,178 |
Total liabilities |
| 887,735 |
| 1,448,903 |
| 2,677,155 |
| 3,173,461 |
| 3,152,062 |
| 494,628 |
Total liabilities and equity |
| 1,465,517 |
| 3,258,481 |
| 5,174,743 |
| 5,903,719 |
| 6,085,501 |
| 954,950 |
|
| As of December 31, |
| |||||||||||||||||
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| |||||
|
| (in thousands) |
| |||||||||||||||||
Selected Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 219,987 |
|
|
| 153,152 |
|
|
| 366,336 |
|
|
| 1,441,802 |
|
|
| 209,701 |
|
Accounts receivable (net of allowance of nil, nil and nil as of December 31, 2016, 2017 and 2018, respectively) |
|
| 21,924 |
|
|
| 19,707 |
|
|
| 32,867 |
|
|
| 58,925 |
|
|
| 8,570 |
|
Amount due from related parties (net of allowance of nil, nil and nil as of December 31, 2016, 2017 and 2018, respectively) |
|
| 172,966 |
|
|
| 476,698 |
|
|
| 578,454 |
|
|
| 656,399 |
|
|
| 95,469 |
|
Inventories |
|
| 89,946 |
|
|
| 192,372 |
|
|
| 249,735 |
|
|
| 484,622 |
|
|
| 70,485 |
|
Non-current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 2,926 |
|
|
| 10,801 |
|
|
| 28,755 |
|
|
| 40,042 |
|
|
| 5,824 |
|
Total assets |
|
| 529,079 |
|
|
| 972,896 |
|
|
| 1,465,517 |
|
|
| 3,258,481 |
|
|
| 473,927 |
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable |
|
| 252,073 |
|
|
| 524,072 |
|
|
| 707,782 |
|
|
| 1,064,106 |
|
|
| 154,768 |
|
Bank borrowings |
|
| — |
|
|
| 10,000 |
|
|
| 30,000 |
|
|
| 20,000 |
|
|
| 2,909 |
|
Total liabilities |
|
| 277,823 |
|
|
| 634,370 |
|
|
| 887,735 |
|
|
| 1,448,903 |
|
|
| 210,734 |
|
Total liabilities, mezzanine equity and equity |
|
| 529,079 |
|
|
| 972,896 |
|
|
| 1,465,517 |
|
|
| 3,258,481 |
|
|
| 473,927 |
|
The following table presents our selected cash flows for the years indicated.
| | | | | | | | | | | | |
| | Years Ended December 31, | ||||||||||
| | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | ||
|
| RMB |
| RMB |
| RMB |
| RMB |
| RMB |
| US$ |
| | (in thousands) | ||||||||||
Selected Consolidated Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by/(used in) operating activities |
| 238,336 |
| 707,605 |
| 427,999 |
| 157,302 |
| (232,435) |
| (36,474) |
Net cash used in investing activities |
| (38,881) |
| (324,841) |
| (112,703) |
| (206,880) |
| (1,069.289) |
| (167,796) |
Net cash provided by financing activities |
| 20,089 |
| 639,170 |
| 25,609 |
| 564,671 |
| 551,077 |
| 86,477 |
Net increase/(decrease) in cash and cash equivalents and restricted cash |
| 219,544 |
| 1,021,934 |
| 340,905 |
| 515,093 |
| (750,647) |
| (117,793) |
Exchange rate effect on cash and cash equivalents and restricted cash |
| (3,175) |
| 60,357 |
| 11,274 |
| (43,334) |
| (15,564) |
| (2,442) |
Cash and cash equivalents and restricted cash at the beginning of the year |
| 153,152 |
| 369,521 |
| 1,451,812 |
| 1,803,991 |
| 2,275,750 |
| 357,115 |
Cash and cash equivalents and restricted cash at end of the year |
| 369,521 |
| 1,451,812 |
| 1,803,991 |
| 2,275,750 |
| 1,509,539 |
| 236,880 |
11
Financial Information Related to the VIEs
The following table presents the condensed consolidating schedule of financial position for our VIEs and other entities as of the dates presented. In the following tables, “Primary Beneficiary of VIEs” refers to Beijing Shunyuan Kaihua Technology Co., Ltd., our WFOE who entered into contractual arrangements with our VIEs and their respective shareholders and acts as the primary beneficiary under the contractual arrangements. “Other Subsidiaries” refer to the subsidiaries of Zepp Health Corporation, our Cayman holding company, other than Beijing Shunyuan Kaihua Technology Co., Ltd., the VIEs and the subsidiaries of the VIEs,
Selected Condensed Consolidated Statements of Operations Data
| | | | | | | | | | | | |
| | For the Year Ended December 31, 2021 | ||||||||||
| | | | | | Primary | | VIEs and | | | | |
| | Zepp Health | | Other | | Beneficiary of | | VIEs’ | | Eliminating | | Consolidated |
|
| Corporation |
| Subsidiaries |
| VIEs |
| Subsidiaries |
| adjustments |
| Totals |
| | (RMB, in thousands) | ||||||||||
| | | | | | | | | | | | |
Third-party revenues |
| — |
| 1,030,549 |
| — |
| 5,219,560 |
| — |
| 6,250,109 |
Inter-company revenues |
| — |
| 533,943 |
| 240,103 |
| 1,202,152 |
| (1,976,198) |
| — |
Total revenues |
| — |
| 1,564,492 |
| 240,103 |
| 6,421,712 |
| (1,976,198) |
| 6,250,109 |
Total costs and expenses |
| (94,824) |
| (1,561,349) |
| (240,920) |
| (6,063,153) |
| 1,804,079 |
| (6,156,167) |
Income/(loss) from subsidiaries and VIEs | | 232,566 |
| 378,511 |
| 384,365 |
| — |
| (995,442) |
| — |
Income/(loss) from non-operations |
| 61 |
| 1,174 |
| (10) |
| 34,728 |
| (23,226) |
| 12,727 |
Income/(loss) before income tax expenses |
| 137,803 |
| 382,828 |
| 383,538 |
| 393,287 |
| (1,190,787) |
| 106,669 |
Less: income tax expenses |
| — |
| 8,501 |
| (5,027) |
| (42,509) |
| 28,290 |
| (10,745) |
Income/(loss) before loss from equity method investments |
| 137,803 |
| 391,329 |
| 378,511 |
| 350,778 |
| (1,162,497) |
| 95,924 |
Income from equity method investments |
| — |
| 7,441 |
| — |
| 33,587 |
| — |
| 41,028 |
Net income/(loss)(1) |
| 137,803 |
| 398,770 |
| 378,511 |
| 384,365 |
| (1,162,497) |
| 136,952 |
Less: net income attributable to non-controlling interests |
| — |
| 851 |
| — |
| — |
| — |
| 851 |
Net income/(loss) attributable to Zepp Health Corporation's shareholders |
| 137,803 |
| 399,621 |
| 378,511 |
| 384,365 |
| (1,162,497) |
| 137,803 |
|
| Years Ended December 31, |
| |||||||||||||||||
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| |||||
|
| (in thousands) |
| |||||||||||||||||
Selected Consolidated Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by operating activities |
|
| (6,767 | ) |
|
| 17,266 |
|
|
| 238,336 |
|
|
| 707,605 |
|
|
| 102,917 |
|
Net cash used in investing activities |
|
| (4,911 | ) |
|
| (99,387 | ) |
|
| (38,881 | ) |
|
| (324,841 | ) |
|
| (47,246 | ) |
Net cash provided by financing activities |
|
| 214,063 |
|
|
| 10,024 |
|
|
| 20,089 |
|
|
| 639,170 |
|
|
| 92,963 |
|
Net increase/(decrease) in cash and cash equivalents |
|
| 202,385 |
|
|
| (72,097 | ) |
|
| 219,544 |
|
|
| 1,021,934 |
|
|
| 148,634 |
|
Exchange rate effect on cash and cash equivalents |
|
| 10,226 |
|
|
| 5,262 |
|
|
| (3,175 | ) |
|
| 60,357 |
|
|
| 8,779 |
|
Cash, cash equivalents and restricted cash at the beginning of year |
|
| 7,376 |
|
|
| 219,987 |
|
|
| 153,152 |
|
|
| 369,521 |
|
|
| 53,744 |
|
Cash, cash equivalents and restricted cash at end of year |
|
| 219,987 |
|
|
| 153,152 |
|
|
| 369,521 |
|
|
| 1,451,812 |
|
|
| 211,157 |
|
Note:
| The net income includes gain from inter-company transactions where the VIEs sold out products through our other subsidiaries functioning as international distributors of the group. |
12
| | | | | | | | | | | | |
| | For the Year Ended December 31, 2020 | ||||||||||
| | | | | | Primary | | VIEs and | | | | |
| | Zepp Health | | Other | | Beneficiary of | | VIEs’ | | Eliminating | | Consolidated |
|
| Corporation |
| Subsidiaries |
| VIEs |
| Subsidiaries |
| adjustments |
| Totals |
| | (RMB, in thousands) | ||||||||||
| | | | | | | | | | | | |
Third-party revenues | | — | | 132,682 | | 3,147 | | 6,297,534 | | — | | 6,433,363 |
Inter-company revenues |
| — |
| 285,645 |
| 147,237 |
| 184,619 |
| (617,501) |
| — |
Total revenues |
| — |
| 418,327 |
| 150,384 |
| 6,482,153 |
| (617,501) |
| 6,433,363 |
Total cost and expenses |
| (81,162) |
| (530,557) |
| (215,859) |
| (6,007,145) |
| 575,556 |
| (6,259,167) |
Income/(loss) from subsidiaries and VIEs |
| 308,578 |
| 427,093 |
| 490,493 |
| — |
| (1,226,164) |
| — |
Income from non-operations |
| 1,337 |
| 13,060 |
| 492 |
| 53,351 |
| 23,173 |
| 91,413 |
Income/(loss) before income tax expenses |
| 228,753 |
| 327,923 |
| 425,510 |
| 528,359 |
| (1,244,936) |
| 265,609 |
Less: income tax expenses/(benefits) |
| — |
| 6,739 |
| 1,583 |
| (39,476) |
| — |
| (31,154) |
Income/(loss) before loss from equity method investments |
| 228,753 |
| 334,662 |
| 427,093 |
| 488,883 |
| (1,244,936) |
| 234,455 |
(Loss)/income from equity method investments |
| — |
| (7,312) |
| — |
| 2,563 |
| — |
| (4,749) |
Net income /(loss) |
| 228,753 |
| 327,350 |
| 427,093 |
| 491,446 |
| (1,244,936) |
| 229,706 |
Less: net loss attributable to non-controlling interests |
| — |
| — |
| — |
| (953) |
| — |
| (953) |
Net income/(loss) attributable to Zepp Health Corporation’s shareholders |
| 228,753 |
| 327,350 |
| 427,093 |
| 490,493 |
| (1,244,936) |
| 228,753 |
| | | | | | | | | | | | |
| | For the Year Ended December 31, 2019 | ||||||||||
| | | | | | Primary | | VIEs and | | | | |
| | Zepp Health | | Other | | Beneficiary of | | VIEs’ | | Eliminating | | Consolidated |
|
| Corporation |
| Subsidiaries |
| VIEs |
| Subsidiaries |
| adjustments |
| Totals |
| | (RMB, in thousands) | ||||||||||
| | | | | | | | | | | | |
Third-party revenues | | — | | 7,797 | | 3,053 | | 5,801,405 | | — | | 5,812,255 |
Inter-company revenues |
| — |
| 204,718 |
| 186,243 |
| 24,698 |
| (415,659) |
| — |
Total revenues | | — |
| 212,515 |
| 189,296 |
| 5,826,103 |
| (415,659) |
| 5,812,255 |
Total cost and expenses | | (65,016) |
| (232,785) |
| (169,594) |
| (5,154,290) |
| 415,914 |
| (5,205,771) |
Income from subsidiaries and VIEs | | 634,043 |
| 648,341 |
| 630,299 |
| — |
| (1,912,683) |
| — |
Income from non-operations | | 6,169 |
| 1,689 |
| 598 |
| 37,429 |
| — |
| 45,885 |
Income/(loss) before income tax expenses | | 575,196 |
| 629,760 |
| 650,599 |
| 709,242 |
| (1,912,428) |
| 652,370 |
Less: income tax expenses/(benefits) | | — |
| 4,089 |
| (2,258) |
| (79,718) |
| — |
| (77,887) |
Income/(loss) before loss from equity method investments | | 575,196 |
| 633,849 |
| 648,341 |
| 629,524 |
| (1,912,428) |
| 574,483 |
Loss from equity method investments | | — |
| (62) |
| — |
| (1,050) |
| — |
| (1,112) |
Net income/(loss) | | 575,196 |
| 633,787 |
| 648,341 |
| 628,474 |
| (1,912,428) |
| 573,371 |
Less: net income attributable to non-controlling interests | | — |
| — |
| — |
| 1,825 |
| — |
| 1,825 |
Net income/(loss) attributable to Zepp Health Corporation's shareholders | | 575,196 |
| 633,787 |
| 648,341 |
| 630,299 |
| (1,912,428) |
| 575,196 |
13
Selected Condensed Consolidated Balance Sheets Data
| | | | | | | | | | | | |
| | As of December 31, 2021 | ||||||||||
| | | | | | Primary | | VIEs and | | | | |
| | Zepp Health | | Other | | Beneficiary of | | VIEs’ | | Eliminating | | Consolidated |
|
| Corporation |
| Subsidiaries |
| VIEs |
| Subsidiaries |
| adjustments |
| Totals |
| | (RMB, in thousands) | ||||||||||
Assets | |
| |
| |
| |
| |
| |
|
Cash and cash equivalents | | 19,634 | | 464,638 | | 30,809 | | 953,418 | | — | | 1,468,499 |
Restricted cash | | — |
| 572 |
| — |
| 40,468 |
| — |
| 41,040 |
Term deposit | | — |
| — |
| — |
| 5,000 |
| — |
| 5,000 |
Accounts receivable, net | | — |
| 185,699 |
| 4,360 |
| 347,025 |
| — |
| 537,084 |
Amount due from related parties | | — |
| — |
| 322 |
| 295,292 |
| — |
| 295,614 |
Inventories, net | | — | | 242,441 | | — | | 1,036,617 | | (29,731) | | 1,249,327 |
Short-term investments | | — |
| — |
| — |
| 19,351 |
| — |
| 19,351 |
Prepaid expenses and other current assets | | 3,010 |
| 16,804 |
| 2,921 |
| 292,303 |
| — |
| 315,038 |
Intra-group receivable due from Zepp Health Corporation's subsidiaries | | 801,856 |
| 886,839 |
| 233,540 |
| 1,779,374 |
| (3,701,609) |
| — |
Total current assets | | 824,500 |
| 1,796,993 |
| 271,952 |
| 4,768,848 |
| (3,731,340) |
| 3,930,953 |
Property, plant and equipment, net | | — |
| 16,592 |
| 11,021 |
| 106,260 |
| — |
| 133,873 |
Intangible assets, net | | — |
| 183,580 |
| 73,251 |
| 67,353 |
| (188,602) |
| 135,582 |
Long-term investments | | — |
| 1,380,141 |
| 20,000 |
| 386,635 |
| (234,185) |
| 1,552,591 |
Investment in subsidiaries and VIEs | | 2,128,912 |
| 378,512 |
| 384,365 |
| — |
| (2,891,789) |
| — |
Deferred tax assets | | — |
| 36,017 |
| 18,847 |
| 60,265 |
| 28,290 |
| 143,419 |
Operating lease right-of-use assets | | — |
| 50,593 |
| 15,904 |
| 41,938 |
| — |
| 108,435 |
Goodwill | | — |
| 61,055 |
| — |
| — |
| — |
| 61,055 |
Other non-current assets | | — |
| 5,882 |
| 4,294 |
| 17,066 |
| (7,649) |
| 19,593 |
Total non-current assets | | 2,128,912 | | 2,112,372 | | 527,682 | | 679,517 | | (3,293,935) | | 2,154,548 |
Total assets |
| 2,953,412 |
| 3,909,365 |
| 799,634 |
| 5,448,365 |
| (7,025,275) |
| 6,085,501 |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable | | — |
| 3,175 |
| 40 |
| 1,314,091 |
| — |
| 1,317,306 |
Advance from customers | | — |
| 1,683 |
| 285 |
| 2,262 |
| — |
| 4,230 |
Amount due to related parties | | — |
| — | �� | 1,562 |
| 48,561 |
| — |
| 50,123 |
Accrued expenses and other current liabilities | | 8,914 |
| 112,128 |
| 29,860 |
| 165,181 |
| — |
| 316,083 |
Intra-group payable due to Zepp Health Corporation's subsidiaries | | 24,150 |
| 2,707,043 |
| 325,052 |
| 641,675 |
| (3,697,920) |
| — |
Income tax payables | | — |
| 2,184 |
| — |
| 411 |
| — |
| 2,595 |
Notes payable | | — |
| — |
| — |
| 103,795 |
| — |
| 103,795 |
Short-term bank borrowings | | — |
| 55,000 |
| — |
| 303,000 |
| — |
| 358,000 |
Total current liabilities | | 33,064 |
| 2,881,213 |
| 356,799 |
| 2,578,976 |
| (3,697,920) |
| 2,152,132 |
Deferred tax liabilities | | — | | 3,903 | | — | | 23,006 | | — | | 26,909 |
Long-term borrowings | | — |
| 480,000 |
| — |
| 254,500 |
| (7,649) |
| 726,851 |
Other non-current liabilities | | — |
| 2,318 |
| — |
| 172,735 |
| — |
| 175,053 |
Non-current operating lease liabilities | | — |
| 37,254 |
| 4,428 |
| 29,435 |
| — |
| 71,117 |
Total non-current liabilities | | — | | 523,475 | | 4,428 | | 479,676 | | (7,649) | | 999,930 |
Total liabilities |
| 33,064 |
| 3,404,688 |
| 361,227 |
| 3,058,652 |
| (3,705,569) |
| 3,152,062 |
Total equity |
| 2,920,348 |
| 504,677 |
| 438,407 |
| 2,389,713 |
| (3,319,706) |
| 2,933,439 |
Total liabilities and equity |
| 2,953,412 |
| 3,909,365 |
| 799,634 |
| 5,448,365 |
| (7,025,275) |
| 6,085,501 |
14
| | | | | | | | | | | | |
| | As of December 31, 2020 | ||||||||||
| | | | | | Primary | | VIEs and | | | | |
| | Zepp Health | | Other | | Beneficiary of | | VIEs’ | | Eliminating | | Consolidated |
|
| Corporation |
| Subsidiaries |
| VIEs |
| Subsidiaries |
| adjustments |
| Totals |
| | (RMB, in thousands) | ||||||||||
Assets | |
| |
| |
| |
| |
| |
|
Cash and cash equivalents | | 204,637 | | 795,908 | | 14,641 | | 1,258,163 | | — | | 2,273,349 |
Restricted cash |
| — |
| 401 |
| — |
| 2,000 |
| — |
| 2,401 |
Term deposit |
| — |
| — |
| — |
| 5,000 |
| — |
| 5,000 |
Accounts receivable, net |
| — |
| 61,854 |
| 8,536 |
| 227,648 |
| — |
| 298,038 |
Amount due from related parties |
| — |
| — |
| — |
| 860,213 |
| — |
| 860,213 |
Inventories, net |
| — |
| 91,059 |
| — | | 1,166,996 | | (40,518) |
| 1,217,537 |
Short-term investments |
| — |
| — |
| — |
| 18,430 |
| — |
| 18,430 |
Prepaid expenses and other current assets |
| 335 |
| 10,890 |
| 4,729 |
| 136,944 |
| — |
| 152,898 |
Intra-group receivable due from Zepp Health Corporation's subsidiaries | | 656,579 | | 105,157 | | 89,076 | | 943,227 | | (1,785,039) | | — |
Total current assets |
| 861,551 |
| 1,065,269 |
| 116,982 |
| 4,609,621 |
| (1,825,557) |
| 4,827,866 |
Property, plant and equipment, net |
| — |
| 17,250 |
| 11,701 |
| 95,668 |
| — |
| 124,619 |
Intangible assets, net |
| — |
| 34,685 |
| 46,858 |
| 63,670 |
| — |
| 145,213 |
Long-term investments |
| — |
| 354,934 |
| 20,000 |
| 286,584 |
| (217,532) |
| 443,986 |
Investment in subsidiaries and VIEs |
| 1,895,011 |
| 427,093 |
| 490,493 |
| — |
| (2,812,597) |
| — |
Deferred tax assets |
| — |
| 26,952 |
| 23,873 |
| 69,365 |
| — |
| 120,190 |
Operating lease right-of-use assets |
| — |
| 64,687 |
| 25,890 |
| 60,588 |
| — |
| 151,165 |
Goodwill |
| — |
| 62,515 |
| — |
| — |
| — |
| 62,515 |
Other non-current assets |
| — |
| 5,660 |
| 4,777 |
| 17,728 |
| — |
| 28,165 |
Total non-current assets | | 1,895,011 | | 993,776 | | 623,592 | | 593,603 | | (3,030,129) | | 1,075,853 |
Total assets |
| 2,756,562 |
| 2,059,045 | | 740,574 | | 5,203,245 |
| (4,855,686) |
| 5,903,719 |
Liabilities |
| |
|
|
|
|
|
|
|
|
|
|
Accounts payable |
| — |
| 5,077 |
| 527 |
| 1,945,731 |
| — |
| 1,951,335 |
Advance from customers |
| — |
| 913 |
| 278 |
| 41,311 |
| — |
| 42,502 |
Amount due to related parties |
| — |
| — |
| 10,293 |
| 892 |
| — |
| 11,185 |
Accrued expenses and other current liabilities |
| 688 |
| 52,096 |
| 23,743 |
| 175,748 |
| — |
| 252,275 |
Intra-group payable due to Zepp Health Corporation's subsidiaries | | 24,727 | | 1,481,240 | | 219,974 | | 59,079 | | (1,785,020) | | — |
Income tax payables |
| — |
| — |
| — |
| 27,706 |
| — |
| 27,706 |
Short-term bank borrowings |
| — |
| — |
| — |
| 504,671 |
| — |
| 504,671 |
Total current liabilities |
| 25,415 |
| 1,539,326 |
| 254,815 |
| 2,755,138 |
| (1,785,020) |
| 2,789,674 |
Deferred tax liabilities |
| — |
| 5,203 |
| — |
| 17,171 |
| — |
| 22,374 |
Long-term borrowings | | — | | — | | — | | 60,000 | | — | | 60,000 |
Other non-current liabilities |
| 889 |
| 359 |
| — |
| 183,920 |
| — |
| 185,168 |
Non-current operating lease liabilities |
| - |
| 53,307 |
| 14,288 |
| 48,650 |
| — |
| 116,245 |
Total non-current liabilities | | 889 | | 58,869 | | 14,288 | | 309,741 | | — | | 383,787 |
Total liabilities |
| 26,304 |
| 1,598,195 |
| 269,103 |
| 3,064,879 |
| (1,785,020) |
| 3,173,461 |
Total equity |
| 2,730,258 |
| 460,850 |
| 471,471 |
| 2,138,345 |
| (3,070,666) |
| 2,730,258 |
Total liabilities and equity |
| 2,756,562 |
| 2,059,045 |
| 740,574 |
| 5,203,224 |
| (4,855,686) |
| 5,903,719 |
15
Selected Condensed Consolidated Cash Flows Data
| | | | | | | | | | | | |
|
| For the Year Ended December 31, 2021 | ||||||||||
| | | | | | Primary | | VIEs and | | | | |
| | Zepp Health | | Other | | Beneficiary of | | VIEs’ | | Eliminating | | Consolidated |
|
| Corporation |
| Subsidiaries |
| VIEs |
| Subsidiaries |
| adjustments |
| Totals |
| | (RMB, in thousands) | ||||||||||
| | | | | | | | | | | | |
Net cash (used in)/provided by transactions with external parties | | (14,164) | | 277,212 | | (199,623) | | (295,860) | | — | | (232,435) |
Net cash (used in)/provided by transactions with intra-group entities | | (489) |
| (520,369) |
| 146,153 |
| 374,705 |
| — |
| — |
Cash flows from operating activities: | | (14,653) |
| (243,157) |
| (53,470) |
| 78,845 |
| — |
| (232,435) |
Net cash (used in)/provided by transactions with external parties | | — |
| (987,276) |
| (10,097) |
| (71,916) |
| — |
| (1,069,289) |
Net cash (used in)/provided by transactions with intra-group entities | | (146,699) |
| (15,751) |
| 79,735 |
| (290,767) |
| 373,482 |
| — |
Cash flows from investing activities: | | (146,699) |
| (1,003,027) |
| 69,638 |
| (362,683) |
| 373,482 |
| (1,069,289) |
Net cash (used in)/provided by transactions with external parties | | (8,298) | | 527,351 | | — | | 32,024 | | — | | 551,077 |
Net cash provided by/(used in) transactions with intra-group entities | | — | | 386,704 | | — | | — | | (386,704) | | — |
Cash flows from financing activities: | | (8,298) |
| 914,055 |
| — |
| 32,024 |
| (386,704) |
| 551,077 |
| | | | | | | | | | | | |
|
| For the Year Ended December 31, 2020 | ||||||||||
| | | | | | Primary | | VIEs and | | | | |
| | Zepp Health | | Other | | Beneficiary of | | VIEs’ | | Eliminating | | Consolidated |
|
| Corporation |
| Subsidiaries |
| VIEs |
| Subsidiaries |
| adjustments |
| Totals |
| | (RMB, in thousands) | ||||||||||
| | | | | | | | | | | | |
Net cash provided by/(used in) transactions with external parties | | 1,880 | | (389,473) | | (226,040) | | 770,935 | | — | | 157,302 |
Net cash (used in)/provided by transactions with intra-group entities | | (14,671) |
| 370,827 |
| 249,267 |
| (605,423) |
| — |
| — |
Cash flows from operating activities: | | (12,791) |
| (18,646) |
| 23,227 |
| 165,512 |
| — |
| 157,302 |
Net cash (used in)/provided by transactions with external parties | | — |
| (66,079) |
| (9,618) |
| (131,183) |
| — |
| (206,880) |
Net cash (used in)/provided by transactions with intra-group entities | | (114,719) |
| — |
| — |
| (597,614) |
| 712,333 |
| — |
Cash flows from investing activities: | | (114,719) |
| (66,079) |
| (9,618) |
| (728,797) |
| 712,333 |
| (206,880) |
Net cash provided by/(used in) transactions with external parties | | — |
| — |
| — |
| 564,671 |
| — |
| 564,671 |
Net cash provided by/(used in) transactions with intra-group entities | | — |
| 712,333 |
| — |
| — |
| (712,333) |
| — |
Cash flows from financing activities: | | — |
| 712,333 |
| — | | 564,671 |
| (712,333) |
| 564,671 |
16
| | | | | | | | | | | | |
|
| For the Year Ended December 31, 2019 | ||||||||||
| | | | | | Primary | | VIEs and | | | | |
| | Zepp Health | | Other | | Beneficiary of | | VIEs’ | | Eliminating | | Consolidated |
|
| Corporation |
| Subsidiaries |
| VIEs |
| Subsidiaries |
| adjustments |
| Totals |
| | (RMB, in thousands) | ||||||||||
| | | | | | | | | | | | |
Net cash (used in)/provided by transactions with external parties | | (5,781) | | (175,313) | | (115,263) | | 724,356 | | — | | 427,999 |
Net cash provided by/(used in) transactions with intra-group entities | | 5,017 |
| 131,307 |
| 109,226 |
| (245,550) |
| — |
| — |
Cash flows from operating activities: | | (764) |
| (44,006) |
| (6,037) |
| 478,806 |
| — |
| 427,999 |
Net cash provided by/(used in) transactions with external parties | | 97,976 |
| (83,586) |
| (206) |
| (126,887) |
| — |
| (112,703) |
Net cash (used in)/provided by transactions with intra-group entities | | (216,528) |
| — |
| — |
| — |
| 216,528 |
| — |
Cash flows from investing activities: | | (118,552) |
| (83,586) |
| (206) |
| (126,887) |
| 216,528 |
| (112,703) |
Net cash provided by/(used in) transactions with external parties | | 45,609 |
| — |
| — |
| (20,000) |
| — |
| 25,609 |
Net cash provided by/(used in) transactions with intra-group entities | | — |
| 216,528 |
| — |
| — |
| (216,528) |
| — |
Cash flows from financing activities: | | 45,609 |
| 216,528 |
| — |
| (20,000) |
| (216,528) |
| 25,609 |
B. Capitalization and Indebtedness
Not applicable.
|
|
Not applicable.
5
TableC. Reasons for the Offer and Use of ContentsProceeds
Not applicable.
D. Risk Factors
Summary of Risk Factors
An investment in our ADSs or Class A ordinary shares involves significant risks. Below is a summary of material risks we face, organized under relevant headings. These risks are discussed more fully in the following Item 3. Key Information—D. Risk Factors.
Risks Related to Our Business
| ● | Xiaomi is our most important customer and distribution channel. Any deterioration of our relationship with Xiaomi or reduction of sales of Xiaomi Wearable Products could have a material adverse effect on our operating results; |
| ● | If we fail to successfully and timely develop and commercialize new products, services and technologies, our operating results may be materially and adversely affected; |
| ● | Our future success depends on our ability to promote our own brands and protect our reputation. The failure to establish and promote our brands, including Amazfit and Zepp, and any damage to our reputation will hinder our growth; |
| ● | We are susceptible to supply shortages, long lead time for raw materials and components, and supply changes, any of which could disrupt our supply chain and have a material adverse impact on our results of operation because some of the key components of our products, such as Bluetooth Low Energy (BLE) system-on-chip and sensors, come from a limited number or a single source of supply; |
17
| ● | We operate in highly competitive markets and the scale and resources of some of our competitors may allow them to compete more effectively than we can, which could result in a loss of our market share and a decrease in our revenue and profitability; |
| ● | If we are unable to anticipate and satisfy consumer preferences in a timely manner or if technological innovation renders existing smart wearable technology non-competitive or obsolete, our business may be materially and adversely affected; |
| ● | We do not have internal manufacturing capabilities and rely on several contract manufacturers to produce our products. If we encounter issues with these contract manufacturers, our business, brand and results of operations could be harmed; |
| ● | Our operating results could be materially harmed if we or Xiaomi is unable to accurately forecast consumer demand for our products and services or manage our inventory; |
| ● | We collect, store, process and use personal information and other user data, which subjects us to laws, governmental regulations and other legal obligations related to privacy, information security and data protection, and any actual or perceived failure to comply with such legal obligations could harm our brand and business; and |
| ● | Any significant cybersecurity incident or disruption of our information technology systems or those of third-party partners could materially damage user relationships and subject us to significant reputational, financial, legal and operation consequences. |
Risks Related to Our Corporate Structure
| ● | We are a Cayman Islands holding company with no equity ownership in our VIEs and we conduct our operations in China through (i) our PRC subsidiaries and (ii) our VIEs with which we have maintained contractual arrangements and their subsidiaries. Investors in our Class A ordinary shares or the ADSs thus are not purchasing equity interest in our VIEs in China but instead are purchasing equity interest in a Cayman Islands holding company. If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations. Our holding company in the Cayman Islands, our VIEs and investors of our company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with our VIEs and, consequently, significantly affect the financial performance of our VIEs and our company as a group; |
| ● | We rely on contractual arrangements with our VIEs and their shareholders for a large portion of our business operations, which may not be as effective as direct ownership in providing operational control; and |
| ● | Any failure by our VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business. |
Risks Related to Doing Business in China
| ● | The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections; |
| ● | Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment; |
| ● | The approval of the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval; |
18
| ● | Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations; |
| ● | Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations; and |
| ● | The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs. |
Risks Related to our ADSs
| ● | Recent disruptions in the financial markets and economic conditions could affect our ability to raise capital; |
| ● | The trading price of our ADSs has fluctuated and is likely to be volatile, which could result in substantial losses to investors; and |
| ● | If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline. |
Risks Related to Our Business
Xiaomi is our most important customer and distribution channel. Any deterioration of our relationship with Xiaomi or reduction of sales of Xiaomi Wearable Products could have a material adverse effect on our operating results.
Xiaomi is the sole customer and distribution channel for all Xiaomi Wearable Products, and it held 14.8%14.4% of our total outstanding shares as of March 31, 2019.February 28, 2022. For the years ended December 31, 2016, 20172019, 2020 and 2018,2021, sales of Xiaomi Wearable Products contributed 92.1%72.2%, 78.8%69.0% and 66.9%53.5% of our revenues, respectively.
We entered into a strategic cooperation agreement with Xiaomi in October 2017, which grants us the most-preferred-partner status globally to develop future Xiaomi Wearable Products. In October 2020, we extended the strategic cooperation agreement with Xiaomi for three years, which will end in October 2023. The renewed agreement deepened our cooperation with Xiaomi by reinstating our most-preferred-partner status globally to develop future Xiaomi Wearable Products, and expanding our most-preferred-partner status to each other to the research and development of AI-chips and algorithms for wearable devices. This strategic cooperation agreement can be terminated by Xiaomi and we can therefore lose the most-preferred-partner status if we fail to meet the various requirements set out in the agreement, such as requirements on product launching timetable, product quality and annual sales target of Xiaomi Wearable Products. In addition, Xiaomi has the option to develop by itself or engage other companies to develop similar and competing products, if such companies can offer better terms and services than we do—for example, such companies may ask for less profit sharing or less intellectual property rights from their cooperation with Xiaomi. The strategic cooperation agreement will expire in October 2020; we cannot assure you that we will be able to renew this agreement upon its expiry or on the same terms. If for any reason, we cannot maintain our cooperation relationship with Xiaomi or renew the strategic cooperation agreement with terms equally favorable to us as compared to those in the existing agreement, our business and operation results may be materially and adversely affected. For more details of the strategic cooperation agreement with Xiaomi, including under what circumstances it can be early terminated, please see “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transaction—Our Relationship with Xiaomi—Strategic Cooperation Agreement.”
In addition, pursuant to our business cooperation agreement with Xiaomi, we and Xiaomi shall jointly set the retail price of Xiaomi Wearable Products (including the Mi Band Series). Because we cannot unilaterally determine the retail price of Xiaomi Wearable Products, particularly future Xiaomi Wearable Products, we cannot assure you that we will be able to continue to introduce Xiaomi Wearable Products with retail price levels that can sustain or improve our gross or net profit margins. Furthermore,In addition, marketing considerations on the part of Xiaomi and other factors beyond our control may also cause Xiaomi Wearable Products to be priced at relatively low levels that may negatively affect the gross and net profit margins of Xiaomi Wearable Products, as a result of which our business and operation results may be materially and adversely affected.
Xiaomi is also an important distribution channel for our self-branded products. If Xiaomi is not successful in selling our products, which in turn can be due to various reasons, including lower demand, market competition and decreasing efficiency of distribution network, our revenue may decrease. Furthermore, negative publicity related to Xiaomi, including products offered by Xiaomi, the celebrities Xiaomi is associated with, or even the labor policies of any of Xiaomi’s suppliers or manufacturers may have a material adverse effect on the sales of our products.
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In addition, Xiaomi sells a broad spectrum of electronic products through its online and offline channels. We cannot assure you that our products can always receive the same level of attention and promotion efforts from Xiaomi as they have been so far receiving.receiving, especially given the sales of Xiaomi wearable products decreased in 2021 as compared to 2020. In the event that Xiaomi dedicates less resources in promoting and selling our products, our revenue may decrease as well. IfAlthough we have been building our own distribution network to reduce reliance on the distribution network of Xiaomi in case we lose Xiaomi as our customer or distribution channel for any reason, we will need to build a larger distribution network on our own, which can be time and resource consuming, and there is no assurance that we can achieve that in anour own distribution network will be as effective and efficient manner, or at all.as the sales channels of Xiaomi. In November 2019, Xiaomi launched its own smart watch product, the Xiaomi Mi Watch series. We believe this launch has, to some extent, diluted potential buyers’ attention to the products we designed and manufactured for Xiaomi and our self-branded watches, and we expect the dilution to continue, which negatively affects our sales performance and in turn, our results of operations.
When exercising its rights as our shareholder, Xiaomi may take into account not only the interests of our company and our shareholders but also its interests and the interests of its other affiliates. The interests of our company and our shareholders may at times conflict with the interests of Xiaomi and its affiliates. Such conflicts may result in lost corporate opportunities for our company, including opportunities to enter into lines of business that may overlap with those pursued by Xiaomi and/or the companies within its ecosystem.
If we fail to successfully and timely develop and commercialize new products, services and technologies, our operating results may be materially and adversely affected.
Historically, sales of smart bands and watches contributed a significant majority of our revenues and our growth has been influenced by our product launches and product cycle. In particular, sales of our smart band products and watches (including Xiaomi-Xiaomi Wearable Products and Amazfit-brandedour self-branded smart wearable products) contributed 85.8%91.8%, 86.6%88.0% and 90.7%90.6% of our total revenues in the years ended December 31 2016, 20172019, 2020 and 2018,2021, respectively. Our future growth depends on whether we can continually develop and introduce new generations of our existing product lines and new forms of smart wearable technology with enhanced functionalities and value-added services in a timely manner. This is particularly important in the current industry landscape where technology and consumer preference evolve constantly and rapidly, which may cause our existing products to reach the end of their lifecycles prematurely and require us to introduce new products with enhanced functionalities to
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sustain our growth. Our capability to roll out new or enhanced products and services in turn depend on a number of factors, including timely and successful research and development efforts by us as well as our suppliers to bring cutting-edge technologies to the market, quality control of service provision and product manufacturing and the effectiveness of our distribution channels. Pursuant to our strategic cooperation agreement with Xiaomi, we are also required to consult Xiaomi regarding the product launch timetable for Xiaomi Wearable Products. If we are unable to commercialize appealing new products, functionalities, services or innovative technologies leveraging our data in a timely manner and introduce them to consumers at attractive price points compared to our existing products and competing products, or our new products, services or technologies are not accepted or adopted by consumers, our competitors may increase their market share, which could adversely impact our operating results. In addition, the research and development of new or enhanced products and services can be complex and costly. Given the complexity, we could experience delays in completing the development and introduction of new and enhanced services and products in the future. Our research and development effort may not yield the benefits we expect to achieve at all after we dedicate our time and resources into it.
We are endeavoring to apply our products in more scenarios, and medical use is one area that we put in significant efforts. Some of our existing products monitor users’ cardiac cycle, which have significant potential for medical application. For example, a doctor may use our products to monitor the cardiac cycle of his or her patients. In such applications, our products may be deemed as medical devices, and we may be requiredWe will need to obtain the relevant medical device registration certificate. In addition, we maycertificate if our products are to be required to obtain the relevantused for medical device registration certificates for our existing products if any new rules or regulations promulgated by relevant governmental authorities classify our existing products as medical devices. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Medical Device.” We have obtained the medical device registration certificate for our ECG health band products.application. The process of obtaining regulatory clearances or approvals to market a medical device for our other products, however, can be costly and time consuming. We may not be able to obtain these clearances or approvals on a timely basis, or at all, in order to extend our business into the medical use wearable device market. Moreover, even if we successfully obtain the required approvals for our products, given the complex and stringent nature of regulations on medical devices, failure to comply with applicable China Food and DrugNational Medical Products Administration (CFDA) regulations will subject us to enforcement actions such as fines, civil penalties or recalls of products, which could harm our reputation and operating results.
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Our future success depends on our ability to promote our own brands and protect our reputation. The failure to establish and promote our brands, including Amazfit and Zepp, and any damage to our reputation will hinder our growth.
Since September 2015, we have begun to use the brand “Amazfit” to sell our products that are not designed and manufactured for Xiaomi to address the middle to high-end market. In August 2020, we introduced a new brand name, “Zepp” for our self-branded products. We believe the strategy to establish and promote our own brand is crucial to our future success as it expands our addressable market and gives us more flexibility in terms of pricing, distribution and marketing compared to our cooperation with Xiaomi on Xiaomi Wearable Products. We have invested, and will need to continue to dedicate, significant time, efforts and resources to build our own brand recognition. Shipments of our self-branded products have increased from approximately 4.7 million units in 2020 to approximately 7.6 million units in 2021. For the year ended December 31, 2021, revenues from our self-branded products and others segment, substantially all of which was from the sales of our self-branded products, were RMB2,909.3 million (US$456.5 million), representing 46.5% of our total revenues. We expect the sales of our Amazfit and Zepp branded products will contribute more to our total revenues as compared to Xiaomi Wearable Products in the future. However, we cannot guarantee that the shipment of our self-branded products will continue to grow, or that our promotion efforts will ultimately be successful, as it involves numerous factors including the effectiveness of our marketing efforts, our ability to provide consistent, high-quality products and services, and our consumers’ satisfaction with the technical support and software updates we provide.
In addition, negative publicity related to our brand, products, contract manufacturers, component suppliers, distributors, strategic partners and the celebrities we are associated with could damage and offset our effort to promote our own brands. In addition, although brand security initiatives are in place, we cannot guarantee that our efforts against the counterfeiting of our brands will be successful. If a third party copies our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially and adversely affected.
We are susceptible to supply shortages, long lead time for raw materials and components, and supply changes, any of which could disrupt our supply chain and have a material adverse impact on our results of operation because some of the key components of our products, such as Bluetooth Low Energy (BLE) system-on-chip and sensors, come from a limited number or a single source of supply.
All of the components and raw materials used to produce our products are sourced from third-party suppliers, and some of these components are sourced from a limited number of or a single supplier. Therefore, we are subject to risks of shortages or discontinuation in supply, long lead time, cost increases and quality control issues given the limited sources of suppliers. In addition, some of our suppliers may have more established relationships with our competitors, and as a result of such relationships, such suppliers may choose to limit or terminate their relationship with us or prioritize our competitors’ orders in the case of supply shortages. We have in the past experienced and may in the future experience component shortages. For example, we experienced component shortages and longer lead time for components such as PPG (photoplethysmography) sensors in 2018, due to higher than expected demand for Xiaomi Wearable Products and our smart watches product lines. We also expect there may be a cost increase in source materials and shortage in chips with respect to BLE system-on-chip products. In addition, as many of electronics component suppliers are concentrated in East and Southeast Asia, there have been industry-wide conditions, health crisis, natural disasters and global events in the past that have caused material shortages for components. Starting from the second quarter of 2020, we have been experiencing components shortages and longer lead time for display driver integrated circuits, power management integrated circuits and near field communication integrated circuits, because the COVID-19 pandemic affected the countries and regions where these components are produced. We cannot guarantee that such component shortage will be resolved in the near future, the failure of which may materially and adversely affect our business, results of operations and financial performance.
In the event of a component shortage or supply interruption from suppliers of key components, we will need to identify alternate sources of supply, which can be time-consuming, difficult and costly. We may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our ability to meet our production requirements or to fill our orders in a timely manner. This could cause delays in shipment of our products, harm our relationships with our customers, distributors and users, and adversely affect our results of operations.
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We operate in highly competitive markets and the scale and resources of some of our competitors may allow them to compete more effectively than we can, which could result in a loss of our market share and a decrease in our revenue and profitability.
We offer a number of products and services and compete with a variety of competitors. For example, the smart wearables market has a multitude of participants, including consumer electronics companies specialized in smart wearable technology, such as Fitbit and Garmin; large, broad-based consumer electronics companies that either compete in our market or adjacent markets, or have announced plans to do so, such as Huawei, Apple, Samsung and Samsung;Xiaomi; traditional health and fitness companies and traditional watch companies. We also face competition from local providers of similar products in the various regions and countries where our products are distributed. As we are rolling out more self-branded smart wearables, we face increasing competition from not only other participants in the industry, but also products under the Xiaomi brand. Intensified competition may result in pricing pressures and reduced profit margins and may impede our ability to continue to increase the sales of our products or cause us to lose market share, any of which could substantially harm our results of operations.
Many of our existing and potential competitors enjoy substantial competitive advantages, such as: (i) longer operating history, (ii) the capacity to leverage their sales efforts and marketing expenditures across a broader portfolio of products, (iii) more established relationships with a larger number of suppliers, contract manufacturers and channel partners, (iv) access to larger and broader user bases, (v) greater brand recognition, (vi) greater financial, research and development, marketing, distribution and other resources, (vii) more resources to make investments and acquisitions, (viii) larger intellectual property portfolios, and (ix) the ability to bundle competitive offerings with other products and services.
If we are unable to anticipate and satisfy consumer preferences in a timely manner or if technological innovation renders existing smart wearable technology non-competitive or obsolete, our business may be materially and adversely affected.
Consumer preferences in smart wearable devices are changing rapidly and difficult to predict. Consumers may decide not to purchase our products and services as their preferences shift to different types or designs of smart wearable devices, or even move away from these categories of products and services altogether. In particular, new technologies might bring about industry-wide impacts and make the category of smart bands and watches less appealing or obsolete. In addition, our new products and services with additional features have higher prices than many of our earlier products, which may not appeal to as large a consumer base.base as before. Accordingly, if we fail to anticipate and satisfy consumer preferences in a timely manner, or if it is perceived that our future products and services will not satisfy consumer preferences, our business may be adversely affected.
In addition, as the smart wearable technology continues to develop, the functions of smart bands and smart watches may converge, which in turn may cause our smart band product lines to compete with our smart watch product lines and inhibit our future growth.
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Our future success depends on our ability to promote our own brands and protect our reputation. The failure to establish and promote our brands, including Amazfit, and any damage to our reputation will hinder our growth.
Since September 2015, we have begun to use the brand, “Amazfit,” to sell our products that are not designed and manufactured for Xiaomi to address the middle to high-end market. Prior to that, all of our products were Xiaomi Wearable Products. We believe the strategy to establish and promote our own brand is crucial to our future success as it expands our addressable market and gives us more flexibility in terms of pricing, distribution and marketing compared to our cooperation with Xiaomi on Xiaomi Wearable Products. We have invested, and will need to continue to dedicate, significant time, efforts and resources to build our own brand recognition. Shipments of our self-branded products have increased from approximately 1.0 million units in 2017 to approximately 3.1 million units in 2018. For the years ended December 31, 2017 and 2018, revenues from our self-branded products and others segment, substantially all of which was from the sales of our self-branded products, were RMB434.4 million and RMB1,205.8 million (US$175.4 million), representing 21.2% and 33.1% of our total revenues, respectively. However, we cannot guarantee that the shipment of our self-branded products will continue to grow, or that our promotion efforts will ultimately be successful, as it involves numerous factors including the effectiveness of our marketing efforts, our ability to provide consistent, high quality products and services, and our consumers’ satisfaction with the technical support and software updates we provide.
In addition, negative publicity related to our brand, products, contract manufacturers, component suppliers, distributors, strategic partners and the celebrities we are associated with could damage and offset our effort to promote our own brands. For example, our company name in Chinese character, “华米,” has been preempted as a trademark by a company unaffiliated to us under certain trademark categories in China. This company currently manufactures and sells products and service lines similar to ours using this trademark. As a result, consumers may be confused and associate any quality issue on the products and services they provide with us, which will have an adverse impact on our brand image. In addition, although brand security initiatives are in place, we cannot guarantee that our efforts against the counterfeiting of our brands will be successful. If a third-party copies our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially and adversely affected. Furthermore, our company name Huami and our brand Amazfit have been preempted as trademarks by third parties in a number of countries overseas, including Turkey (with respect to our company name), as well as Spain, Indonesia, the Philippines and Paraguay (with respect to Amazfit and related logos). While we are contesting the registration of these trademarks by such third parties in each of these countries, we cannot assure you that we will prevail in these proceedings.
We do not have internal manufacturing capabilities and rely on several contract manufacturers to produce our products. If we encounter issues with these contract manufacturers, our business, brand and results of operations could be harmed.
We do not maintain our own manufacturing capabilities and rely on contract manufactures to produce our products. We assign the production of Mi Band series, and Mi Smart Scale series and our self-branded product lines to a number of manufacturers while each of our self-branded product lines is assigned to a corresponding manufacturer.manufacturers. We may experience operational difficulties with our manufacturers, including reductions in the availability of production capacity, failures to comply with product specifications, insufficient quality control, failures to meet production deadlines, increases in manufacturing costs and longer lead time required. Our manufacturers may experience disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, lockdowns as a result of new waves of outbreaks of the COVID-19 pandemic or other epidemics, component or material shortages, cost increases or other similar problems. In addition, we may not be able to renew contracts with our contract manufacturers or identify manufacturers who are capable of producing new products we target to launch in the future.
We are susceptible to supply shortages, long lead time for raw materials and components, and supply changes, any of which could disrupt our supply chain and have a material adverse impact on our results of operation because some of the key components of our products, such as Bluetooth Low Energy (BLE) system-on-chip and sensors, come from a limited number or a single source of supply.22
All of the components and raw materials used to produce our products are sourced from third-party suppliers, and some of these components are sourced from a limited number of or a single supplier. Therefore, we are subject to risks of shortages or discontinuation in supply, long lead time, cost increases and quality control issues given the limited sources of suppliers. In addition, some of our suppliers may have more established relationships with our competitors, and as a result of such relationships, such suppliers may choose to limit or terminate their relationship with us or prioritize our competitors’ orders in the case of supply shortages. We have in the past experienced and may in the future experience component shortages. For example, we experienced component shortages and longer lead time for components such as PPG (photoplethysmography) sensors in 2018, due to higher than expected demand for Xiaomi Wearable Products and our smart watches product lines. In addition, as many of electronics component suppliers are concentrated in East and Southeast Asia, there have been industry-wide conditions, natural disasters and global events in the past that have caused material shortages for components, such as a shortage of flash memory in 2011 in aftermath of the tragic earthquake and tsunami in Japan. While component shortages have historically been immaterial, they could be material in the future.
In the event of a component shortage or supply interruption from suppliers of key components, we will need to identify alternate sources of supply, which can be time-consuming, difficult and costly. We may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our ability to meet our production requirements or to fill our orders in a timely manner. This could cause delays in shipment of our products, harm our relationships with our customers, distributors and users, and adversely affect our results of operations.
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Our operating results could be materially harmed if we or Xiaomi is unable to accurately forecast consumer demand for our products and services or manage our inventory.
To ensure adequate inventory supply for our products, we procure raw materials and components based on sales and production forecasts. The ability to accurately forecast demand for our products and services could be affected by many factors, including changes in customer demand for our products and services or our competitors’, sales promotions by us or our competitors, sales channel inventory levels, and unanticipated changes in general market and economic conditions. In addition, as we continue to introduce new products and services, we may also face challenges managing the production plan of our existing products, which may in turn affect the inventory management for our existing products. If we or Xiaomi fails to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale. After we sell Xiaomi Wearable Products to Xiaomi, Xiaomi will only have limited right of return if the products have quality issues and will largely bear the inventory risks of such products. However, inventory levels in excess of end-customer demand may still ultimately result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which may cause our gross margin to suffer and could impair the strength of our brand. On the other hand, in the case we experience shortage of products, we may be unable to meet the demand for our products, and our business and operating results could be adversely affected. We expect that it will become more difficult to forecast demand as we introduce and develop a more diverse product portfolio and as market competition for similar products intensifies.
We collect, store, process and use personal information and other user data, which subjects us to laws, governmental regulations and other legal obligations related to privacy, information security and data protection, and any security breaches or our actual or perceived failure to comply with such legal obligations could harm our brand and business.
Exploring growth opportunities with our wealth of data is one of our key strategies. Due to the volume and sensitivity of the personal information and biometric data we collect and manage and the nature of our products, the security features of our enterprise platform and information systems are critical. We face risks inherent in handling and protecting large volume of data. In particular, we face a number of challenges relating to data from transactions and other activities on our platforms, including:
| ● | protecting the data in and hosted on our system, including against attacks on our system by outside parties or fraudulent behavior or improper use by our employees; |
| ● | addressing concerns related to privacy and sharing, safety, security and other factors; and |
| ● | complying with applicable laws, rules and regulations relating to the collection, use, storage, transfer, disclosure and security of personal information, including any requests from regulatory and government authorities relating to these data. |
In general, we expect that data security and data protection compliance will receive greater attention and focus from regulators, both domestically and globally, as well as attract continued or greater public scrutiny and attention going forward, which could increase our compliance costs and subject us to heightened risks and challenges associated with data security and protection. If we are unable to manage these risks, we could become subject to penalties, including fines, suspension of business and revocation of required licenses, and our reputation and results of operations could be materially and adversely affected.
The PRC regulatory and enforcement regime with regard to data security and data protection is evolving and may be subject to different interpretations or significant changes. Moreover, different PRC regulatory bodies, including the Standing Committee of the NPC, the Ministry of Industry and Information Technology, or the MIIT, the CAC, the Ministry of Public Security and the State Administration of Market Regulation, or the SAMR, have enforced data privacy and protections laws and regulations with varying standards and applications. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Information Security” and “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Internet Privacy.” The following are examples of certain recent PRC regulatory activities in this area:
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Data Security
| ● | In June 2021, the Standing Committee of the NPC promulgated the Data Security Law, which took effect in September 2021. The Data Security Law, among other things, provides for security review procedure for data-related activities that may affect national security. In July 2021, the state council promulgated the Regulations on Protection of Critical Information Infrastructure, which became effective on September 1, 2021. Pursuant to this regulation, critical information infrastructure means key network facilities or information systems of critical industries or sectors, such as public communication and information service, energy, transportation, water conservation, finance, public services, e-government affairs and national defense science, the damage, malfunction or data leakage of which may endanger national security, people’s livelihoods and the public interest. In December 2021, the CAC, together with other authorities, jointly promulgated the Cybersecurity Review Measures, which became effective on February 15, 2022 and replaces its predecessor regulation. Pursuant to the Cybersecurity Review Measures, critical information infrastructure operators that procure internet products and services must be subject to the cybersecurity review if their activities affect or may affect national security. The Cybersecurity Review Measures further stipulates that network platform operators that hold personal information of over one million users shall apply with the Cybersecurity Review Office for a cybersecurity review before any initial public offering at a foreign stock exchange. As of the date of this annual report, no detailed rules or implementation rules have been issued by any authority and we have not been informed that we are a critical information infrastructure operator by any government authorities. Furthermore, the exact scope of “critical information infrastructure operators” under the current regulatory regime remains unclear, and the PRC government authorities may have wide discretion in the interpretation and enforcement of the applicable laws. Therefore, it is uncertain whether we would be deemed to be a critical information infrastructure operator under PRC law. If we are deemed to be a critical information infrastructure operator under the PRC cybersecurity laws and regulations, we may be subject to obligations in addition to what we have fulfilled under the PRC cybersecurity laws and regulations. |
| ● | In November 2021, the CAC released the Regulations on the Network Data Security (Draft for Comments), or the Draft Regulations. The Draft Regulations provide that data processors refer to individuals or organizations that, during their data processing activities such as data collection, storage, utilization, transmission, publication and deletion, have autonomy over the purpose and the manner of data processing. In accordance with the Draft Regulations, data processors shall apply for a cybersecurity review for certain activities, including, among other things, (i) the listing abroad of data processors that process the personal information of more than one million users and (ii) any data processing activity that affects or may affect national security. However, there have been no clarifications from the relevant authorities as of the date of this annual report as to the standards for determining whether an activity is one that “affects or may affect national security.” In addition, the Draft Regulations requires that data processors that process “important data” or are listed overseas must conduct an annual data security assessment by itself or commission a data security service provider to do so, and submit the assessment report of the preceding year to the municipal cybersecurity department by the end of January each year. As of the date of this annual report, the Draft Regulations was released for public comment only, and their respective provisions and anticipated adoption or effective date may be subject to change with substantial uncertainty. |
Personal Information and Privacy
| ● | The Anti-monopoly Guidelines for the Platform Economy Sector published by the Anti-monopoly Committee of the State Council, effective on February 7, 2021, prohibits collection of user information through coercive means by online platforms operators. |
| ● | In August 2021, the Standing Committee of the NPC promulgated the Personal Information Protection Law, which integrates the scattered rules with respect to personal information rights and privacy protection and took effect on November 1, 2021. We update our privacy policies from time to time to meet the latest regulatory requirements of PRC government authorities and adopt technical measures to protect data and ensure cybersecurity in a systematic way. Nonetheless, the Personal Information Protection Law elevates the protection requirements for personal information processing, and many specific requirements of this law remain to be clarified by the CAC, other regulatory authorities, and courts in practice. We may be required to make further adjustments to our business practices to comply with the personal information protection laws and regulations. |
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Many of the data-related legislations are relatively new and certain concepts thereunder remain subject to interpretation by the regulators. If any data that we possess belongs to data categories that are subject to heightened scrutiny, we may be required to adopt stricter measures for protection and management of such data. The Cybersecurity Review Measures and the Draft Regulations remain unclear on whether the relevant requirements will be applicable to companies that are already listed in the United States, such as us, if we were to pursue another listing outside of the PRC. We cannot predict the impact of the Cybersecurity Review Measures and the Draft Regulations, if any, at this stage, and we will closely monitor and assess any development in the rule-making process. If the Cybersecurity Review Measures and the enacted version of the Draft Regulations mandate clearance of cybersecurity review and other specific actions to be taken by issuers like us, we face uncertainties as to whether these additional procedures can be completed by us timely, or at all, which may delay or disallow our future listings (should we decide to pursue them), subject us to government enforcement actions and investigations, fines, penalties, suspension of our non-compliant operations, or removal of our app from the relevant application stores, and materially and adversely affect our business and results of operations. As of the date of this annual report, we have not been involved in any formal investigations on cybersecurity review made by the CAC on such basis.
In general, compliance with the existing PRC laws and regulations, as well as additional laws and regulations that PRC regulatory bodies may enact in the future, related to data security and personal information protection, may be costly and result in additional expenses to us, and subject us to negative publicity, which could harm our reputation and business operations. There are also uncertainties with respect to how such laws and regulations will be implemented and interpreted in practice.
Moreover, regulatory authorities in China have recently increased their supervision on the collection and use of personal information over mobile applications. In December 2019, a notice from a governmental authority was informally forwarded to us, stating that the authority had observed inconvenient operation for users to cancel information pushing and their accounts of one of our apps, which might interfere with users’ exercising of their user right. The notice required us to make rectification or raise an objection and make a defense within a prescribed time limit. In order to optimize user experience of our app, we waived the right to make a defense, and immediately adjusted our privacy policies and offered easier cancellation procedures for users to exercise their rights more conveniently in accordance with the relevant personal information protection laws and regulations within such prescribed time limit. In October 2020, we received a notice from a governmental authority to make rectification on our app to avoid collecting certain information and we have passed the examination after rectification.
In November 2021, we received an oral notice from the Beijing branch of CAC requiring us to make rectification on our app to change our keyword censorship mechanism. We have made the rectification as requested. In December 2021, we received a formal notice from the Beijing branch of CAC, stating that certain internet-based information services provided by us violated the relevant provisions under the PRC Cybersecurity Law and we were imposed with a fine of RMB0.5 million. We have paid up such fine and have adjusted our business practices to comply with the PRC Cybersecurity Law and other applicable regulations. We cannot assure you that similar incident will not occur in the future. Any of these incidents may adversely affect our brand and reputation, consume our managerial resources, result in potential liability of us or administrative measures being enforced on us, or otherwise harm our business.
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In addition, regulatory authorities around the world have adopted or are considering a number of legislative and regulatory proposals concerning data protection. These legislative and regulatory proposals, if adopted, and the uncertain interpretations and application thereof could, in addition to the possibility of fines, result in an order requiring that we change our data practices and policies, which could have an adverse effect on our business and results of operations. The European Union General Data Protection Regulation (“GDPR”), which came into effect on May 25, 2018, includes operational requirements for companies that receive or process personal data of residents of the European Economic Area. The GDPR establishes new requirements applicable to the processing of personal data, affords new data protection rights to individuals and imposes penalties for serious data breaches. Individuals also have a right to compensation under the GDPR for financial or non-financial losses. Given our products are sold in Europe, and the resident of the European Economic Area can access our website and our mobile platform and input protected information, we are subject to provisions of the GDPR. In the United States, the Health Insurance Portability and Accountability Act, or HIPAA, governs the privacy and security of health information and require that covered entities, including most health care providers, implement administrative, physical, and technical safeguards to protect the security of individually identifiable health information that is maintained or transmitted electronically. Violations of the HIPAA privacy and security regulations could result in significant civil and criminal penalties. The California Consumer Privacy Act, or CCPA, which took effect in January 2020, also establishes certain transparency rules and creates new data privacy rights for users, including more ability to control how their data is shared with third parties. These laws and regulations are evolving and subject to interpretation. Similarly, there are a number of legislative proposals in the European Union, the United States, at both the federal and state level, as well as other jurisdictions that could impose new obligations or limitations in areas affecting our business. In addition, some countries are considering or have passed legislation implementing data protection requirements or requiring local storage and processing of data or similar requirements that could increase the cost and complexity of delivering our services. Moreover, a growing number of legislative and regulatory bodies have adopted consumer notification requirements in the event of unauthorized access to or acquisition of certain types of personal data. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another, which might become a particular concern as we accelerate our international expansion. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises user data. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us.
We generally comply with industry standards and are subject to the terms of our own privacy policies. Compliance with any additional laws could be expensive, and may place restrictions on the conduct of our business and the manner in which we interact with our customers. For each product we develop, we gather personnel from product team, research and development team, security team and legal team to thoroughly assess the privacy risks related to the product. We review the character, potential and defined sales areas, types of personal data to be collected, related purpose for data collection and other aspects of each product to ensure compliance with applicable laws and regulations, including GDPR and CCPA regulations. For upgraded services and additional functions to be added to established products, we go through the same procedures. In 2021, we obtained the ISO/IEC 27001 information security management system certification. However, we cannot guarantee that our efforts will be effective or sufficient. Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR and the Committee on Foreign Investment in the United States) and regulations can be costly. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us, and the misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against us by governmental entities or others, damage our reputation and credibility and could have a negative impact on revenues and profits.
Any significant cybersecurity incident or disruption of our information technology systems or those of third-party partners could materially damage user relationships and subject us to significant reputational, financial, legal and operation consequences.
We depend on our information technology systems, as well as those of third parties, to develop new products and services, operate our platform, host and manage our services, store data, process transactions, respond to user inquiries, and manage inventory and our supply chain. Any material disruption or slowdown of our systems or those of third parties whom we depend upon, including a disruption or slowdown caused by our failure to successfully manage significant increases in user volume, could cause outages or delays in our services, particularly in the form of interruption of services delivered by our mobile applications, which could harm our brand and adversely affect our operating results. We primarily rely on Amazon Web Services to store our data, except for the data in Russia. Problems with our cloud service providers or the telecommunications network providers with whom they contract could adversely affect the experience of our users. We cannot guarantee that our cloud service providers will provide us with continuously uninterrupted services. Any change in service levels at our cloud servers or any errors, defects, disruptions, or other performance problems with our platform could harm our brand and may damage the data of our users. If changes in technology cause our information systems, or those of third parties whom we depend upon, to become obsolete, or if our or their information systems are inadequate to handle our growth, we could lose users and our business and operating results could be adversely affected.
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We have adopted security policies and measures, including encryption technology, to protect our proprietary data and user information. However, our enterprise platform and information systems may be targets of attacks, such as viruses, malware or phishing attempts by cyber criminals or other wrongdoers seeking to steal our user data for financial gain or to harm our business operations or reputation. The loss, misuse or compromise of such information may result in costly investigations, remediation efforts and notification to affected users. If such content is accessed by unauthorized third parties or deleted inadvertently by us or third parties, our brand and reputation could be adversely affected. Cyber-attacks could also adversely affect our operating results, consume internal resources, and result in litigation or potential liability for us and otherwise harm our business. In addition, according to our cooperation agreement with Xiaomi, both Xiaomi and we have access and can collect and use user data of Xiaomi Wearable Products. Consequently, any leak or abuse of user data by Xiaomi may be perceived by consumers as a result of the compromise of our information security system. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal and administrative obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other user data, could cause our users to lose trust in us and could expose us to legal claims.
A growingSignificant capital and other resources may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply with our privacy policies or privacy-related legal obligations. The resources required may increase over time as the methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer data, could cause our customers to lose trust in us and could expose us to legal claims. Any perception by the public that online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth of our business in general, which may reduce the number of legislativeorders we receive.
Our patents, know-how, trade secrets and regulatory bodies have adopted consumer notification requirements in the event of unauthorized accessother intellectual property rights and proprietary rights are critical to or acquisition of certain types of personal data. Such breach notification laws continue to evolve and may be inconsistent from one jurisdiction to another, which might become a particular concern as we accelerate our international expansion. Complying with these obligations could cause us to incur substantial costs and could increase negative publicity surrounding any incident that compromises user data.success. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us.
Ourobtain, maintain, enforce or protect our patents and other intellectual property rights would materially and proprietary rights may not adequately protect our products, andadversely harm our business, may suffer if it is alleged or determined that our technologies, products, or other aspectscompetitive position, results of our business infringe third partyoperations and financial condition.
We rely on intellectual property or if third parties infringe our rights.
We may fail to own or apply for keyrights such as patents, trademarks, or patents on important products, services, technologies or designs in a timely fashion, or at all, bothcopyrights, and domain names in China and overseas. For example,other foreign jurisdictions to carry out our company namebusiness operations. Given our technological advantages and brand recognition, we may become an attractive target to counterfeiting and intellectual property theft activity. Despite the measures we have taken to safeguard our intellectual property rights, any of our intellectual property rights could be challenged, invalidated, circumvented, infringed or misappropriated. In addition, it is often difficult to register, maintain and enforce intellectual property rights in Chinese characters, “华米”, has been registeredvarious developing countries around the world, such as a trademark by a company unaffiliated to us in certain trademark categories in China. As such, we currently cannot use the “华米” trademark in certain categories of productsStatutory laws and our self-branded productsregulations are sold under the brand name of “Amazfit.” In addition, this company currently manufacturessubject to judicial interpretation and sells productsenforcement and service lines similar to ours under the “华米” trademark. As a result, consumers may not be confused and associate any quality issue on the products and services they provide with us, which will have an adverse impact on our brand image. Furthermore, the “华米” trademark in several other trademark categories—which is contractually owned jointly by Xiaomi and us—is currently registered under the name of Xiaomi alone. Xiaomi is in the process of transferring its title to us pursuantapplied consistently due to the relevant agreement. However, in the event that the transfer process is not completed as planned,lack of clear guidance on statutory interpretation. Accordingly, we willmay not be able to effectively protect our intellectual property rights or to enforce our contractual rights in a number of jurisdictions in which we operate, such as China. Policing any unauthorized use “华米” asof our intellectual property is difficult and costly, and the steps we take may be inadequate to prevent the infringement or misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a trademarkdiversion of our managerial and financial resources, and could put our intellectual property at risk of being invalidated or narrowed in these additional categories as well.scope. We have registered “Amazfit” as our trademarks in China in several categories and in the U.S., and we are in the process of registering it in additional categories or in combination with logo. There can beprovide no assurance however, that we will be able to register the trademark of “Amazfit”prevail in all of the categories or formats assuch litigation, and even if we desire. The pending applications for registration of “Amazfit” and related logos were initially unsuccessful, challenged or rejected in Spain, Indonesia, the Philippines, Paraguay, Pakistan, India, Mexico, Japan and Peru for reasons including butdo prevail, we may not limited to third parties having already registered similar marks in those countries. Furthermore, the pending
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applications for the registration of “Huami” were initially unsuccessful, challenged or rejected in Turkey, Mexico, Saudi Arabia, the European Union, India, Australia, Columbia, Japan and Peru. Accordingly, it may be possible, in those foreign countries where the status of various applications is pending, unclear, challenged or rejected, forobtain a third-party owner of the national trademark registration for a similar mark to prohibit the manufacture, sale or exportation of our products in or from that country. Failure to register our trademarks or purchase or license the right to use our trademarks or logos in these countries could limit our ability to obtain supplies from, or manufacture in, less costly markets or penetrate new markets should our business plan include selling our products in those countries.meaningful recovery.
Various other issues may arise with respect to our intellectual property portfolio. We and Xiaomi are co-owners of certain patents, certain other intellectual properties and user data related to Xiaomi Wearable Products. There is a possibility that Xiaomi may use these intellectual properties and user data to develop and manufacture competing products on its own or engage other companies leveraging such resources to do so. In addition, we may not have sufficient intellectual property rights in all countries and regions where unauthorized third-party copying or use of our proprietary technology may occur and the scope of our intellectual property might be more limited in certain countries and regions. Our existing and future patents may not be sufficient to protect our products, services, technologies or designs and/or may not prevent others from developing competing products, services, technologies or designs. We cannot predict the validity and enforceability of our patents and other intellectual property with certainty.
Litigation27
We may not be necessaryable to protect our intellectual property rights throughout the world.
Filing, prosecuting and defending patents and other intellectual property on our products and services in all countries throughout the world would be prohibitively expensive. In addition, the laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States, and we may encounter difficulties in protecting and defending such rights in foreign jurisdictions. Consequently, we may not be able to prevent third parties from practicing our intellectual property in all countries outside the United States, or from selling or importing products made using our intellectual property. Competitors may use our technologies in jurisdictions where we have not obtained intellectual property protection to develop their own products and may also export infringing products to territories where we have patent protection, but enforcement is not as strong as that in the United States. These products may compete with our products and our patents or other intellectual property rights may not be effective or sufficient to prevent them from competing.
Many companies have encountered significant problems in protecting and defending intellectual property rights in foreign jurisdictions. The legal systems of many other countries do not favor the enforcement of patents and other intellectual property protection, which could make it difficult for us to stop the infringement of our intellectual property in such countries. Proceedings to enforce our intellectual property rights. Initiating infringement proceedings against third parties can be expensive and time-consuming,rights in foreign jurisdictions could result in substantial cost and divert management’sour efforts and attention from other aspects of our business, concerns.could put our intellectual property at risk of being invalidated or interpreted narrowly and our patent applications at risk of not issuing, and could provoke third parties to assert claims against us. We may not prevail in litigationany lawsuits that we initiate and the damages or other remedies awarded, if any, may not be commercially meaningful. Accordingly, our efforts to enforce our intellectual property against unauthorized use.rights around the world may be inadequate to obtain a significant commercial advantage from the intellectual property that we develop.
Our business may suffer if it is alleged or determined that our technologies, products, or other aspects of our business infringe third party intellectual property or if third parties infringe our rights.
We may fail to own or apply for key trademarks or patents on important products, services, technologies or designs in a timely fashion, or at all, both in China and overseas. We have registered and applied to register trademarks and service marks, including but not limited to “Amazfit”, “ZEPP”, “华米” and “跃我” in China and foreign jurisdictions. We may not be able to adequately protect our trademarks and service marks, and our competitors and others may successfully challenge the validity and/or enforceability of our trademarks and service marks and other intellectual property. Additionally, we may be prohibited from entering into certain new markets due to restrictions surrounding competitors’ trademarks. For example, our company name in Chinese characters, “华米”, has been registered as a trademark by a company unaffiliated to us in certain trademark categories in China. Furthermore, the “华米” trademark in several other trademark categories—which is contractually owned jointly by Xiaomi and us— is currently registered under the name of Xiaomi alone. Xiaomi is in the process of transferring its title to us pursuant to the relevant agreement. However, in the event that the transfer process is not completed as planned, we will not be able to use “华米” as a trademark in these additional categories as well.
It may be possible, in jurisdictions where the status of various applications is pending, unclear, challenged or rejected, for a third-party owner of the national trademark registration for a similar mark to prohibit the manufacture, sale or exportation of our products in or from that country. Failure to register our trademarks or purchase or license the right to use our trademarks or logos in these countries could limit our ability to obtain supplies from, or manufacture in, less costly markets or penetrate new markets should our business plan include selling our products in those countries. Additionally, we may receive from time to time letters alleging infringement of patents, trademarks or other intellectual property rights by us.
If we continue to grow, we may not be able to effectively manage our growth and the increased complexity of our business, which could negatively impact our brand and financial performance.
Since our founding in December 2013, our company has experienced rapid growth. Continued growth of our business requires us to expand our product development, sales and marketing, and distribution functions, to upgrade our management information systems and other processes and technology, and to secure more space for our expanding workforce. Such expansion could increase the strain on our resources, and we could experience serious operating difficulties, including difficulties in hiring, training, and managing an increasing number of employees.
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As we only have a limited history of operating our business at its current scale, it is difficult to evaluate our current business and future prospects, including our ability to plan for and model future growth. Our limited operating experience at this scale, combined with the rapidly evolving nature of the market in which we sell our products and services, substantial uncertainty concerning how these markets may develop, and other economic factors beyond our control, reduces our ability to accurately forecast quarterly or annual revenue. As such, any predictions about our future revenue and expenses may not be as accurate as they would be if we had a longer operating history or operated in a more developed and predictable market. Failure to manage our future growth effectively could have an adverse effect on our business, which, in turn, could have an adverse impact on our operating results and financial condition.
We are subject to a variety of costs and risks due to our continued expansion internationally that may not be successful and could adversely affect our profitability and operating results.
Our products have international versions that are manufactured for sales and distribution in overseas markets. The shipment volume of international versions of our products, as a percentage of our total shipment volume, increased from 12.8%51.6% in 20162019 to 23.8%54.1% in 2017,2020, and further to 44.2%56.3% in 2018.2021. International expansion represents a large opportunity to further grow our business and enhance our competitive position, and is one of our core strategies.
We may enter into new geographic markets where we have limited or no experience in marketing, selling, and localizing and deploying our products. International expansion has required and will continue to require us to invest significant capital and other resources and our efforts may not be successful. International sales and operations may be subject to risks such as:
limited brand recognition (compared with our home market in China);
costs associated with establishing new distribution networks;
foreign consumers’ preferences and customs;
difficulties in staffing and managing foreign operations;
burdens of complying with a wide variety of local laws and regulations, including packaging and labeling;
adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash;
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| limited brand recognition (compared with our home market in China); |
| ● | costs associated with establishing new distribution networks; |
| ● | difficulties in capturing foreign consumers’ preferences and customs; |
| ● | difficulties in staffing and managing foreign operations; |
| ● | costs and difficulties associated with providing after-sales customer services; |
| ● | burdens of complying with a wide variety of local laws and regulations, including packaging and labeling; |
| ● | adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash; |
| ● | political and economic instability; |
| ● | trade restrictions, including sanction-related restrictions; |
| ● | differing employment practices and laws and labor disruptions; |
| ● | the imposition of government controls; |
| ● | lesser degrees of intellectual property protection; |
| ● | tariffs and customs duties and the classifications of our goods by applicable governmental bodies; and |
| ● | a legal system subject to undue influence or corruption. |
trade restrictions, including sanction-related restrictions;
differing employment practices and laws and labor disruptions;
the imposition of government controls;
lesser degrees of intellectual property protection;
tariffs and customs duties and the classifications of our goods by applicable governmental bodies; and
a legal system subject to undue influence or corruption.
The occurrence of any of these risks could negatively affect our international business and consequently our business and operating results. In particular, the conflicts in Ukraine and the imposition of broad economic sanctions on Russia could raise energy prices and disrupt global markets, and may affect the demand for and sales of Xiaomi wearable products and our self-branded products in the affected regions. In addition, the concern over these risks may also prevent us from entering into or releasing certain of our products in certain markets.
Our current international expansion efforts29
We had in the past primarily dependrelied on Xiaomi’s brand recognition and distribution channels in markets outside China. In 2019, we started to explore domestic and international sales and marketing channels for our Amazfit products on our own, and we plan to keep doing so in the foreseeable future. In August 2020, we launched premium smart watches under our own “Zepp” brand. In 2021, we promoted our Amazfit products sold in China as Chinese characters “跃我”, which means “up your game” in Chinese. We have incurred expenses on a variety of different sales and marketing efforts designed to enhance our brand recognition and increase sales of our Amazfit and Zepp products. Our marketing and branding activities may not achieve anticipated results. If we are unablefail to leverage such advantageenhance our marketing approaches and experiment with new marketing methods, or fail to do so in the future, such as in the event that the brand recognition of Xiaomi deteriorates or Xiaomi fails to establish its global distribution network,a cost-effective manner, our expansion efforts will be hindered.
We are exposed to potential liabilities arising from the products we sell, and costs related to defective products could have a material adverse impact on us.
Contractual disputes over warranties of our products can arise in the ordinary course of our business. In extreme situations, we may be exposed to potential personal injury liabilities as a result of the misuse or quality defects of the products we sell. There can be no assurance that we will not experience material product liability losses in the future, or that we will be able to defend such claims at a contained level of cost. We currently do not have productAlthough we purchased products liability insurance and we cannot assure you that we would be able to obtain insurance coverage with sufficient coverage at an acceptable cost in the future. A2021, which covers a wide range of our products, a successful claim brought against us in excess of our available insurance coverage may have a material adverse effect on our business. Although we had insignificant volume of product replacement or product return historically, the cost of product replacements or product returns may be substantial, and we could incur substantial costs in implementing modifications to fix the defects.
In addition, due to the nature of some of our smart wearable devices, some users have had in the past and may in the future experience skin irritations or other biocompatibility issues not uncommon with jewelry or other wearable products that stay in contact with skin for extended periods of time. There have been a limited number of reports from some users of certain of our devices experiencing skin irritations. This negative publicity could harm the sales of our products and also adversely affect our relationships with distributors and retailers that sell our products, including causing them to be reluctant to continue to sell our products. If large numbers of users experience these problems, we could be subject to enforcement actions or the imposition of significant monetary fines or other penalties by regulatory agencies, and face personal injury or class action litigation, any of which could have a material adverse impact on our business, financial condition and operating results.
We also rely on the accuracy of sensors and our algorithms to ensure that our products can offer high measurement accuracy. Additionally, usages of our products in different physical environments or by different types of users may require delicate modification of our sensors and algorithms. There is, however, no assurance that the functionality of sensors from our suppliers or our algorithms can progress as much and as quickly to meet the demand of our users. Although we have not received any significant claims of the inaccuracy of measurements by our products in the past, these claims may occur from time to time. Such claims may further prompt warranty claims, regulatory investigations and litigation. In that case, our brand may suffer from negative publicity, which may then result in loss of consumer confidence and reduction of sales in our products.
Furthermore, levels of warranty claims or estimated costs of warranty claims might materially affect our gross margins and operating results. Any failure to detect, prevent, or fix defects, or an increase in defects could result in a variety of consequences, including a greater number of returns and replacement of products than expected from Xiaomi for Xiaomi Wearable Products, or from end users for our Amazfit and Zepp products. This will lead to increases in warranty costs, regulatory proceedings and product recalls, which could harm not only our revenue and operating results.results, but also our brand name. We currently offer a standard product warranty that the product will operate under normal use. For products that are sold to Xiaomi pursuant to our business cooperation agreement with Xiaomi, weWe offer an 18-month warranty which includes a six-monthproduct warranty to Xiaomi and an additional 12-month warranty to end-users.distributors of our self-branded products. For products sold directly to end users, the warranty period is 12 monthseither through Xiaomi and distributors of our self-branded products, or directly by us to end users.users, we offer a 12-month warranty. We generally elect to replace the defective products covered under the warranty. At the time revenue is recognized, an estimate of warranty costs in relation to the products sold is recorded as a component of cost of revenues. Therefore, the occurrence of real or perceived quality problems or material defects in our current and future products could expose us to warranty claims in excess of our current reserves. If we experience greater returns or replacement of defective products from Xiaomi or end users, or greater warranty claims, in excess of our reserves, our brand name could suffer, and our business, revenue, gross margin, and operating results could be harmed.
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Our business, financial condition and results of operations have been, and may continue to be, adversely affected by the COVID-19 pandemic.
The ongoing COVID-19 pandemic has restricted general commercial activities in affected regions and resulted in reduced business volume. We witnessed a decrease in demand than our expectation for smart wearable products, both in China and overseas, which negatively affected our sales performance. The pandemic has also caused occasional temporary closures of our offices and limited access by our employees to certain warehouses and logistics centers since early 2020. In addition, we implemented short-term measures for employees to work remotely from home at the beginning of 2020. Since the end of 2020, the spread of COVID-19 was substantially controlled in China, business activities have largely resumed, government emergency measures have been significantly relaxed, and the general economy is gradually recovering. However, restrictions were re-imposed from time to time thereafter in certain cities to combat sporadic outbreaks, and business activities were negatively affected due to occasional lockdown, such as the lockdown in Shenzhen, Shanghai and other cities in the first and second quarters in 2022. To the extent we have service centers, sales channels or manufacturing facilities in these locations, we took a series of measures in response to the outbreak, including, among others, remote working arrangement for our employees. As a result, we are susceptible to factors adversely affecting one or more of these locations as a result of COVID-19. These measures, if taken again in the future, could reduce the capacity and efficiency of our operations, which in turn could negatively affect our results of operations. Due to the uncertainties of the future development of the pandemic in Mainland China, where we operate substantially all of our business, we cannot guarantee that such disruption will not occur again in the future.
The global spread of COVID-19 pandemic in a significant number of countries around the world has resulted in, and may intensify, global economic distress, and the extent to which it may affect our financial condition, results of operations, and cash flows will depend on future developments, which are highly uncertain and cannot be predicted. The worldwide pandemic has not only adversely affected our logistic network, delivery time and sales performance overseas, but also led to components and raw materials shortages as we source those from south east Asia, Europe and other areas around the world. In particular, delays in the production of certain parts continued to affect the inventory availability for some of our new products throughout 2021. Furthermore, some of the companies we have invested in have suffered from the temporary closure of offices and facilities and the downturn of the macroeconomy resulted from the COVID-19 pandemic. Consequently, we may not receive investment returns as expected, and may lose part or all of our investment in these companies.
The duration of such business disruption, the extent of reduced sales and financial impact cannot be reasonably estimated at this time. The COVID-19 pandemic, including the COVID Delta and Omicron and other future variants may negatively affect our financial results for the fiscal year of 2022, maybe even beyond. The extent to which this pandemic impacts our results will depend on future developments, both in China and globally, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of this pandemic and the actions to contain this pandemic or treat its impact, among others.
An occurrence of a widespread health epidemic or other outbreaks could materially and adversely affect our business, financial condition and results of operations.
In addition to the impact of COVID-19, our business could be adversely affected by the effects of epidemics, such as the Influenza A virus subtype H1N1, or the H1N1 virus, Severe Acute Respiratory Syndrome, or SARS, avian influenza or other epidemics or outbreaks on the economic and business climate. A prolonged outbreak of any of these illnesses or other adverse public health developments in China or elsewhere in the world could have a material adverse effect on our business operations. Such outbreaks could significantly impact the online and offline retail industry and cause a temporary closure of the facilities we use for our operations. Such impact or closures would severely disrupt our operations and adversely affect our business, financial condition and results of operations. Our operations could be disrupted if any of our employees or employees of our partners were suspected of having the COVID-19, the H1N1 virus, SARS or avian influenza, since this could require us or our partners to quarantine some or all of such employees or disinfect the facilities used for our operations and may deter our customers or potential customers from purchasing or accepting our products. In addition, our business, financial condition and results of operations could be adversely affected to the extent that an outbreak harms the global or Chinese economy in general, such as wars, acts of terrorism, snowstorms, earthquakes, fire, floods, environmental accidents, power shortage or communication interruptions.
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We cooperate with a wide range of strategic partners to enable diversified application scenarios, further enhance the performance of our products and expand our sales channels. If we fail to expand or maintain the pool of our strategic partners, the number of application scenarios, the performance of our products and our sales channels may not grow or develop as quickly, or at all, which may reduce the attractiveness of our products. Any underperformance or negative publicity of our strategic partners may also adversely affect our operating results.
It requires resources and contributions from a variety of market players to capitalize on the data and user base that we have accumulated so far. We have been actively seeking strategic cooperation opportunities on this front to create diverse application scenarios of our products. Furthermore, we have been pursuing collaborative relationships with leading wearable hardware companies with advanced know-how in order to develop increasingly sophisticated products, as well as partnership opportunities to expand our sales channels. We anticipate that we will continue to leverage strategic relationships with existing strategic partners to grow our business while pursuing new relationships with additional strategic partners. Pursuing, establishing and maintaining relationships with strategic partners require significant time and resources. If we fail to expand or maintain the pool of our partners, the growth of application scenarios, the development and performance of our products and the expansion of our sales channels may slow down or even wither, which in turn may affect the willingness of our users to purchase our products.
As in any cooperation relationship, the success of our initiatives to extend the application scenarios of and further drive the performance of our products, as well as our sales channels, together with our strategic partners involves many factors beyond our control. Additionally, there can be no assurances that our choices of strategic partners can always deliver satisfactory performance to our users, that our strategic partners would not replace us with any of our competitors, and that our current strategic partners would not leave the market. Further, as we associate ourselves with these strategic partners in providing services, any negative publicity on them may also have adverse impact on our own reputation.
Our future success depends on the continuing efforts of our key employees, including our founder Mr. Wang Huang, and on our ability to attract and retain highly skilled personnel and senior management.
Our future success depends, in part, on our ability to continue to attract and retain highly skilled personnel. In particular, we are highly dependent on the contributions of our founder Mr. Wang Huang, as well as other members of our senior management team. The loss of any key personnel could be disruptive to our operations and research and development activities, reduce our employee retention and revenue, and impair our ability to compete.
Certain director may have conflicts of interest.
One of our directorsOur director, Mr. De Liu, is also a co-founder and a senior vice president of Xiaomi. Mr. Wang Huang, the chairman of our board of directors and our chief executive officer, also serves as the chairman of the board of directors of Jiangsu Yitong High-tech Co., Ltd., or Jiangsu Yitong, an affiliate of our company. Our director, Ms. Yunfen Lu, also serves as a director of Jiangsu Yitong. Such association may give rise to potential conflicts of interest, especially with regarding to our business cooperation with Xiaomi.Xiaomi and Jiangsu Yitong. Directors of our company are required by law to act honestly and in good faith with a view to the best of our interests and to disclose any interest that they may have in any of our projects or opportunities. In addition, we have adopted a code of ethics and an audit committee charter. The code of ethics provides that an interested director needs to refrain from participating in any discussion among senior officers of our company relating to an interested business and may not be involved in any proposed transaction with such interested business. Furthermore, the audit committee charter provides that most related party transactions must be pre-approved by the audit committee, a majority of which consists of independent directors. Our audit committee charter, however, exempts the pre-approval requirement for related party transactions that are immaterial to us or not unusual by nature. In the event of such transactions with Xiaomi or Jiangsu Yitong, Mr. Liu and Ms. Lu will still be entitled to vote in our board meeting, and we cannot assure you that Mr. Liu’stheir decision will not be impacted by any potential conflict of interest arising from histheir respective relationship with Xiaomi.Xiaomi and Jiangsu Yitong.
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We have granted, and may continue to grant, options and other types of awards under our share incentive plan, which may result in increased share-based compensation expenses.
We adopted a share incentive plan in 2015 and 2018, which we refer to as the 2015 Plan and the 2018 Plan, respectively, in this annual report, for the purpose of granting share-based compensation awards to employees, directors and consultants to incentivize their performance and align their interests with ours. We recognize expenses in our consolidated statement of income in accordance with U.S. GAAP. Under our two share incentive plans, we are authorized to grant options and other types of awards. The maximum aggregate number of shares which may be issued pursuant to all awards under the 2015 Plan and 2018 Plan is 14,328,358 and 19,119,213 Class A ordinary shares. The maximum aggregate number of shares, which may be issued initially pursuant to all awards under the 2018 Plan is 9,559,607 ordinary shares. The number of shares reserved for future issuances under the 2018 Plan will be increased by (i) a number equal to 1.0% of the total number of outstanding shares, or (ii) such number of shares as may be determined by our board of directors, on the first day of each calendar year during the term of the 2018 Plan beginning in 2018.respectively. As of March 31, 2019,February 28, 2022, awards to purchase 13,808,02813,586,319 Class A ordinary shares under the 2015 Plan have been granted and outstanding, excluding awards that were forfeited or cancelled after the relevant grant dates. As of March 31, 2019,February 28, 2022, awards to purchase 7,160,02520,300,122 Class A ordinary shares under the 2018 Plan have been granted and outstanding, excluding awards that were forfeited or cancelled after the relevant grant dates. Some of our outstanding awards set the completion of an initial public offering of our ordinary shares as a performance condition for vesting. As a result, a number of awards have become vested when we completed our initial public offering, and we recorded a significant share-based compensation expense on the completion date of our initial public offering. As of December 31, 2018,2021, our unrecognized share-based compensation expenses amounted to RMB105.4RMB139.7 million (US$15.321.9 million).
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We believe the granting of share-based awards is of significant importance to our ability to attract and retain key personnel and employees, and we will continue to grant share-based compensation to employees in the future. As a result, our expenses associated with share-based compensation may increase, which may have an adverse effect on our results of operations.
Competition for highly skilled personnel is often intense and we may incur significant costs or not successful in attracting, integrating, or retaining qualified personnel to fulfill our current or future needs. We have, from time to time, experienced, and we expect to continue to experience, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. In addition, if any of our senior management or key personnel joins a competitor or forms a competing company, we may lose knowhow, trade secrets, business partners and key personnel. Furthermore, perspective candidates and existing employees often consider the value of the equity awards they receive in connection with their employment. Thus, our ability to attract or retain highly skilled employees may be adversely affected by declines in the perceived value of our equity or equity awards. Furthermore, there are no assurances that the number of shares reserved for issuance under our share incentive plans will be sufficient to grant equity awards adequate to recruit new employees and to compensate existing employees.
Higher labor costs and inflation may adversely affect our business and our profitability.
Labor costs in China have risen in recent years as a result of the enactment of new labor laws and social development. Given our contract manufacturers are currently all located in China, rising labor costs in China will increase their costs, which in turn may be reflected in the manufacturing fees charged by these contract manufacturers to us.
In addition, we have witnessed growing inflation rates in many areas of the world, and particularly in Asia where we procure most of our raw materials, which adversely affects us and our suppliers alike.
The rising costs as a result of higher labor cost of our contract manufacturers and increasing raw material price, on the other hand, cannot be easily passed to end consumers in the form of higher retail sale prices due to severe competition in the smart wearable device market. Our profitability therefore may be adversely affected if labor cost and inflation continue to rise in the future.
Our business is subject to seasonal fluctuations and if our sales fall below our forecasts, our overall financial conditions and results of operations could be adversely affected.
Our business is subject to seasonal fluctuations, which may be caused by product launches and various promotional events hosted by our distributors. Our revenues have been higher in the fourth quarter each year primarily as a result of (i) holiday sales for Black Friday and Cyber Monday and during the lead-up to Christmas and (ii) promotional events organized by TMall and other e-commerce platforms. Accordingly, any shortfall in expected fourth quarter revenue would adversely affect our annual operating results.
Furthermore, our rapid growth may obscure the extent to which seasonality trends have affected our business. Accordingly, yearly or quarterly comparisons of our operating results may not be useful and our results in any particular period will not necessarily be indicative of the results to be expected for any future period.
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You should not rely on our Mobile App MAU or number of registered users metrics as indicators of future retention of users, continual user engagement or other revenue opportunities.
Our MAU metric tracks the number of the accounts that have been logged into on our mobile apps during a given calendar month. Our number of registered users metric tracks the number of users who have completed the registration process on our mobile apps as of a specified date. They do not fully capture the frequency and duration that users engage with our devices as users may not sign in or stay logged in on our mobile apps when using our devices. The Mobile App MAU and the number of registered users metrics only represent the potential size or growth of our user community and are not necessarily indicators of the actual size and growth of our user community. In addition, most of the services provided on our mobile apps currently are offered to users for free once they have purchased our smart wearable devices. Therefore, our Mobile App MAU metric should not be relied upon as an indicator of the level of retention of individual users in the future, continual user engagement or the potential size and growth of our user community, all of which are indicators for other potential revenue opportunities.
We may engage in acquisition and investment activities, which could require significant management attention, disrupt our business, dilute shareholder value, and adversely affect our operating results.
As part of our business strategy, we have completed acquisitions in the past and may continue to acquire or make investments in other companies, products, or technologies to enhance the features and functionality of our devices, and accelerate the expansion of our platform and network of strategic partners. We may not be able to find suitable acquisition or investment candidates and we may not be able to complete acquisition and investment on favorable terms, if at all. If we do complete acquisition and investment as we expect, we may not ultimately strengthen our competitive position or achieve our goals; and any acquisition and investment we complete could be viewed negatively by users or investors. In addition, if we fail to successfully integrate such acquisitions or the technologies associated with such acquisitions, into our company, the revenue and operating results of the combined company could be adversely affected, we may not realize the expected benefits from the transaction relative to the consideration paid, and our business, financial condition, and results of operations may be adversely affected. To be successful, the integration process requires us to achieve the benefits of combining the companies, including generating operating efficiencies and synergies and eliminating or reducing redundant costs. This integration process involves inherent uncertainties, and we cannot assure you that the anticipated benefits of these acquisitions will be fully realized without incurring unanticipated costs or diverting management’s attention from our core operations.
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Acquisitions and investments may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to additional liabilities, increase our expenses, and adversely impact our business, financial condition, operating results, and cash flows. In particular, our acquisitions and investments may be subject to relevant laws, regulations and governmental approvals, potentially strict scrutiny by foreign governments, both retrospectively and prospectively. For example, in June 2020, we acquired PAI Health, a heart health software company incorporated in Canada. However, we cannot guarantee that the Canadian national security inspection or similar events in the future will not negatively affect our business and results of operations. Failure to obtain necessary governmental approvals or to comply with applicable laws and regulations in the jurisdictions where we or the companies we invest in or acquire operate could subject us to administrative liabilities, which will materially and adversely affect our results of operations and financial performance. In addition, certain early-stage enterprises that we have invested in may require a significant amount of cash to develop their businesses and maintain their daily operations, and therefore are susceptible to market risks. Certain enterprises we invested in that subsequently became public companies have been, and likely will continue to be, subject to severe volatility in stock prices, and the value of our investment may in turn be negatively affected. We may not accurately forecast the financial impact of an acquisition or investment transaction, including accounting charges. We would have to pay cash, incur debt, or issue equity securities to pay for any such acquisition and investment, each of which may affect our financial condition or the value of our capital stock and could result in dilution to our shareholders. We had RMB259.4RMB1,571.9 million (US$37.7246.7 million) of short-term and long-term investments as of December 31, 2018.2021.
Furthermore, our financial results could be adversely affected by our investments or acquisitions. The investments and acquired assets or businesses may not generate the financial results we expect. They could result in the occurrence of significant investments and goodwill impairment charges, and amortization expenses for other intangible assets. Most of our investee companies are in their early stages and may not be able to achieve profitability or generate positive operating cash flows in the near future. A partial or complete loss of our investments in these investee companies is possible. For example, we acquired 29.99% of the total outstanding shares of Jiangsu Yitong through one of our subsidiaries in China. We adopted the equity method and consolidated the income or loss of Jiangsu Yitong, which may affect our net income. If the stock price of Jiangsu Yitong decreases significantly for an extended period, the valuation of this investment may be adjusted and we may need to recognize an impairment loss.
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Additionally, we may receive indications of interest from other parties interested in acquiring some or all of our business. The time required to evaluate such indications of interest could require significant attention from management, disrupt the ordinary functioning of our business, and adversely affect our operating results.
An economic downturn or economic uncertainty may adversely affect consumer discretionary spending and demand for our products and services.
Our products and services may be considered discretionary items for consumers. Factors affecting the level of consumer spending for such discretionary items include general economic conditions, and other factors, such as consumer confidence in future economic conditions, fears of recession, the availability and cost of consumer credit, levels of unemployment, and tax rates. As global economic uncertainty remains, trends in consumer discretionary spending also remain unpredictable and subject to reductions. Unfavorable economic conditions may lead consumers to delay or reduce purchases of our products and services and consumer demand for our products and services may not grow as we expect. Our sensitivity to economic cycles and any related fluctuation in consumer demand for our products and services may have an adverse effect on our operating results and financial condition.
In addition,COVID-19 had a severe and negative impact on the Chinese and the global economy starting from 2020. Whether this will lead to a prolonged downturn in the economy is still unknown. Even before the outbreak of COVID-19, the global macroeconomic environment iswas facing numerous challenges. The growth rate of the Chinese economy had gradually slowed since 2010, and it was further affected by the impact of COVID-19. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China. There have been concerns over unrestChina, even before 2020. Unrest, terrorist threats and terrorist threatsthe potential for war in the Middle East Europe and Africa and overelsewhere may increase market volatility across the conflicts involving Ukraine, Syria and North Korea.globe. There have also been concerns onabout the relationship amongbetween China and other countries, including the surrounding Asian countries, which may result in or intensify potential conflicts in relation to territorial disputes, andpotentially have economic effects. In particular, there is significant uncertainty about the possibility of a trade warfuture relationship between the United States and China with respect to trade policies, treaties, government regulations and tariffs. Economic conditions in China are sensitive to global economic conditions, as well as changes in domestic economic and political policies and the expected or perceived overall economic growth rate in China. In addition, the U.K. held a referendum on June 23, 2016 on its membershipAny severe or prolonged slowdown in the E.U., in which a majority of voters in the U.K. voted to exit the E.U. (commonly referred to as “Brexit”). The U.K.’s departure schedule from the E.U. remains uncertain. Brexit couldglobal or Chinese economy may materially and adversely affect Europeanour business, results of operations and worldwide economic and market conditions and could contribute to instability in global financial and foreign exchange markets. It is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic conditions in the long term.condition.
We are subject to governmental economic sanctions laws that could subject us to liability and impair our ability to compete in international markets.
Exports of our products must be made in compliance with various economic and trade sanctions laws in different jurisdictions. For example, U.S. economic sanctions prohibit the provision of products and services to countries, governments, and persons targeted by U.S. sanctions. Even though we take precautions to prevent our products from being provided to the targets of U.S. sanctions, our products, including our firmware updates, could be provided to those targets through independent distributors despite such precautions. Any such provision could have negative consequences, including government investigations, penalties and reputational harm. We could be subject to future enforcement action with respect to compliance with governmental economic sanctions laws, which could result in penalties and costs and consequentially have a material effect on our business and operating results.
Any significant cybersecurity incident or disruption of our information technology systems or those of third-party partners could materially damage user relationships Changes in U.S. and subject usinternational trade policies, particularly with regard to significant reputational, financial, legal and operation consequences.
We depend on our information technology systems, as well as those of third parties, to develop new products and services, operate our platform, host and manage our services, store data, process transactions, respond to user inquiries, and manage inventory and our supply chain. Any material disruption or slowdown of our systems or those of third parties whom we depend upon, including a disruption or slowdown caused by our failure to successfully manage significant increases in user volume, could cause outages or delays in our services, particularly in the form of interruption of services delivered by our mobile applications, which could harm our brand andChina, may adversely affect our operating results. We rely on cloud servers maintained by cloud service providers to store our data, and the majority of the data we collected are hosted at
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Xiaomi’s cloud servers. Problems with our cloud service providers or the telecommunications network providers with whom they contract could adversely affect the experience of our users. Our cloud service providers could decide to cease providing us services without adequate notice. Any change in service levels at our cloud servers or any errors, defects, disruptions, or other performance problems with our platform could harm our brand and may damage the data of our users. If changes in technology cause our information systems, or those of third parties whom we depend upon, to become obsolete, or if our or their information systems are inadequate to handle our growth, we could lose users andimpact our business and operating results couldresults.
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The U.S. government has made statements and taken certain actions that may lead to potential changes to U.S. and international trade policies towards China. While the “Phase One” agreement was signed between the United States and China on trade matters, it remains unclear what additional actions, if any, will be adversely affected.
We have adopted security policiestaken by the U.S. or other governments with respect to international trade, tax policy related to international commerce, or other trade matters. The situation is further complicated by the political tensions between the United States and measures, including encryption technology, to protect our proprietary dataChina that escalated during the COVID-19 pandemic and user information. However, advances in technology, the expertise of hackers, new discoveries in the field of cryptography or other events or developments could result in a compromise or breachwake of the technologyPRC National People’s Congress’ decision on Hong Kong national security legislation, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the central government of the PRC and the executive orders issued by U.S. President in August 2020 that we use to protect confidential information. Weprohibit certain transactions with certain China-based companies and their respective subsidiaries. Rising trade and political tensions could reduce levels of trades, investments, technological exchanges and other economic activities between China and other countries, which would have an adverse effect on global economic conditions, the stability of global financial markets, and international trade policies.
Any unfavorable government policies on international trade, such as capital controls or tariffs, may not be able to prevent third parties, especially hackers or other individuals or entities engaging in similar activities, from illegally obtaining such confidential or private information we hold by usingaffect the demand for our products and mobile apps. Such individualsservices, impact the competitive position of our products or entities obtaining our users’ confidential prevent us from being able to sell products in certain countries. If any new tariffs, legislation and/or private information may further engageregulations are implemented, or if existing trade agreements are renegotiated or, in various other illegal activities usingparticular, if the U.S. government takes retaliatory trade actions due to the recent U.S.-China trade tension, such information. Any negative publicity on the safety or privacy protection mechanisms and policies, and any claims asserted against us or fines imposed upon us as a result of actual or perceived failures,changes could have a material andan adverse effect on our public image, reputation,business, financial condition and results of operations.
Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the internet and mobile platforms are under increased public scrutiny. As smart wearable and AI technologies continue to evolve, we believe that increased regulation by the PRC government of data privacy on the internet is likely. We may become subject to new laws and regulations applying to the collection, processing or use of personal or user information that could affect how we store, process and share data with our users and partners. For example, the General Administration of Quality Supervision, Inspection and Quarantine and Standardization Administration jointly issued the Standard of Information Security Technology—Personal Information Security Specification, which has come into effect in May 2018. Pursuant to this new standard, personal data controllers, i.e., entities or persons who are authorized to determine the purposes and methods for using and processing personal information, should collect information in accordance with the principles of legality and minimization and should also obtain a consent from the information provider. In addition, we may need to comply with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the United States, Europe and elsewhere. For example, the European Union adopted the General Data Protection Regulation, or the GDPR, which became effective on May 25, 2018. The GDPR imposes additional obligations on companies regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored. In addition, in the United States, the Health Insurance Portability and Accountability Act, or HIPAA, governs the privacy and security of health information and require that covered entities, including most health care providers, implement administrative, physical, and technical safeguards to protect the security of individually identifiable health information that is maintained or transmitted electronically. Violations of the HIPAA privacy and security regulations could result in significant civil and criminal penalties. Compliance with existing, proposed and recently enacted laws (including implementation of the privacy and process enhancements called for under GDPR) and regulations can be costly; any failure to comply with these regulatory standards could subject us to legal and reputational risks.
We generally comply with industry standards and are subject to the terms of our own privacy policies. Compliance with any additional laws could be expensive, and may place restrictions on the conduct of our business and the manner in which we interact with our customers. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us, and the misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against us by governmental entities or others, damage our reputation and credibility and could have a negative impact on revenues and profits.
Significant capital and other resources may be required to protect against information security breaches or to alleviate problems caused by such breaches or to comply with our privacy policies or privacy-related legal obligations. The resources required may increase over time as the methods used by hackers and others engaged in online criminal activities are increasingly sophisticated and constantly evolving. Any failure or perceived failure by us to prevent information security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the unauthorized release or transfer of personally identifiable information or other customer data, could cause our customers to lose trust in us and could expose us to legal claims. Any perception by the public that online transactions or the privacy of user information are becoming increasingly unsafe or vulnerable to attacks could inhibit the growth of our business in general, which may reduce the number of orders we receive.
Our use of open source software could negatively affect our ability to sell our products and subject us to possible litigation.
Some of the technologies we use incorporate open source software, such as Zepp OS, and we may incorporate other open source software in the future. Such open source software is generally licensed by its authors or other third parties under open source licenses. These licenses may subject us to certain unfavorable conditions, including requirements that we offer our products and services that incorporate the open source software for no cost, that we make publicly available the source code for any modifications we made or derivative works we created based upon, incorporating, or using the open source software, or that we license such modifications or derivative works under the terms of the particular open source license. Additionally, if a third-party software provider has incorporated open source software into the software that we license from such provider, we could be required to disclose or provide at no cost any of our source code that incorporates or is a modification of such licensed software. If the author or other third party distributor of the open source software that we use or license were to allege that we had not complied with the conditions of the applicable license, we could be required to incur significant legal expenses defending against such allegations and could be subject to significant damages and enjoined from the sale of our products and services that contained the open source software. Any of the foregoing could disrupt the distribution and sale of our products and services and harm our business.
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We do not maintain insurance coverage which could expose usbe exposed to significant costs and business disruption.disruption resulted from product liability claims.
We do not maintainAlthough we purchased products liability insurance coverage forin 2021, which covers a wide range of our products, and business operation. Aa successful liability claim against us due to injuries suffered by our users in excess of our available insurance coverage could materially and adversely affect our financial conditions, results of operations and reputation. In addition, we do not have any business disruption insurance. Any business disruption event could result in substantial cost to us and diversion of our resources.
If we fail to implement and maintain an effective system of internal controls, we may be unable to accurately or timely report our results of operations or prevent fraud, and investor confidence and the market price of our ADSs may be materially and adversely affected.
We are subject to the reporting obligations under the U.S. securities laws. The Securities and Exchange Commission, or SEC, as required under Section 404 of the Sarbanes-Oxley Act of 2002, has adopted rules requiring a public company to include a report of management on the effectiveness of such company’s internal control over financial reporting in its annual report on Form 20-F. In addition, once we cease to be an “emerging growth company,” as such term is defined in the Jumpstart Our Business Startups Act of 2012 (as amended by the Fixing America’s Surface Transportation Act of 2015), or the JOBS Act, an independent registered public accounting firm for a public company must issue an attestation report on the effectiveness of our internal control over financial reporting.
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Our management has concluded that our consolidatedinternal control over financial statements for the fiscal year endedreporting was effective as of December 31, 2017, we2021. We will endeavor to maintain an effective internal control system, but any failure may cause our management and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting as well as other control deficiencies, in accordance with the standards established by the PCAOB. As defined in the U.S. Public Company Accounting Oversight Board Auditing Standard, a “material weakness” is a deficiency, or a combination of deficiencies, in internal cover over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified related to (i) our lack of accounting personnel with appropriate knowledge of U.S. GAAP and (ii) our lack of comprehensive accounting policies and procedures manual in accordance with U.S. GAAP. We have taken actions to remediate those material weaknesses in 2018, including hiring personnel with appropriate knowledge of U.S. GAAP and completing a comprehensive accounting policies and procedures manual in accordance with U.S. GAAP.
We and our independent registered public accounting firm, in the course of auditing our consolidated financial statements for the year ended December 31, 2018, identified one material weakness. The material weakness identified related to lack of adequate supervisory review over the appropriate accounting treatment of complex transactions (including some of our equity transactions consummated prior to the initial public offering of our ADSs that were treated as a deemed dividend) to ensure that such transactions were in compliance with U.S. GAAP. This identified material weakness impacted our interim reporting during 2018 and could affect our ability to accurately and timely report our financial results in accordance with U.S. GAAP and detect or prevent material misstatements of our annual or interim financial statements on a timely basis prospectively. As a result of the identification of this material weakness, we have been taking measures to remedy this control deficiency. However, we can give no assurance that the implementation of these measures will be sufficient to eliminate this material weakness or any other material weakness or significant deficiency in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal controls over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, which may result in volatility in and a decline in the market price of the ADSs.
During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting at a reasonable assurance level in accordance with Section 404. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting its own independent testing, may issue a report that is qualified if it is not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interpretsfuture. This could in turn result in the relevant requirements differently from us.
If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatementsloss of investor confidence in the reliability of our financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline innegatively impact the trading price of our ADSs. Additionally, ineffective internal control over financial reporting couldFurthermore, we have incurred and may need to incur additional costs and use additional management and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other requirements going forward.
Increasing focus with respect to environmental, social and governance matters may impose additional costs on us or expose us to increased risk of fraudadditional risks. Failure to adapt to or misuse of corporate assetscomply with the evolving expectations and subject us to potential delistingstandards on environmental, social and governance matters from investors and the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.
Shutdowns of the U.S. federalPRC government could materially impair our business and financial condition.
Development of our product candidates and/or regulatory approval may be delayed for reasons beyond our control. For example, over the last several years the U.S. government has shut down several times and certain regulatory agencies, such as the Securities and Exchange Commission, or SEC, have had to furlough critical SEC and other government employees and stop critical activities. In our operations as a public company, future government shutdowns could impact our ability to access the public markets, such as through delaying the declaration of effectiveness of registration statements, and obtain necessary capital in order to properly capitalize and continue our operations.
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Changes in U.S. and international trade policies, particularly with regard to China, may adversely impact our business and operating results.
The U.S. government has recently made statements and taken certain actions that may lead to potential changes to U.S. and international trade policies, including imposing several rounds of tariffs affecting certain products manufactured in China. It is unknown whether and to what extent new tariffs (or other new laws or regulations) will be adopted, or the effect that any such actions would have on us or our industry and customers. While cross-border business between China and the U.S. may not be an area of our focus, any unfavorable government policies on international trade, such as capital controls or tariffs, may affect the demand for our products and services, impact the competitive position of our products or prevent us from being able to sell products in certain countries. If any new tariffs, legislation and/or regulations are implemented, or if existing trade agreements are renegotiated or, in particular, if the U.S. government takes retaliatory trade actions due to the recent U.S.-China trade tension, such changes could have an adverse effect on our business, financial condition and results of operations.operation.
Recent disruptionsThe PRC government and public advocacy groups have been increasingly focused on environment, social and governance (“ESG”) issues in the financial markets and economic conditions could affect our ability to raise capital.
In recent years, making our business more sensitive to ESG issues and changes in governmental policies and laws and regulations associated with environment protection and other ESG-related matters. Investor advocacy groups, certain institutional investors, investment funds, and other influential investors are also increasingly focused on ESG practices and in recent years have placed increasing importance on the United Statesimplications and global economies suffered dramatic downturnssocial cost of their investments. Regardless of the industry, increased focus from investors and the PRC government on ESG and similar matters may hinder access to capital, as theinvestors may decide to reallocate capital or to not commit capital as a result of their assessment of a deterioration incompany’s ESG practices. Any ESG concern or issue could increase our regulatory compliance costs. If we do not adapt to or comply with the credit marketsevolving expectations and related financial crisis as well as a variety of other factors including, among other things, extreme volatility in security prices, severely diminished liquiditystandards on ESG matters from investors and credit availability, ratings downgrades of certain investments and declining valuations of others. The United States and certain foreign governmentsthe PRC government or are perceived to have taken unprecedented actions in an attempt to address and rectify these extreme market and economic conditions by providing liquidity and stabilitynot responded appropriately to the growing concern for ESG issues, regardless of whether there is a legal requirement to do so, we may suffer from reputational damage and the business, financial markets. Ifcondition, and the actions taken by these governments are not successful, the returnprice of adverse economic conditions may cause a significant adverse impact on our ability to raise capital, if needed, on a timely basisADSs could be materially and on acceptable terms or at all.adversely effected.
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Risks Related to Our Corporate Structure
If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
Our WFOE has entered into a series of contractual arrangements with our VIEs and their respective shareholders, respectively, which enable us to (i) exercise effective control over our VIEs, (ii) receive substantially all of the economic benefits of our VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in our VIEs when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIEs and hence consolidate their financial results into our consolidated financial statements under U.S. GAAP. See “Item“Item 4. Information on the Company—C. Organizational Structure”Structure” for further details. We conduct our operations in China through (i) our PRC subsidiaries and (ii) our VIEs with which we maintained these contractual arrangements and their subsidiaries in China. Investors in our ADSs thus are not purchasing equity interest in our VIEs in China but instead are purchasing equity interest in a Cayman Islands holding company with no equity ownership in our VIEs.
In the opinion of Zhong Lun Law Firm, our PRC legal counsel, (i) the ownership structures of our VIEs in China and our WFOE comply with all existing PRC laws and regulations; and (ii) the contractual arrangements between our WFOE, our VIEs and their respective shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect. However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. Our holding company in the Cayman Islands, our VIEs and investments in our Company face uncertainty about potential future actions by the PRC government that could affect the enforceability of the contractual arrangements with VIEs and, consequently, the business, financial condition, and results of operations of our VIEs and our Company as a group. In addition, our ADSs may decline in value or become worthless if we are unable to assert our contractual control rights over the assets of our VIEs which contributed to 83.5% of our revenues in 2021. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of our VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures, including:
| ● | discontinuing or placing restrictions or onerous conditions on our operations through any transactions between our WFOE and our VIEs; |
| ● | imposing fines, confiscating the income from our WFOE or our VIEs, or imposing other requirements with which we or our VIEs may not be able to comply; |
| ● | requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIEs and deregistering the equity pledges of our VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIEs; or |
| ● | restricting or prohibiting our use of the proceeds of our initial public offering and our ADS offering in April 2019 to finance our business and operations in China. |
discontinuing or placing restrictions or onerous conditions on our operations through any transactions between our WFOE and our VIEs;
imposing fines, confiscating the income from our WFOE or our VIEs, or imposing other requirements with which we or our VIEs may not be able to comply;
requiring us to restructure our ownership structure or operations, including terminating the contractual arrangements with our VIEs and deregistering the equity pledges of our VIEs, which in turn would affect our ability to consolidate, derive economic interests from, or exert effective control over our VIEs; or
restricting or prohibiting our use of the proceeds of our initial public offering to finance our business and operations in China.
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The imposition of any of these penalties would result in a material and adverse effect on our ability to conduct our business. In addition, it is unclear what impact the PRC government actions would have on us and on our ability to consolidate the financial results of our VIEs in our consolidated financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in violation of PRC laws and regulations. If the imposition of any of these government actions causes us to lose our right to direct the activities of our VIEs or our right to receive substantially all the economic benefits and residual returns from our VIEs and we are not able to restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial results of our VIEs in our consolidated financial statements. Either of these results, or any other significant penalties that might be imposed on us in this event, would have a material adverse effect on our financial condition and results of operations.
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We rely on contractual arrangements with our VIEs and their shareholders for a large portion of our business operations, which may not be as effective as direct ownership in providing operational control.
We have relied and expect to continue to rely on contractual arrangements with our VIEs and their shareholders to conduct certain of our key businesses. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs. For example, our VIEs and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests.
If we had direct ownership of our VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our VIEs and their respective shareholders of their obligations under the contracts to exercise control over our VIEs. However, the shareholders of our consolidated VIEs may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the contractual arrangements with our VIEs. If any disputes relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “Item“Item 3. Key Information—D. Risk Factors—Factors—Any failure by our VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.” Therefore, our contractual arrangements with our VIEs may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership would be.
Any failure by our VIEs or their shareholders to perform their obligations under our contractual arrangements with them would have a material and adverse effect on our business.
We refer to the shareholders of each of our VIEs as its nominee shareholders because although they remain the holders of equity interests on record in each of our VIEs, pursuant to the terms of the relevant power of attorney, each such shareholder has irrevocably authorized our WFOE to exercise his, her or its rights as a shareholder of the relevant VIE. However, if our VIEs or their shareholders fail to perform their respective obligations under the contractual arrangements, we may have to incur substantial costs and expend additional resources to enforce such arrangements. We may also have to rely on legal remedies under PRC law, including seeking specific performance or injunctive relief, and claiming damages, which we cannot assure will be effective under PRC law. For example, if the shareholders of our VIEs refuse to transfer their equity interest in our VIEs to us or our designee if we exercise the purchase option pursuant to these contractual arrangements, or if they otherwise act in bad faith toward us, then we may have to take legal actions to compel them to perform their contractual obligations.
All of the agreements under our contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in China. Accordingly, these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.” Meanwhile, there are very few precedents and little formal guidance as to whether contractual arrangements would be judged to form effective control over the relevant VIEs through the contractual arrangements, or how contractual arrangements in the context of a VIEvariable interest entity should be interpreted or enforced underby the PRC law. There remain significant uncertainties regardingcourts. Should legal actions become necessary, we cannot guarantee that the ultimate outcomecourt will rule in favor of such arbitration should legal action become necessary.the enforceability of the variable interest entity contractual arrangements. In addition, under PRC law, rulings by arbitrators are final, parties cannot appeal the arbitration results in courts, and if the losing parties fail to carry out the arbitration awards within a prescribed time limit, the prevailing parties may only enforce the arbitration awards in PRC courts through arbitration award recognition proceedings, which would require additional expenses and delay. In the event we are unable to enforce these contractual arrangements, or if we suffer significant delays or other obstacles in the process of enforcing these contractual arrangements, we may not be able to exert effective control over our VIEs, and our ability to conduct our business may be negatively affected.
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The shareholders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.
The shareholders of our VIEs may have potential conflicts of interest with us. These shareholders may breach, or cause our VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIEs, which would have a material and adverse effect on our ability to effectively control our VIEs and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
Contractual arrangements in relation to our VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC VIEs owe additional taxes, which could negatively affect our financial condition and the value of your investment.
Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of our VIEs in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIEs for PRC tax purposes, which could in turn increase its tax liabilities without reducing our WFOE’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our VIEs’ tax liabilities increase or if it is required to pay late payment fees and other penalties.
We may lose the ability to use and enjoy assets held by our VIEs that are material to the operation of certain portion of our business if our VIEs go bankrupt or become subject to a dissolution or liquidation proceeding.
As part of our contractual arrangements with our VIEs, our VIEs and their subsidiaries hold certain assets that are material to the operation of certain portion of our business, including intellectual property and premise. If our VIEs go bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our VIEs may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If our VIEs undergo a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.
Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law
On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law or the FIL, which will taketook effect on January 1, 2020,and replacereplaced the existingprevious laws regulating foreign investment in China, namely, the PRC Equity Joint Venture Law, the PRC Cooperative Joint Venture Law and the Wholly Foreign-owned Enterprise Law, or Existing FIE Laws, together with their implementation rules and ancillary regulations. The FIL embodies an expected PRC regulatory trend to rationalize its foreign investment regulatory regime in line with prevailing international practice andregulations, or collectively, the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments.Outdated FIE Laws. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Foreign Investment.”
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Table of ContentsAs it is newly adopted,
Meanwhile, the Implementation Rules to the Foreign Investment Law came into effect on January 1, 2020, which clarify and elaborate on the relevant provisions of the Foreign Investment Law. However, uncertainties still exist in relation to interpretation and implementation of the FIL, especially in regard to, including, among other things, the nature of variable interest entities contractual arrangements the promulgation schedule of both the “negative list” under the FIL and specific rules regulating the organization form of foreign-invested enterprises within the five-year transition period. The FIL does not explicitly classify whether variable interest entities that are controlled through contractual arrangements would be deemed as foreign-invested enterprises, but it has a catch-all provision under the definition of “foreign investment” that includes investments made by foreign investors in China through other means as provided by laws, administrative regulations or rules of the State Council, so there is still a possibility for future laws, administrative regulations or provisions of the State Council to stipulate contractual arrangements as a form of foreign investment. Therefore, there can be no assurance that our control over our VIEs through contractual arrangements will not be deemed as foreign investment in the future. In the event that any possible implementing regulations of the FIL, any other future laws, administrative regulations or provisions deem contractual arrangements as a way of foreign investment, or if any of our operations through contractual arrangements is classified in the “restricted” or “prohibited” industry in the future “negative list” under the FIL, our contractual arrangements may be deemed as invalid and illegal, and we may be required to unwind the variable interest entity contractual arrangements and/or dispose of any affected business, any of which may have a material adverse effect on our business operation. Also, if future laws, administrative
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regulations or provisions mandate further actions to be taken with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can complete such actions in a timely manner, or at all. Furthermore, under the FIL, foreign investors and foreign-invested enterprises will be subject to legal liabilities if they fail to report investment information in accordance with the FIL. In addition, the FIL provides that foreign-invested enterprises established according to the existing laws regulating foreign investment may maintain their structure and corporate governance within a five-year transition period, which means that we may be required to adjust the structure and corporate governance of certain of our PRC subsidiaries in such transition period. Failure to take timely and appropriate measures to cope with any of these or similar regulatory compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations.
Risks Related to Doing Business in China
The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States), or the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB. As a result, we and investors in our ADSs are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our ADSs to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
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Our ADSs will be prohibited from trading in the United States under the Holding Foreign Companies Accountable Act, or the HFCAA, in 2024 if the PCAOB is unable to inspect or fully investigate auditors located in China, or in 2023 if proposed changes to the law are enacted. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment.
The Holding Foreign Companies Accountable Act, or the HFCAA, was signed into law on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On December 2, 2021, the SEC adopted final amendments implementing the disclosure and submission requirements of the HFCAA, pursuant to which the SEC will identify an issuer as a “Commission Identified Issuer” if the issuer has filed an annual report containing an audit report issued by a registered public accounting firm that the PCAOB has determined it is unable to inspect or investigate completely, and will then impose a trading prohibition on an issuer after it is identified as a Commission-Identified Issuer for three consecutive years. On December 16, 2021, the PCAOB issued a report to notify the SEC of its determination that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in mainland China and Hong Kong. The PCAOB identified our auditor as one of the registered public accounting firms that the PCAOB is unable to inspect or investigate completely. Therefore, we expect to be identified as a “Commission Identified Issuer” shortly after the filing of this annual report on Form 20-F.
Whether the PCAOB will be able to conduct inspections of our auditor before the issuance of our financial statements on Form 20-F for the year ending December 31, 2023 which is due by April 30, 2024, or at all, is subject to substantial uncertainty and depends on a number of factors out of our, and our auditor’s, control. If our shares and ADSs are prohibited from trading in the United States, there is no certainty that we will be able to list on a non-U.S. exchange or that a market for our shares will develop outside of the United States. Such a prohibition would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting would have a negative impact on the price of our ADSs. Also, such a prohibition would significantly affect our ability to raise capital on terms acceptable to us, or at all, which would have a material adverse impact on our business, financial condition, and prospects.
On June 22, 2021, the U.S. Senate passed a bill which would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two. On February 4, 2022, the U.S. House of Representatives passed a bill which contained, among other things, an identical provision. If this provision is enacted into law and the number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA is reduced from three years to two, then our shares and ADSs could be prohibited from trading in the United States in 2023.
The approval of the CSRC or other PRC government authorities may be required in connection with our offshore offerings under PRC law, and, if required, we cannot predict whether or for how long we will be able to obtain such approval.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC persons or entities to obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear, and our offshore offerings may ultimately require approval of the CSRC. If the CSRC approval is required, it is uncertain whether we can or how long it will take us to obtain the approval and, even if we obtain such CSRC approval, the approval could be rescinded. Any failure to obtain or delay in obtaining the CSRC approval for any of our offshore offerings, or a rescission of such approval if obtained by us, would subject us to sanctions imposed by the CSRC or other PRC regulatory authorities, which could include fines and penalties on our operations in China, restrictions or limitations on our ability to pay dividends outside of China, and other forms of sanctions that may materially and adversely affect our business, financial condition, and results of operations.
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On July 6, 2021, the relevant PRC government authorities issued Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. These opinions emphasized the need to strengthen the administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-listed companies. As these opinions are recently issued, official guidance and related implementation rules have not been issued yet and the interpretation of these opinions remains unclear at this stage. We cannot assure you that any new rules or regulations promulgated in the future will not impose additional requirements on us. If it is determined in the future that approval from the CSRC or other regulatory authorities or other procedures, including the cybersecurity review under the enacted version of the revised Measures for Cybersecurity Review, are required for our offshore offerings, it is uncertain whether we can or how long it will take us to obtain such approval or complete such procedures and any such approval could be rescinded. Any failure to obtain or delay in obtaining such approval or completing such procedures for our offshore offerings, or a rescission of any such approval if obtained by us, would subject us to sanctions by the CSRC or other PRC regulatory authorities for failure to seek CSRC approval or other government authorization for our offshore offerings. These regulatory authorities may impose fines and penalties on our operations in China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from our offshore offerings into China or take other actions that could materially and adversely affect our business, financial condition, results of operations, and prospects, as well as the trading price of our ADSs. The CSRC or other PRC regulatory authorities also may take actions requiring us, or making it advisable for us, to halt our offshore offerings before settlement and delivery of the shares offered. Consequently, if investors engage in market trading or other activities in anticipation of and prior to settlement and delivery, they do so at the risk that settlement and delivery may not occur. In addition, if the CSRC or other regulatory authorities later promulgate new rules or explanations requiring that we obtain their approvals or accomplish the required filing or other regulatory procedures for our prior offshore offerings, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties or negative publicity regarding such approval requirement could materially and adversely affect our business, prospects, financial condition, reputation, and the trading price of our ADSs.
Changes in China’s economic, political or social conditions or government policies could have a material adverse effect on our business and operations.
Substantially all of our assets and operations are located in China. Accordingly, our business, financial condition, results of operations and prospects may be influenced to a significant degree by political, economic and social conditions in China generally. The Chinese economy differs from the economies of most developed countries in many respects, including the level of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. Although the Chinese government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the Chinese government continues to play a significant role in regulating industry development by imposing industrial policies. The Chinese government also exercises significant control over China’s economic growth through allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, and providing preferential treatment to particular industries or companies.
While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy, and the rate of growth has been slowing since 2012. Any adverse changes in economic conditions in China, in the policies of the Chinese government or in the laws and regulations in China could have a material adverse effect on the overall economic growth of China. Such developments could adversely affect our business and operating results, lead to reduction in demand for our services and adversely affect our competitive position. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us. For example, our financial condition and results of operations may be adversely affected by government control over capital investments or changes in tax regulations. In addition, in the past the Chinese government has implemented certain measures, including interest rate adjustment, to control the pace of economic growth. These measures may cause decreased economic activity in China, which may adversely affect our business and operating results.
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Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.
We conduct our business primarily through our PRC subsidiaries and consolidated variable interest entities in China. Our operations in China are governed by PRC laws and regulations. Our PRC subsidiaries are subject to laws and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value. The PRC legal system is evolving rapidly, and the interpretation of many laws, regulations and rules may contain inconsistencies and enforcement of these laws, regulations and rules involves uncertainties.
From time to time, we may have to resort to administrative and court proceedings to enforce our legal rights. Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory provisions and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could materially and adversely affect our business and results of operations.
Furthermore, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all and may have retroactive effect. As a result, we may not be aware of our violation of any of these policies and rules until sometime after the violation. Such unpredictability towards our contractual, property and procedural rights could adversely affect our business and impede our ability to continue our operations.
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In addition, the interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies have created substantial uncertainties regarding the legality of existing and future foreign investments and activities of our business. We cannot assure you that we have obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses or obtain new ones. If the PRC government considers that we were operating without the requisite approvals, licenses or permits or promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses, and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these actions by the PRC government may have a material adverse effect on our business and results of operations.
The PRC government’s significant oversight and discretion over our business operation could result in a material adverse change in our operations and the value of our ADSs.
We conduct our business primarily in China. Our operations in China are governed by PRC laws and regulations. The PRC government has significant oversight and discretion over the conduct of our business, and may intervene or influence our operations. The PRC government has recently published new policies that significantly affected certain industries and we cannot rule out the possibility that it will in the future release regulations or policies that directly or indirectly affect our industry or require us to seek additional permission to continue our operations, which could result in a material adverse change in our operation and/or the value of our ADSs. Therefore, investors of our company and our business face potential uncertainty from actions taken by the PRC government affecting our business.
You may experience difficulties in effecting service of legal process, enforcing foreign judgments or bringing actions in China against us or our management named in this annual report based on foreign laws.
We are a company incorporated under the laws of the Cayman Islands, we conduct substantially all of our operations in China and substantially all of our assets are located in China. In addition, most of our directors and senior executive officers reside within China for a significant portion of the time and most are PRC nationals. As a result, it may be difficult for you to effect service of process upon us or those persons inside mainland China. It may also be difficult for you to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors who reside and whose assets are located outside the United States. In addition, there is uncertainty as to whether the courts of the Cayman Islands or the PRC would recognize or enforce judgments of U.S. courts against us or such persons predicated upon the civil liability provisions of the securities laws of the United States or any state.
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The United States and the Cayman Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of U.S. courts in civil and commercial matters and that there is uncertainty as to whether the courts of the Cayman Islands would (i) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers, predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States, or (ii) entertain original actions brought in the Cayman Islands against us or our directors or officers, predicated upon the securities laws of the United States or any state in the United States. A judgment obtained in any federal or state court in the United States will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (i) is given by a foreign court of competent jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (iii) is final, (iv) is not in respect of taxes, a fine or a penalty, and (v) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the United States courts under the civil liability provisions of the securities laws if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands.
The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.
It may be difficult for overseas regulators to conduct investigation or collect evidence within China.
Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for regulatory investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC, and no organization or individual may provide documents or materials relating to securities business activities to overseas parties arbitrarily without the consent of the competent securities regulatory authority in China. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase the difficulties you face in protecting your interests. See also “—Risks Related to Our ADSs—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.” for risks associated with investing in us as a Cayman Islands company.
We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.
We are a Cayman Islands holding company and we may rely principally on dividends and other distributions on equity from our PRC subsidiaries for our cash requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders for services of any debt we may incur. If any of our PRC subsidiaries incur debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. Under PRC laws and regulations, our PRC subsidiaries, each of which is a wholly foreign-owned enterprise may pay dividends only out of its respective accumulated profits as determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any, to fund a certain statutory reserve fund, until the aggregate amount of such fund reaches 50% of its registered capital. Such reserve funds cannot be distributed to us as dividends. At its discretion, a wholly foreign-owned enterprise may allocate a portion
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Our PRC subsidiaries generate primarily all of their revenue in Renminbi, which is not freely convertible into other currencies. As result, any restriction on currency exchange may limit the ability of our PRC subsidiaries to use their Renminbi revenues to pay dividends to us.
The PRC government may continue to strengthen its capital controls, and more restrictions and substantial vetting process may be put forward by SAFE for cross-border transactions falling under both the current account and the capital account. Any limitation on the ability of our PRC subsidiaries to pay dividends or make other kinds of payments to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
In addition, the Enterprise Income Tax Law and its implementation rules provide that a withholding tax rate of up to 10% will be applicable to dividends payable by Chinese companies to non-PRC-resident enterprises unless otherwise exempted or reduced according to treaties or arrangements between the PRC central government and governments of other countries or regions where the non-PRC-resident enterprises are incorporated.
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PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our initial public offering and our ADS offering in April 2019 to make loans or additional capital contributions to our PRC subsidiaries, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
We are an offshore holding company conducting our operations in China through our PRC subsidiaries and VIEs. We may make loans to our PRC subsidiaries and VIEs subject to the approval or registration from governmental authorities and limitation of amount, or we may make additional capital contributions to our wholly foreign-owned subsidiaries in China. Any loans to our wholly foreign-owned subsidiaries in China, which are treated as foreign-invested enterprises under PRC law, are subject to foreign exchange loan registrations. In addition, SAFE issued the Circular on the Management Concerning the Reform of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or the SAFE Circular No. 19, which took effect on June 1, 2015. Pursuant to the SAFE Circular No. 19, an FIE shall use its capital pursuant to the principle of authenticity and self-use within its business scope. The capital of an FIE shall not be used for the following purposes: (i) directly or indirectly used for payment beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for investment in securities or investments other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations; (iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises). On October 23, 2019, SAFE promulgated the Circular Regarding Further Promotion of the Facilitation of Cross-Border Trade and Investment, or the SAFE Circular No. 28. The SAFE Circular No. 28 allows foreign-invested enterprises whose business scope does not include investment, or non-investment foreign-invested enterprises, to make equity investments in the PRC with their capital funds in accordance with relevant laws and regulations. As the SAFE Circular No. 28 is newly issued and the relevant government authorities have broad discretion in its interpretation, it is unclear whether SAFE will, in actual practice, permit such capital funds to be used for equity investments in the PRC.
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvalsrecord-filing on a timely basis, if at all, with respect to future loans by us to our PRC subsidiaries or VIEs or with respect to future capital contributions by us to our PRC subsidiaries. If we fail to complete such registrations or obtain such approvals,record-filing, our ability to use the proceeds from our initial public offering and our ADS offering in April 2019 and to capitalize or otherwise fund our PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Fluctuations in exchange rates could have a material and adverse effect on our results of operations and the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions in China and by China’s foreign exchange policies. On July 21, 2005, the PRC government changed its decade-old policy of pegging the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the RMB has fluctuated against the U.S. dollar, at times significantly and unpredictably. While appreciating approximately by 7% against the U.S. dollar in 2017, the RMB in 2018 depreciated approximately by 5% against the U.S. dollar. Since October 1, 2016, the RMB has joined the International Monetary Fund (IMF)’s basket of currencies that make up the Special Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen and the British pound. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and there is no guarantee that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future.
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Significant revaluation of the Renminbi may have a material and adverse effect on your investment. For example, to the extent that we need to convert U.S. dollars we receive from our initial public offering and our ADS offering in 2019 into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive from the conversion. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. To date, we have not entered into any hedging transactionsAt the end of 2021, in an effort to reduce our exposure to foreign currency exchange risk.risk, we have entered into several currency hedging arrangements and recorded a gain in RMB2.8 million (US$0.4 million). While we may decide to enter intoconsider the hedging transactions intransaction coverage currently sufficient based on the currency exposure amount and prediction on the future exchange rate, the availability and effectiveness of these hedges may be limited, further hedging options may be limited, and we may not be able to adequately hedge our exposure or at all.exposure. In addition, our currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into a foreign currency.
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Governmental control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and, in certain cases, the remittance of currency out of China. We receive substantially all of our revenues in Renminbi. Under our current corporate structure, our Cayman Islands holding company primarily relies on dividend payments from our PRC subsidiaries to fund any cash and financing requirements we may have. Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval of SAFE by complying with certain procedural requirements. Specifically, under the existing exchange restrictions, without prior approval of SAFE, cash generated from the operations of our PRC subsidiaries in China may be used to pay dividends to our company. However, approval from or registration with appropriate government authorities is required where Renminbi is to be converted into a foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. As a result, we need to obtain SAFE approval to use cash generated from the operations of our PRC subsidiaries and VIEs to pay off their respective debt in a currency other than Renminbi owed to entities outside China, or to make other capital expenditure payments outside China in a currency other than Renminbi. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders of our ADSs.
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Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions.
Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that in some instances the MOFCOM shall be notified in advance of any change-of-control transaction in which a foreign investor acquirestakes control of aan affiliated PRC domestic enterprise or a foreign company with substantial PRC operations, if certain thresholds under the Provisions on Thresholds for Prior Notification of Concentrations of Undertakings, issued by the State Council in 2008, were triggered.enterprise. Moreover, the Anti-Monopoly Law promulgatedrequires, among other things, that the anti-trust governmental authority shall be notified in advance of any concentration of undertakings if certain thresholds are triggered. In addition, the Notices on the Establishment of Security Review System for Mergers and Acquisitions of Domestic Enterprises by the Standing Committee of the NPCForeign Investors, which became effective in 2008 requires that transactions which are deemed concentrations and involve parties with specified turnover thresholds must be cleared by the MOFCOM before they can be completed. In addition, PRC national security review rules which became effective in SeptemberMarch 2011, require acquisitions by foreign investors of PRC companies engaged in military related or certain other industries that are crucial to national security be subject to security review before consummation of any such acquisition. We may pursue potential strategic acquisitions that are complementary to our business and operations. Complying with the requirements of these regulations to complete such transactions could be time-consuming, and any required approval processes, including obtaining approval or clearance from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
Any failure or perceived failure by us to comply with the anti-monopoly and anti-unfair competition laws and regulations may result in governmental investigations or enforcement actions, litigation or claims against us and could have an adverse effect on our business, financial condition and results of operations.
The PRC government has adopted a series of anti-monopoly and anti-unfair competition laws and regulations and has recently enhanced its enforcement of such laws and regulations. The PRC Anti-monopoly Law and the relevant implementing rules (i) require that where concentration of undertakings reaches the filing threshold stipulated by the State Council, a filing must be made with the anti-monopoly authority before the parties implement the concentration, (ii) prohibit a business operator with a dominant market position from abusing such position, such as by selling commodities at unfairly high prices or buying commodities at unfairly low prices, selling products at prices below cost without any justifiable cause, or refusing to trade with a trading party without any justifiable cause, and (iii) prohibit business operators from entering into monopoly agreements, which refer to agreements that eliminate or restrict competition with competing business operators or transaction counterparties, such as by boycotting transactions, fixing or changing the price of commodities, limiting the output of commodities or fixing the price of commodities for resale to third parties, unless the agreements satisfy certain exemptions under the PRC Anti-monopoly Law. Furthermore, in February 2021, the Anti-monopoly Commission of the State Council officially promulgated the Anti-Monopoly Guidelines for the Internet Platform Economy Sector, or the Anti-Monopoly Guidelines. The Anti-Monopoly Guidelines prohibit certain monopolistic acts of internet platforms so as to protect market competition and safeguard the interests of users and undertakings participating in the internet platform economy, including without limitation, prohibiting platforms with a dominant position from abusing their market dominance (such as discriminating against customers in terms of pricing and other transactional conditions using big data and analytics, coercing counterparties into exclusivity arrangements, using technology to block competitors’ interfaces, favorable positioning in search results of goods displays, using bundle services to sell services or products, compulsory collection of unnecessary user data). In addition, the Anti-Monopoly Guidelines also reinforce antitrust merger review for internet platform related transactions to safeguard market competition. As the Anti-Monopoly Guidelines were newly promulgated, it is still uncertain how they will impact on our business, financial condition, results of operations and prospects.
According to the PRC Anti-unfair Competition Law, unfair competition, which refers to the production and operating activities where the operator disrupts the market competition order and damages the legitimate rights and interests of other operators or consumers in violation of the provisions of the PRC Anti-unfair Competition Law, shall be prohibited. Pursuant to the PRC Anti-unfair Competition Law, operators shall abide by the principle of voluntariness, equality, impartiality, integrity and adhere to laws and business ethics during market transactions. Operators in violation of the PRC Anti-unfair Competition Law may be subject to civil, administrative or criminal liabilities depending on the specific circumstances.
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In March 2018, the SAMR was formed as a new governmental agency to take over, among other things, the anti-monopoly enforcement functions from the relevant departments under the MOFCOM, the NDRC, and the former State Administration for Industry and Commerce, respectively. Since its inception, the SAMR has continued to strengthen anti-monopoly enforcement. In December 2018, the SAMR issued the Notice on Anti-monopoly Enforcement Authorization, which grants authorities to its provincial branches to conduct anti-monopoly enforcement within their respective jurisdictions. In September 2020, the SAMR issued Anti-monopoly Compliance Guideline for Operators, which requires operators to establish anti-monopoly compliance management systems to prevent anti-monopoly compliance risks. In particular, the PRC regulators have been increasingly focused on inspection and regulation on potential noncompliance with anti-unfair competition and antimonopoly related laws recently. For example, in April 2021, the SAMR, the Cyberspace Administration of China and the SAT, held an administrative guidance meeting for Internet platform enterprises. During the meeting, it was pointed out that illegal activities including, among others, forcing the implementation of “choose one” among the enterprise and its competitors, abusing dominant market position, “cash burning” to seize the “community group buying” market, making use of big data analysis to the disadvantage of existing customers, etc., shall be prohibited and rectified. In addition, many platforms, including 34 enterprises which attended such administrative guidance meeting as representatives of Internet platform enterprises, are required to conduct a comprehensive self-inspection and make necessary rectification accordingly. The competent administration for market regulation will organize and conduct inspections on the platforms’ rectification results. If the platforms are found to conduct illegal activities including forcing the implementation of “choose one” among them and their competitors, abusing dominant market position, infringing consumers rights and interests, etc., they will be imposed with more severe penalties in accordance with the laws. We have been conducting necessary self-inspection and rectifications in accordance with such guidance and are working on some of the rectification procedures, such as concentration notification for past deals. We cannot guarantee you that we will not be subject to more similar or even stricter rectification requests from the governmental authorities or that we will fully comply with all applicable rules and regulations at all times. As a result of the regulators’ focus on anti-monopoly and anti-unfair competition compliance and enhanced regulation of platform enterprises, our business practice and expansion strategy may be subject to heightened regulatory scrutiny. In order to comply with existing laws and regulations and new laws and regulations that may be enacted in the future, we may need to devote significant resources and efforts, including restructuring affected businesses and adjusting investment activities, which may adversely affect our business operation, growth prospects and reputation. In addition, we cannot assure you that our efforts are sufficient to comply with the all the applicable laws and regulations on anti-monopoly and anti-unfair competition and the authorities’ requirements in all respects. Any anti-monopoly or anti-unfair competition related lawsuit, regulatory investigations or administrative proceedings initiated against us could also result in our being subject to regulatory actions and constraints on our investments and acquisitions, which could include forced termination of any agreements or transactions, required divestitures, limitations on certain pricing and business practices or significant fines. As a result, we may be subject to significant difficulties in operating our current business and pursuing our investment and acquisition strategy.
PRC regulations relating to the establishment of offshore special purpose companies by PRC residents may subject our PRC resident beneficial owners or our PRC subsidiaries to liability or penalties, limit our ability to inject capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits to us, or may otherwise adversely affect us.
In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment Through Special Purpose Vehicles, or SAFE Circular 37, to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for Domestic Residents’ Financing and Roundtrip Investment Through Offshore Special Purpose Vehicles, or SAFE Circular 75, which ceased to be effective upon the promulgation of SAFE Circular 37. SAFE Circular 37 requires PRC residents (including PRC individuals and PRC corporate entities) to register with SAFE or its local branches in connection with their direct or indirect offshore investment activities. SAFE Circular 37 is applicable to our shareholders who are PRC residents and may be applicable to any offshore acquisitions that we make in the future.
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Under SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect investments in offshore special purpose vehicles, or SPVs, will be required to register such investments with SAFE or its local branches. In addition, any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its filed registration with the local branch of SAFE with respect to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to update their registration with the local branch of SAFE. If any PRC shareholder of such SPV fails to make the required registration or to update the previously filed registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital contributions into its subsidiary in China. On February 13, 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign Exchange Administration Policy on Direct Investment, or SAFE Notice 13, which became effective on June 1, 2015. Under SAFE Notice 13, applications for foreign exchange registration of inbound foreign direct investments and outbound overseas direct investments, including those required under SAFE Circular 37, will be filed with qualified banks instead of SAFE. The qualified banks will directly examine the applications and accept registrations under the supervision of SAFE. SAFE Notice 13 also provides that the relevant entities which have completed the above foreign exchange registration shall complete annual existing right registration.
We have requested PRC residents who we know hold direct or indirect interest in our company to make the necessary applications, filings and registrations as required under SAFE Circular 37 and ourSAFE Notice 13. Our PRC resident shareholders, namely Wang Huang, Yunfen Lu, Meihui Fan, Bin Fan, Yi Zhang and Xiaojun Zhang, have completed all necessary registrations with the local SAFE branch or qualified banks as required by SAFE Circular 37. However, we may not be informed of the identities of all the PRC residents holding direct or indirect interest in our company, and we cannot provide any assurance that these PRC residents will comply with our request to make or obtain any applicable registrations or comply with other requirements under SAFE Circular 37.37 and SAFE Notice 13. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth in these regulations may subject us to fines and legal sanctions, restrict our cross-border investment activities, limit the ability of our wholly foreign-owned subsidiaries in China to distribute dividends and the proceeds from any reduction in capital, share transfer or liquidation to us, and we may also be prohibited from injecting additional capital into these subsidiaries. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for circumventing applicable foreign exchange restrictions. As a result, our business operations and our ability to distribute profits to you could be materially and adversely affected.
Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options are subject to these regulations as our company has become an overseas-listed company. Failure to complete SAFE registrations may subject them to fines of up to RMB300,000 for entities and up to RMB50,000 for individuals, and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Item“Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Employee Share Options.”
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If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
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We believe that HuamiZepp Health Corporation is not a PRC resident enterprise for PRC tax purposes. See “Item“Item 4. Information on the Company—B. Business Overview—Regulation—Regulations on Tax—PRC Enterprise Income Tax.”However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” If the PRC tax authorities determine that HuamiZepp Health Corporation is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% unless a reduced rate is available under an applicable tax treaty. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares.
We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.
On December 10, 2009, SAT issued the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, with retroactive effect from January 1, 2008, to December 1, 2017. Pursuant to the SAT Circular 698, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise this Indirect Transfer.
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On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 extends its tax jurisdiction to not only Indirect Transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.
On October 17, 2017, the SAT released Public Notice Regarding Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, effect from December 1, 2017. SAT Public Notice 37 replaced a series of important circulars, including but not limited to SAT Circular 698, and revised the rules governing the administration of withholding tax on China-source income derived by the non-resident enterprise. SAT Public Notice 37 provided certain key changes to the current withholding regime including, such as (i) the withholding obligation for non-resident enterprise deriving dividend arises on the day the payment is actually made rather than on the day of the resolution to declare the dividends; (ii) the provision that non-residentnonresident enterprise shall self-report tax within seven days if their withholding agents fail to withhold is removed, etc.
We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to withholding obligations if our company is transferee in such transactions, under SAT Public Notice 37 and SAT Public Notice 7. For transfer of shares in our company by investors who are non-PRC resident enterprises, our PRC subsidiaries may be required to expend valuable resources to comply with SAT Public Notice 37 and SAT Public Notice 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have an adverse effect on our financial condition and results of operations.
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The audit report included in this annual report is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, you are deprived of the benefits of such inspection.
Auditors of companies whose shares are registered with the SEC and traded publicly in the United States, including our independent registered public accounting firm, must be registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, and are required by the laws of the United States to undergo regular inspections by the PCAOB to assess their compliance with the laws of the United States and professional standards applicable to auditors. Our independent registered public accounting firm is located in, and organized under the laws of, the PRC, which is a jurisdiction where the PCAOB, notwithstanding the requirements of U.S. law, is currently unable to conduct inspections without the approval of the Chinese authorities. In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with the China Securities Regulatory Commission, or the CSRC, and the PRC Ministry of Finance, which establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations undertaken by the PCAOB, or the CSRC or the PRC Ministry of Finance in the United States and the PRC, respectively. The PCAOB continues to be in discussions with the CSRC and the PRC Ministry of Finance to permit joint inspections in the PRC of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges. On December 7, 2018, the SEC and the PCAOB issued a joint statement highlighting continued challenges faced by the U.S. regulators in their oversight of financial statement audits of U.S.-listed companies with significant operations in China. However, it remains unclear what further actions the SEC and PCAOB will take to address the problem.
This lack of PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors may be deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to PCAOB inspections, which could cause investors and potential investors of our ADSs to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.
Proceedings instituted by the SEC against Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.
Starting in 2011 the Chinese affiliates of the “big four” accounting firms, including our independent registered public accounting firm, were affected by a conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in mainland China, the SEC and the PCAOB sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to such papers in China had to be channeled through the CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the Sarbanes-Oxley Act of 2002 against these Chinese accounting firms, including our independent registered public accounting firm. A first instance trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepts that future requests by the SEC for the production of documents will normally be made to the CSRC. The firms will receive matching Section 106 requests, and are required to abide by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they fail to meet the specified criteria during a period of four years starting from the settlement date, the SEC retains authority to impose a variety of additional remedial measures on the firms depending on the nature of the failure. Additional remedies for any future noncompliance could include, as appropriate, an automatic six-month bar on a single firm’s performance of certain audit work, commencement of additional proceedings against a firm, or in extreme cases the resumption of the current proceeding against all four firms. In addition, pursuant to the terms of the settlement, the underlying proceeding against these Chinese accounting firms had been deemed dismissed with prejudice on February 6, 2019. We cannot predict if the SEC will further challenge these Chinese accounting firms’ compliance with U.S. law in connection with U.S. regulatory requests for audit work papers, or if such challenge will result in the SEC imposing penalties, such as suspensions, on these Chinese accounting firms. If the SEC pursues further challenges against these Chinese accounting firms, we may not be able to timely file future financial statements in compliance with the requirements of the Exchange Act.
In the event that the SEC restarts the administrative proceedings, depending upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.
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If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of our ADSs from the New York Stock Exchange or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the trading of our ADSs in the United States.
Risks Related to Our ADSs
Recent disruptions in the financial markets and economic conditions could affect our ability to raise capital.
In recent years, the United States and global economies suffered dramatic downturns as the result of a deterioration in the credit markets and related financial crisis as well as a variety of other factors including, among other things, extreme volatility in securities prices, severely diminished liquidity and credit availability, ratings downgrades of certain investments and declining valuations of others. The United States and certain foreign governments have taken unprecedented actions in an attempt to address and rectify these extreme market and economic conditions by providing liquidity and stability to the financial markets. If the actions taken by these governments are not successful, the return of adverse economic conditions may cause a significant adverse impact on our ability to raise capital, if needed, on a timely basis and on acceptable terms or at all.
The trading price of our ADSs has fluctuated and is likely to be volatile, which could result in substantial losses to investors.
Since we first listed our ADSs on the New York Stock Exchange, or NYSE, on February 8, 2018, the trading prices of our ADSs have been and may continue to be subject to wide fluctuations. In 2018,2021, the trading prices of our ADSs on NYSE have ranged from US$8.434.56 to US$15.0919.72 per ADS.
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The trading price of our ADSs is likely to be volatile and could fluctuate widely due to factors beyond our control. This may happen because of broad market and industry factors, including the performance and fluctuation of the market prices of other companies with business operations located mainly in China that have listed their securities in the United States. In addition to market and industry factors, the price and trading volume for our ADSs may be highly volatile for factors specific to our own operations, including the following:
| ● | regulatory developments affecting us or our industry, customers or suppliers; |
| ● | announcements of studies and reports relating to the quality of our product and service offerings or those of our competitors; |
| ● | changes in the economic performance or market valuations of other smart wearables companies; |
| ● | actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results; |
| ● | changes in financial estimates by securities research analysts; |
| ● | conditions in the online retail market; |
| ● | announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments; |
| ● | additions to or departures of our senior management; |
| ● | fluctuations of exchange rates between the RMB and the U.S. dollar; |
| ● | release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs; |
| ● | sales or perceived potential sales of additional ordinary shares or ADSs; |
| ● | any actual or alleged illegal acts of our shareholders or management; and |
| ● | proceedings instituted by the SEC against PRC-based accounting firms, including our independent registered public accounting firm. |
regulatory developments affecting us or our industry, customers or suppliers;
announcements of studies and reports relating to the quality of our product and service offerings or those of our competitors;
changes in the economic performance or market valuations of other smart wearables companies;
actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
changes in financial estimates by securities research analysts;
conditions in the online retail market;
announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments;
additions to or departures of our senior management;
fluctuations of exchange rates between the RMB and the U.S. dollar;
release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs;
sales or perceived potential sales of additional ordinary shares or ADSs;
any actual or alleged illegal acts of our shareholders or management; and
proceedings instituted by the SEC against PRC-based accounting firms, including our independent registered public accounting firm.
Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.
In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.
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If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.
The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.
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The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.
Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs.
Because we domay not expect to pay dividends again in the foreseeable future, you must rely on a price appreciation of our ADSs for return on your investment.
On March 17, 2022, our board of directors approved the declaration and payment of special cash dividends in an amount of US$0.025 per ordinary share (US$0.1 per American depositary share), representing an aggregate dividend payment to all shareholders of our company of approximately RMB40 million (US$6.28 million), to be paid out of our cash balance. In April 2022, we paid such cash dividend to our shareholders of record at the close of business on March 28, 2022. Other than the payment of dividends in April 2022, we currently do not plan to declare or pay any dividends in the near future on our shares or ADSs. We currently intend to retain most, if not all, of our available funds and any future earnings to fund the developmentoperate and growth ofexpand our business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in our ADSs as a source for any future dividend income.
Our board of directors has complete discretion as to whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Under Cayman Islands law, a Cayman Islands company may pay a dividenddividends out of either profit or share premium account, provided that in no circumstances may a dividend be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on our future results of operations and cash flow, our capital requirements and surplus, the amount of distributions, if any, received by us from our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the return on your investment in our ADSs will likely depend entirely upon any future price appreciation of our ADSs. There is no guarantee that our ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in our ADSs and you may even lose your entire investment in our ADSs.
Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of control transactions that holders of our Class A ordinary shares and ADSs may view as beneficial.
We have a dual class ordinary share structure. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares are entitled to one vote per share, while holders of Class B ordinary shares are entitled to ten votes per share. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any transfer of Class B ordinary shares by a holder thereof to any person or entity, such Class B ordinary shares shall be automatically and immediately converted into the equal number of Class A ordinary shares.
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As of March 31, 2019,February 28, 2022, holders of our Class B ordinary shares held an aggregate of 184,376,679117,208,247 Class B ordinary shares, which represent 76.2%47.1% of the total outstanding shares and 97.0%89.9% of total voting power of our outstanding shares. Therefore, our Class B ordinary shareholders have decisive influence over matters requiring shareholders’ approval, including election of directors and significant corporate transactions, such as a merger or sale of our company or our assets. This concentrated control will limit your ability to influence corporate matters and could discourage others from pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as beneficial.
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The dual class structure of our ordinary shares may adversely affect the trading market for our ADSs.
In 2017, S&P Dow Jones and FTSE Russell announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no more than 5% of total voting power from being added to such indices. In addition, several shareholder advisory firms have announced their opposition to the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the inclusion of our ADSs, each representing four of our Class A ordinary shares, in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market for our ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could also adversely affect the value of our ADSs.
Our Memorandum and Articles contain anti-takeover provisions that could have a material adverse effect on the rights of holders of our ordinary shares and ADSs.
Our Memorandum and Articles contain provisions to limit the ability of others to acquire control of our company or cause us to engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar transaction. Our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications, limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of which may be greater than the rights associated with our ordinary shares, in the form of ADS or otherwise. Preferred shares could be issued quickly with terms calculated to delay or prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred shares, the price of our ADSs may fall and the voting and other rights of the holders of our ordinary shares and ADSs may be materially and adversely affected.
Our directors, officers and principal shareholders collectively control a significant amount of our shares, and their interests may not align with the interests of our other shareholders.
As of March 31, 2019,February 28, 2022, our officers, directors and principal shareholders collectively held 97.3%93.5% of total voting power. This significant concentration of share ownership and voting power may adversely affect or reduce the trading price of our ADSs because investors often perceive a disadvantage in owning shares in a company with one or several controlling shareholders. Furthermore, our directors and officers, as a group, have the ability to significantly influence or control the outcome of all matters requiring shareholders’ approvals, including electing directors and approving mergers or other business combination transactions. These actions may be taken even if they are opposed by our other shareholders. This concentration of share ownership and voting power may also discourage, delay or prevent a change in control of our company, which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company.
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You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.
We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our Memorandum and Articles, the Companies Law (2018 Revision)Act (As Revised) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records (other than copies of the memorandum and articles of association, the register of mortgages and charges and any special resolutions passed by our shareholders) or to obtain copies of lists of shareholders of these companies. Our directors have discretion under our Memorandum and Articles to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
As a result of all of the above, our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States.
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Certain judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands company and substantially all of our assets are located outside of the United States. Substantially all of our current operations are conducted in China. In addition, most of our current directors and officers are nationals and residents of countries other than the United States. Substantially all of the assets of these persons are located outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of China may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, subject to the depositary’s right to require a claim to be submitted to arbitration, the federal or state courts in the City of New York have exclusive jurisdiction to hear and determine claims arising under the deposit agreement and in that regard, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our Class A shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.
If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable U.S. state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the U.S. federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before investing in the ADSs.
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If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or the ADSs, including claims under U.S. federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if this jury trial waiver provision is not enforced, to the extent a court action proceeds, it would proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.
The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to vote your Class A ordinary shares.
Holders of ADSs do not have the same rights as our registered shareholders. As a holder of our ADSs, you will not have any direct right to attend general meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which are carried by the underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the provisions of the deposit agreement. Under the deposit agreement, you may vote only by giving voting instructions to the depositary. Upon receipt of your voting instructions, the depositary will try, as far as is practicable, to vote the Class A ordinary shares underlying your ADSs in accordance with your instructions. If we ask for your instructions, then upon receipt of your voting instructions, the depositary will try to vote the underlying Class A ordinary shares in accordance with these instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give, but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares unless you withdraw the shares, and become the registered holder of such shares prior to the record date for the general meeting. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the shares underlying your ADSs and become the registered holder of such shares to allow you to attend the general meeting and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general meeting. In addition, under our amended and restated articles of association, for the purposes of determining those shareholders who are entitled to attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and such closure of our register of members or the setting of such a record date may prevent you from withdrawing the Class A ordinary shares underlying your ADSs and becoming the registered holder of such shares prior to the record date, so
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that you would not be able to attend the general meeting or to vote directly. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver our voting materials to you. We have agreed to give the depositary at least 30 days’ prior notice of shareholder meetings. Nevertheless, we cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying Class A ordinary shares represented by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of carrying out your voting instructions. The deposit agreement provides that if the depositary does not timely receive voting instructions from the ADS holders and if voting is by poll, then such holder shall be deemed, and the depositary shall deem such holder, to have instructed the depositary to give a discretionary proxy to a person designated by us to vote the Class A ordinary shares underlying the relevant ADSs, with certain limited exceptions. This means that you may not be able to exercise your right to direct how the shares underlying your ADSs are voted and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
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You may not receive dividends or other distributions on our ordinary shares and you may not receive any value for them, if it is illegal or impractical to make them available to you.
The depositary of our ADSs has agreed to pay you the cash dividends or other distributions or the custodian receives on ordinary shares or other deposited securities underlying our ADSs, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A ordinary shares your ADSs represent. However, the depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any holders of ADSs. For example, it would be unlawful to make a distribution to a holder of ADSs if it consists of securities that require registration under the Securities Act but that are not properly registered or distributed under an applicable exemption from registration. The depositary may also determine that it is not feasible to distribute certain property through the mail. Additionally, the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may determine not to distribute such property. We have no obligation to register under U.S. securities laws any ADSs, ordinary shares, rights or other securities received through such distributions. We also have no obligation to take any other action to permit the distribution of ADSs, ordinary shares, rights or anything else to holders of ADSs. This means that you may not receive distributions we make on our ordinary shares or any value for them if it is illegal or impractical for us to make them available to you. These restrictions may cause a material decline in the value of our ADSs.
You may experience dilution of your holdings due to the inability to participate in rights offerings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire securities. Under the deposit agreement, the depositary will not distribute rights to holders of ADSs unless the distribution and sale of rights and the securities to which these rights relate are either exempt from registration under the Securities Act with respect to all holders of ADSs, or are registered under the provisions of the Securities Act. The depositary may, but is not required to, attempt to sell these undistributed rights to third parties, and may allow the rights to lapse. We may be unable to establish an exemption from registration under the Securities Act, and we are under no obligation to file a registration statement with respect to these rights or underlying securities or to endeavor to have a registration statement declared effective. Accordingly, holders of ADSs may be unable to participate in our rights offerings and may experience dilution of their holdings as a result.
You may be subject to limitations on the transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when it deems it expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rightsright offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. The depositary may refuse to deliver, transfer or register transfers of our ADSs generally when our share register or the books of the depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement, or for any other reason.
We are an emerging growth company within the meaning of the Securities Act and may take advantage of certain reduced reporting requirements.
We are an “emerging growth company,” as defined in the JOBS Act, and we may take advantage of certain exemptions from requirements applicable to other public companies that are not emerging growth companies including, most significantly, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 for so long as we remain an emerging growth company. As a result of our current status as an emerging growth company, our investors may not have access to certain information they may deem important.
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We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an “emerging growth company.”
We are now a public company and expect to incurhave incurred significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002, as well as rules subsequently implemented by the SEC and the New York Stock Exchange, impose various requirements on the corporate governance practices of public companies. As a company with less than US$1.07 billion in revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002, or Section 404, in the assessment of the emerging growth company’s internal control over financial reporting. The JOBS Act also permits an emerging growth company to delay adopting new or revised accounting standards until such time as those standards apply to private companies. However, we have elected to “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted for public companies. This decision to opt out of the extended transition period under the JOBS Act is irrevocable.
We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other rules and regulations of the SEC. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from the NYSE corporate governance listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards.
As a Cayman Islands company listed on the New York Stock Exchange, we are subject to the NYSE corporate governance listing standards. However, the NYSE corporate governance listing standards permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance listing standards.
Pursuant to Sections 303A.01, 303A.04, 303A.05 and 303A.07 of the New York Stock Exchange Listed Company Manual, a company listed on the New York Stock Exchange must have a majority of independent directors, a nominating and corporate governance committee composed entirely of independent directors and a compensation committee composed entirely of independent directors and an audit committee with a minimum of three members.directors. We currently follow our home country practice in lieu of these requirements. We may also continue to rely on these and other exemptions available to foreign private issuers in the future, and to the extent that we choose to do so in the future, our shareholders may be afforded less protection than they otherwise would under the NYSE corporate governance listing standards applicable to U.S. domestic issuers. As a result, you may not be afforded the same protections or information, which would be made available to you, were you investing in a United States domestic issuer.
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There can be no assurance that we will not be a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year, which could result in adverse U.S. federal income tax consequences to U.S. Holders of our ADSs or Class A ordinary shares.
A non-U.S. corporation, such as our company, will be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year if either (i) at least 75% or more of its gross income for such year consists of certain types of “passive” income; or (ii) at least 50% or more of the value of its assets (based(generally determined on an averagethe basis of thea quarterly values of the assets)average) during such year is attributable to assets that produce passive income or are held for the production of passive income (the “asset test”).income. Based on our income and assets, (taking into accountand the market pricevalue of our ADSs),ADSs, we do not believe that we were a PFIC for the taxable year ended December 31, 20182021 and do not anticipate becoming a PFIC in the current taxable year or in the foreseeable future. However,While we do not expect to be or become a PFIC for the current taxable year or the foreseeable future, no assurance can be given in this regard because the determination of whether we are or will become a PFIC is a fact-intensive inquiryfactual determination made on an annual basisannually that depends,will depend, in part, upon the composition of our income and assets. Fluctuations in the market price of our ADSs may cause us to becomebe classified as a PFIC for the current or subsequentfuture taxable years because the value of our assets for the purposepurposes of the asset test, including the value of our goodwill and unbooked intangibles, may be determined by reference to the market price of our ADSs.ADSs from time to time (which may be volatile). In particular, recent declines in the market price of our ADSs significantly increased our risk of becoming a PFIC. The market price of our ADSs may continue to fluctuate considerably and, consequently, we cannot assure you of our PFIC status for any taxable year. Furthermore, the composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets.
If we were to be or become a PFIC for any taxable year during which a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) holds our ADSs or Class A ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Item“Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”
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ITEM 4. INFORMATIONINFORMATION ON THE COMPANY
A.History and Development of the Company |
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We commenced operations in December 2013 through Anhui Huami Information Technology Co., Ltd., or Anhui Huami, to develop, manufacture and sell smart wearable devices. In July 2014, we incorporated Huami (Beijing) Information Technology Co., Ltd., or Beijing Huami, to expand our operation.
In December 2014, we incorporated Zepp Health Corporation (formerly, Huami CorporationCorporation) in Cayman Islands as our offshore holding company to facilitate financing and offshore listing. Shortly following its incorporation, HuamiZepp Health Corporation established a wholly-owned Hong Kong subsidiary, Hong Kong Zepp Holding Limited (formerly named Huami HK Limited.Limited). From December 2014 to April 2015, our Cayman holding company HuamiZepp Health Corporation issued ordinary shares and preferred shares to the holding vehicles of the then shareholders of Anhui Huami, in proportion to these shareholders’ then respective equity interest percentages in Anhui Huami.
In February 2015, Huami HKHong Kong Zepp Holding Limited established a wholly-owned subsidiary in China, Beijing Shunyuan Kaihua Technology Co., Ltd., which we refer to as Shunyuan Kaihua or our WFOE in this annual report. Our WFOE later entered into a series of contractual arrangements with Anhui Huami, Beijing Huami, which two entities we collectively refer to as our VIEs in this annual report, and their respective shareholders. These contractual arrangements enable us to exercise effective control over our VIEs; receive substantially all of the economic benefits of our VIEs; and have an exclusive option to purchase all or part of the equity interests in and assets of them when and to the extent permitted by PRC law. As a result of these contractual arrangements, each of Anhui Huami and Beijing Huami is our consolidated variable interest entity, which generally refers to an entity in which we do not have any equity interests but whose financial results are consolidated into our consolidated financial statements in accordance with U.S. GAAP because we have effective financial control over, and are the primary beneficiary of, that entity. We treat each of Anhui Huami and Beijing Huami and their respective subsidiaries as our consolidated affiliated entities under U.S. GAAP and have consolidated their financial results in our consolidated financial statements in accordance with U.S. GAAP. However, those contractual arrangements may not be as effective as direct ownership in terms of providing operational control.
On February 8, 2018, our ADSs commenced trading on the NYSE under the symbol “HMI.” Counting in the ADSs sold upon the exercise of the over-allotment option by our underwriters, we raised from our initial public offering approximately US$103.9 million in net proceeds after deducting underwriting commissions and discounts and the offering expenses payable by us.
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In April 2019, we completed a registered follow-on offering of our ADSs, raising US$6.6 million in net proceeds after deducting underwriting commissions and discounts and the offering expenses payable by us.
In February 2021, we, through Anhui Shunyuan Xinke Management Consulting Partnership (Limited Partnership), one of our subsidiaries in China, acquired 29.99% of the total outstanding shares of Jiangsu Yitong, a PRC company listed in Shenzhen Stock Exchange, for an aggregate consideration of RMB959.7 million in cash to expand the healthcare ecosystem for Chinese market in the long term. The transaction was completed in February 2021.
Effective February 25, 2021, we changed our corporate name from “Huami Corporation” to “Zepp Health Corporation,” and our trading symbol at the New York Stock Exchange from “HMI” to “ZEPP.”
Our principal executive offices are located at Huami Global Innovation Center, Building H8,B2, Zhong’an Chuanggu Technology Park, No. 2800, Chuangxin900 Wangjiang West Road Road, Hefei, 230088, People’s Republic of China. Our telephone number at this address is +86 551-65837200.010-5940-3268. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited at PO Box 309 Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.
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We areSEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC on www.sec.gov. You can also find information on our website https:// ir.zepp.com/investor. The information contained on our website is not a biometricpart of this annual report.
B. Business Overview
Our mission is to connect health with technology. In pursuit of that mission, we have developed substantial proprietary technology, which has enabled our company to become a significant global player in producing consumer health and activity data-driven company with significant expertise infitness devices.
Through our own Amazfit and Zepp brands, and as the developer of smart wearable technology and one of the leading companies in the smart wearables market globally. Wedevices for Xiaomi brands, we shipped 27.536.1 million units of smart wearable devices in 2018,2021, and we had shipped 79.3an aggregate of 203.4 million units between our inception and December 31, 2018. Leveraging2021. In 2021, we promoted our vast biometric database, weAmazfit products sold in China as Chinese characters “跃我”, which means “up your game” in Chinese. We collaborate with partners across many verticals such as sports and social network, mobile payment and health and related industries. It isOur key product and technology offerings include our mission to enable everyone to access and enjoy better sports and health services through the power of technology.
Our Smart Devices
Our smart devices, mainly includehome fitness equipment and healthcare initiatives, together forming our smart bands, smart watcheshealth ecosystem.
Smart Bands and smart scales. Smart Watches
We have beendeveloped a wide range of smart wearables that offers robust features at competitive pricing under the sole partner of Xiaomi to designbrand and manufacture Xiaomi Wearable Products. Since September 2015, we have begun to use the brand, “Amazfit,” to sell our products that are not designedown brands, Amazfit and manufactured for Xiaomi to address the middle to high-end market. We obtained the China State Food and Drugs Administration Class II medical device approval for our ECG health band products in April 2018.
Smart Bands
Mi Band Series
Zepp. Mi Band series is our smart band series that is designed and manufactured for Xiaomi.
We introduced the first generation modelof Mi Band in July 2014, and recently Mi Band 1.6 in March 2021. We will also launch Mi Band 1 had three versions, Mi Band 1. Mi Band 1A7 in 2022. We offer products in different styles, such as round versus rectangular, and Mi Band 1S.
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In June 2016.our consumers. For example, in 2021, we introduced Mi Band 2, featuring all-new design, OLED display, touch buttonfashion series GTR 3, GTS 3 and improved pedometer algorithms. Mi Band 2 tracks time, steps, heart rate,GTR 3 Pro smart watches, providing periodic upgrades in features and sleep durationmaterials at the $199 price point.
We pursue a strategy of fast development and qualityreplacement cycles with shorter manufacturing runs. This brings new products to market fast, stimulating new purchase by delivering compelling newly-launched or updated offerings throughout the year. All of our products utilize the same AI chipset and sends an idle alertsensor array with a gentle buzz to users when they have been sitting stillimportant differentiating benefits for too long. It also synchronizes with our “M Fit” mobile app to allow users to monitor their running speed and heart rate in real time and to evaluate their sleep quality. In addition, it features vibrating alerts for incoming calls, texts and alarmsdata analytics service offerings, which provides consistent biometric data and allows users to instantly unlock their Xiaomi-branded smartphones by lifting their wrists and moving Mi Band closeconnect with different terminals to smartphones. Mi Band 2 generally has 20 days or more of battery life.improve the IoT application scenarios.
In May 2018,2021, we sold our own branded products under the Amazfit and Zepp brand names. Significant models include:
| ● | Amazfit Band 5; |
| ● | Amazfit basic smart watches, Bip S, U and U Pro; |
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| ● | Amazfit sport and outdoor smart watches, Neo, T-Rex, T-Rex Pro and Stratos 3; |
| ● | Amazfit fashion smart watches, GTR and GTS series and GT mini; and |
| ● | Zepp advanced smart watches, E and Z. |
We launched the Zepp-branded smart watches in 2020, and continued to present new models of Zepp-branded smart watches in 2021. The Zepp smart watches represent a new high-end line of smart watches featuring higher-end materials, designs and finishes, which provide distinctive, dressier smart watch options to consumers. We also launched our brand-new children’s smartwatch product line in the second quarter of 2021, allowing us to enter a niche market we have not previously addressed. Beyond basic children’s smartwatch functionalities, our products focus on motivating children to go outdoors and participate in various physical activities, while ensuring compliance with the policy guidance of Chinese education regulatory authorities.
Smart Scales
Smart scales, which gather biometric and correlate data and analysis algorithms with other devices, such as smart watch and app, have been a strong component of the smart health device market for several years.
Hearables and Others
Smart ear buds, ear phones and other personal listening devices have become a fast-growing segment of the smart wearables industry in the last three years.
We introduced Mi Band 3, the third generationour first two smart hearable products, Amazfit PowerBuds and Amazfit ZenBuds, which incorporate true health monitoring and health benefits, in our flagship smart band product line. Mi Band 3 offers significantly more advanced health-related2020. Amazfit PowerBuds are designed for listening use during exercise or outdoor activities, and sports-related tracking functionalities than earlier versions, including betterprovide heart rate monitoring and additional screen accessdata sharing with our Zepp app. In 2021, we introduced a new smart hearable product, Amazfit PowerBuds Pro, an upgraded version of Amazfit PowerBud featuring true wireless stereo with powerful multi-scenario, active noise cancellation and advanced health monitoring functions, including cervical vertebrae and hearing protection.
We offer a home treadmill, Amazfit AirRun, primarily for messagingsales in Asia. We also offer sportswear, home appliances and real-timesmart watch accessories.
Data Analytics Capability
We had more than 41.3 million Mobile App MAUs as of December 31, 2021, contributing to a large data feeds. Other new features include weather forecast, timer and more text displays, enablingset for health related data analytics. In addition, we use the same biosensor array in each of our products, regardless of price or type, which provides us to further broaden user scenarios. The new design has no physical buttons and features a full-touch, high resolution curved display on a larger 0.78-inch OLED panel (with a resolution of 128*80) with a batteryconsistency as to the quality and format of the data collected that many of our competitors do not possess.
Under strict guidance of our data privacy and security policies, we offer use of various sets of the data set we have accumulated. Use of user data may be individually identified or de-identified, depending upon the application, agreement with the company, and agreement with users. In some cases, users may opt-in to have their personal data seen by the population manager. Each use of data under data analytics services is specifically codified in contract language, with the default always to be protection of individuals’ personal identity and data, and only shared upon users’ specific instruction (opt-in).
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Subject to our data privacy and security policies, we also offer use of specific data sets and to population health managers, such as life and health insurance companies, employers and wellness program providers. These population health managers are granted access to data of uptheir own members or users to 20 daysdrive health and water resistance upwellness programs, identify at-risk members or improve population risk management. In particular, PAI Health, which we acquired in 2020, developed a robust heart health algorithm that has proven to 50 meters. Users can operatebe a strong predictor of longevity. The PAI algorithm is built into our products to give consumers the benefit of PAI information and activity guidance. In 2020, PAI Health entered into an agreement with Prudential Corporation Asia for the inclusion of the PAI algorithm into Prudential’s Pulse digital health app to be offered in some countries in Asia. In addition, in 2021, we also commenced partnership with Zurich Brazil, ERGO China Life and other high-profiled insurance companies to conduct data analytics pilots with them. Some of the insurance companies look to leverage our data and our PAI health technology to achieve more efficient customer acquisition and generate increased customer engagement with their applications. Some insurance companies are leveraging the data collected from our smart band through directional swipingwearables for enhanced accuracy in insurance underwriting and gesture-based controls.pricing. We also cooperate with insurance companies on corporate wellness programs, where the insurance companies monitor health conditions of the corporate employees leveraging the PAI Health data analytics.
Core Technology for Our Products and Services
We design and develop our own core technology for smart devices, which we deem as a key competitive edge of our company as compared to many competitors who outsource their key components. We believe this give us an edge in product design for current and future products, as well as cost advantages.
Huangshan AI-Powered Smart Chipset
In September 2018, we launchedintroduced the upgraded versionworld’s first AI-powered wearable chipset, Huangshan-1. Leveraging the world’s first RISC-V open-source instruction set wearable processor, Huangshan-1 features four core artificial intelligence engines—cardiac biometrics engine, ECG, ECG Pro, and Hearth Rhythm Abnormality Monitoring Engine.
Huangshan-1 operates alongside an always-on (AON) module designed to transfer sensor data to internal static random access memory without waking the primary processor, with dedicated accelerators for neural network workloads. Huangshan-1 also supports real-time movement tracking, real-time biometric identification and real-time warning, among a huge array of Mi Band 3 with Near Field Communication, or NFC, technology. The NFC feature gives users one-touch payment capabilities for public transportation services in more than 160 cities throughout China (including Beijing, Shenzhen and Guangzhou).functions. In addition, Huangshan-1 can scan the NFC version Mi Band 3 allowsheart rate patterns of users to use theirthrough cloud-based AI, which helps monitor the user’s heart rate carefully, check for any unusual patterns and update users’ health statistics even when the users are not online. With lightning performance and minimal power consumption, Huangshan-1 has been applied on our Amazfit-branded health-oriented products since August 2019.
In June 2020, at a Zepp-sponsored AI Innovation conference, we announced our next generation of the Huangshan chipset, Huangshan-2. Based on RISC-V instruction set and a new independent neural network engine, the Huangshan-2 improves computing efficiency by 38% and can make software algorithms 26 times faster than other standard algorithms running on MCU core, at significantly lower power consumption than the Huangshan-1.
In July 2021, at our annual developers conference, we announced our new generation of smart band as a virtual access cardwearable chip Huangshan-2s, the third generation Huangshan chip. Compared to their home, office or other identified locations.
Amazfit Equator
Amazfit Equator is the slimmest, most lightweight activity tracker of our smart band product line. First introduced in September 2015, its innovative features include a full ceramic body and wireless charging technology. It can also communicate and control home appliances that support our product control protocols, including lights and air conditioners. based on users’ body temperature. Amazfit Equator has an enhanced luxury version, Amazfit Moonbeam, which was introduced along with Amazfit Equator in September 2015. Amazfit Moonbeam is a stylish activity tracker that is designed to serve both function and fashion. It comes with a premium leather band and rose gold plated metal case and is available in two colors. It has the same functions as Amazfit Equator.
Amazfit Cor Series
Amazfit Cor is an activity tracker that features minimalist design, large color screen and enhanced water-resistant capability. It was first introduced in September 2017, with its second generation Amazfit Cor 2 launched in January 2019. Users can switch among four activity modes, including outdoor/indoor running, biking and walking, to enable Amazfit Cor to display different key metrics associated with each activity. Amazfit Cor 2 is available in four colors. Amazfit Cor 2 outpaced its predecessor, with improved battery life. Furthermore, Amazfit Cor 2 comes equipped with NFC connectivity that supports contactless payment, a feature not availablethe Huangshan-2s reduces operating power consumption by 56% and dormant power consumption by 93%, and improves graphics performance by 67%. Huangshan-2s smart wearable chips successfully taped out in the original Amazfit Cor.
Amazfit Health Band is what we believe to beMarch 2021, and have become one of the firstkey smart band trackers inwearable chips for our next generation of Amazfit smart watches.
BioTracker Sensor Array
We develop our own proprietary biosensor array for our smart devices. Like the market equipped with ECG sensors that haveHuangshan chipset, we believe this provides significant development and cost competitive advantages for our company.
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In June 2020, we announced the capabilities to accurately capturesecond generation of our biosensor array, BioTrackerTM 2. The new sensor supports five AI-driven biologic data engines, including RealBeatsTM2 heart rate variabilitymonitoring, OxygenBeatsTM oxygen data monitoring, SomnusCareTM sleep data monitoring, ExerSenseTM exercise data detection and ECG. enabling users to monitor their heart conditions on a real-time basis. It was first introduced in April 2017. Based on ECG captured on Amazfit Health Band, we can then utilize our proprietary big data technology to analyze users’ heart conditionsmonitoring and notify users who are at heightened risks of cardiovascular diseases through our mobile apps. Similar to our other smart band products, Amazfit Health Band also tracks activity data, including steps, distance traveled, calories burned and sleep duration and quality, and allows users to set vibrating alerts for incoming calls, app notifications and alarms.
We launched a new Amazfit Health Band 1S in September 2018. Utilizing an embedded AI algorithm, the Amazfit Health Band 1S serves as a convenient extension of establishedZepp-PAI heart health monitoring techniques and offers a battery lifeanalysis. The upgrade to our biosensor capabilities includes improvements in sensitivity, accuracy and scope of up to seven days. Forinformation detected by our devices. In October 2021, we introduced the first time,third generation of our biosensor array, BioTrackerTM 3, into our smart watch products Amazfit GTS 3, Amazfit GTR 3 and Amazfit GTR 3 Pro. The BioTrackerTM 3 monitors blood oxygen level, heart rate stress level and sleep quality, providing users with easy-to-use enhanced health and sports experience.
Zepp OS
We announced the new band features self-developed optical modulesZepp OS in July 2021. Zepp OS is not only a smart watch operating system but also the core of an open platform, designed with emphasis on health, user experience and privacy protection with three key characteristics, namely being light, smooth and practical.
The new Zepp OS provides a reliable and stable Bluetooth channel to better connect with smart phones, smart homes, other health devices and payment systems. We are also opening the Mini Program framework for developers to create new apps that provide highly accurate photoplethysmography (PPG)leverage the high-quality data and deliver continuous, real-time heart rateintelligence from our company’s proprietary biosensor array and heart rhythm monitoring. The Amazfit Health Band 1S is capableAI chip, creating a global open IoT ecosystem for smart wearable users.
We also licensed Zepp OS and Huangshan-2s smart wearable chip technologies, including patents, technical secrets, integrated circuit layout-design, to Whale Microelectronics of screening the user’s heart rhythm in the background and sending an alert if an arrhythmia including atrial fibrillation is detected. Once an arrhythmia is detected, the user is instructed to put a finger on top of the band to start a 30 to 120 second ECG recording process to capture detailed heart health data in real time. The recorded heart-related data is uploaded to the cloud and users can access medical consultation services for this data via 24 x 7 online and phone channels. This service is provided free of charge to registered Amazfit Health Band 1S users for the first 6 months of purchase, subject to certain conditions and restrictions. After the free-trial period, users can continue to enjoy such service by subscribing to our paid monthly package or paying for each medical consultation as needed.
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Amazfit Wearable Dynamic ECG Recorder
In December 2018, we introduced our first China State Food and Drug Administration-certified health band with medical-grade ECG power and a wearable dynamic ECG recorder. Wearable dynamic ECG recorder optimizes the process of ECG measurement and recording. In the case of discomfort, the measurement can be started by pressing the touch button of the ECG recorder with one key. UserJiangsu Yitong. Whale Microelectronics are able to enrich the IoT ecosystem in China by connecting with smart car and other smart home appliances.
PumpBeats Blood Pressure Measurement System
In July 2021, we introduced PumpBeats(TM), a non-invasive and sleeveless blood pressure measurement system on Amazfit smart watches, which enables both spot measurement and continuous monitoring during sleep. Based on five years of technical research and employing our proprietary Huangshan AI chip and biosensor array, the PumpBeats(TM) algorithm is able to measure record, monitorblood pressure through the watch’s optical sensors in only 30 seconds. This feature provides users with easy, convenient, accurate readings anytime and view real-time non-prescription ECG after wearing dynamic ECG recorder connected to our “Amazfit” mobile app. The device can be attached to the designated position of the chest by chest electrodes. The ECG data recorded can provide reference for the next examination.
Smart Watches
anywhere throughout their busy day. PumpBeats(TM) is now being tested in Amazfit Pace
Amazfit Pace is a GPS-enabled sports smart watch. It holds five days of battery life and tracks key data, including pace, cadence, distance, elevation, time and heart rate as well as other data. It was firstGTR 3 Pro introduced in August 2016. Users can choose from a wide range of activityOctober 2021.
Zepp and sport modes based on their activities, including outdoor/indoor running, trail running, walking, outdoor/indoor biking and elliptical. Amazfit Pace provides music storage for up to 500 soundtracks and is equipped with Bluetooth chipsets so that users can enjoy their favorite music phone-free while running. It comes with guided training plans that cater to different runner levels such as beginner, 5K, 10K and marathon runners. Users can customize the watch face by uploading their personal photos, and can receive calls, texts, emails and app notifications via the always-on display. Amazfit Pace also supports mobile payment through Alipay and Xiaomi’s voice-activated smart home devices.
Amazfit BIP
Amazfit BIP is a lightweight GPS-enabled sports smart watch, first introduced in July 2017. It holds 45 days of battery life and provides four different activity modes, including walking, outdoor/indoor running and biking and tracks pace, distance, elevation, heart rate and other data. Similar to our other products, it sends vibrating alerts for incoming calls, texts, emails and app notifications.
Amazfit Stratos
Amazfit Stratos was introduced in December 2017. It is water-resistant up to 50 meters, which is perfect for swimmers who want to track their activity data under water. It provides 11 activity and sports modes, covering everyday activities and exercises as well as competitive sports such as triathlon and cross-country running. In addition to the key metrics such as pace, cadence and distance, Amazfit Stratos also provides performance indicators such as maximum oxygen uptake (V02 max), training load, training effect and recovery time. Amazfit Stratos also supports mobile payment through Alipay. Amazfit Stratos has an enhanced luxury version, Amazfit Stratos Plus.
Amazfit Verge
Amazfit Verge is the newest model of our smart watch line, first introduced in September 2018. Amazfit Verge offers many new and improved features to enrich the user experience including a 1.2G dual core processor, running Huami Watch OS (WOS) based on the Android infrastructure with remarkable extensibility that allows operation of third-party Apps. Amazfit Verge also comes with a 1.3-inch full color AMOLED round screen as well as optimized power consumption that provides an industry-leading five days of battery life on a single charge. Amazfit Verge is capable of making and receiving phone calls directly via blue-tooth connected mobile phones and displaying real time messages, including WeChat and incoming phone call alerts, all of which allow users to more conveniently stay connected with their friends, family and business associates. Xiaomi’s intelligent voice assistant (Xiao AI) is built into Amazfit Verge, allowing users to interact with Xiaomi’s ecosystem IoT home devices, such as controlling Xiaomi TV, Mi Robot Vacuum, Xiaomi Air Purifier and others by voice control or simple screen touch, as well as getting more information from the IoT devices (fire alert, security alert and others). Furthermore, digital wallet functionality in conjunction with Union Pay and Alipay, combined with integrated one-touch public transportation payment in over 160 cities in China, helps users to capture the convenience of full digital transactions (through NFC and QR codes). Amazfit Verge can be also used as entrance access device utilizing NFC technology. In addition, Amazfit Verge comes with enriched sports functionality, including advanced route tracking driven by GPS +GLONASS system that supports 11 sport modes. Full-day heart rate recording makes Amazfit Verge a valuable training and performance-tracking tool. Moreover, the new self-developed heart rate sensor and powerful algorithms deliver enhanced heart rate monitoring accuracy as well as reduced power consumption.
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Mi Smart Scale
Mi Smart Scale is our entry-level Bluetooth-connected scale that tracks weight and BMI, first introduced in March 2015. It is embedded with a high-precision sensor and is made of manganese steel. It utilizes three different algorithms to collect and interpret data, achieving half the error margin than that of comparable weighing scales It automatically identifies each family member and can store up to 16 user profiles with up to 800 weight records. It automatically synchronizes with our “Mi Fit” app to display easy-to-read graphs with weight stats and progress.
Mi Body Fat Scale
Mi Body Fat Scale is our advanced smart scale that measures muscle mass, metabolism, visceral fat level, bone mass, body water percentage and body shape in addition to weight, body fat percentage and BMI. It was first introduced in February 2017. It recognizes up to 16 individual users separately with no limit on weight records.
Others
We also offer a wide range of accessories including bands, watch straps, sportswear, etc. Several of our products have been recognized by numerous industrial design awards, including iF Product Design Award, Red Dot Product Design Award and China Red Star Design Award.
We continue to focus on new product development to address evolving user preferences and enhance our market-leading positions. In general, we launch a new version of our existing smart bands and watches every 12-24 months, in addition to new products and services that we introduce from time to time.
OurZepp Life Mobile Apps
We mainly offer two mobile apps: our “Zepp Life” mobile app (formerly known as the “Mi Fit” mobile appapp) and our “Zepp” mobile app (formerly known as the “Amazfit” mobile app.app). Both of our mobile apps sync automatically with, and display real-time data from our devices. They use charts and graphs to display analysis of the activity and biometric data collected from users. Our “Mi Fit”“Zepp Life” mobile app is designed with a focus on sports and fitness functions while our “Amazfit”“Zepp” mobile app emphasizes functions relating to health and medical care.
We launched “Mi Fit” mobile app in July 2014 and “Amazfit” mobile app in November 2015. The number of registered users of our mobile apps increased from 31.5 million as of December 31, 2016 to 56.1 million as of December 31, 2017 and further to 93.1 million as of December 31, 2018. Since our inception in 2013, we have amassed a large user base. As of MarchDecember 31, 2019,2021, we had 21.5282.0 million registered users of our mobile apps. In 2021, we had an average Mobile App MAUs.MAUs of 41.3 million.
We developed our mobile apps to support and expand the functionalities of our smart wearable devices as a way to attract users and promote sales of our wearable devices. We generate minor certain miscellaneous revenues from our mobile apps, including through sales of products via in-app store and in-app advertising services, and value-added services such as paid courses and paid medical SaaS subscription services. However, the amounts of such revenues are immaterial. We continue to provide innovative features and functionalities to users through our mobile apps, including the following:
| ● | Workout Tutorials and Health Tips. Users can watch workout tutorials and learn helpful tips in our apps to enhance the effectiveness of their training and to learn how to maintain a healthy lifestyle. |
| ● | Discover. Users can discover and sign up for exciting online and offline sports and fitness events, such as our 21-Day Healthy Lifestyle Challenge and the Beijing International Marathon, directly via our apps, to compete with other users and win rewards from our partners for their participation. |
Workout Tutorials and Health Tips. Users can watch workout tutorials and learn helpful tips in our apps to enhance the effectiveness of their training and to learn how to maintain a healthy lifestyle.64
Discover. Users can discover and sign up for exciting online and offline sports and fitness events, such as our 21-Day Healthy Lifestyle Challenge and the Beijing International Marathon, directly via our apps, to compete with other users and win rewards from our partners for their participation.
Fitness campaigns. We launch fitness campaigns on our mobile apps periodically to encourage users to stay active and engage with our devices and mobile apps.
Feed. Users can upload vivid content, such as status updates, workout photos and videos, to our apps community through Amazfit Circle function to share and interact with friends and fellow users. Users can create posts, follow other users, like and make comments on other users’ posts.
E-Commerce. Users can purchase our products and sports gear directly through our in-app store.
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| ● | Fitness campaigns. We launch fitness campaigns on our mobile apps periodically to encourage users to stay active and engage with our devices and mobile apps. |
| ● | Feed. Users can upload vivid content, such as status updates, workout photos and videos, short videos and live videos to our apps community through Amazfit Circle function to share and interact with friends and fellow users. Users can create posts, follow other users, like and make comments on other users’ posts. |
| ● | E-Commerce. Users can purchase our products and sports gear directly through our in-app store, which is compatible with various payment methods. |
| ● | AI assistant. Our apps are compatible with virtual assistants including Xiao Ai developed by Xiaomi and Amazon Alexa developed by Amazon. Users can connect to these virtual assistants directly from our apps. |
Our strong data technology is vital in enhancing the performance of our products and in further expanding their applications, as well as in enhancing our various data-enabled services.
Data Sources and Storage
Our big data storage system stores and processes a massive amount of multi-dimensional user data, including activity data (steps, distance traveled, sleep duration and quality, etc.), and biometric data, (heart rate, ECG, weight, etc.), which serves as the foundation of our big data technology. Based on the foregoing two types of data, we are able to derive additional personal data such as calories burned, BMI, body fat composition, and heart health index, personal activity index and even calculate the likelihood of certain heart diseases. We also collect and analyze software and hardware error data and product defects data to optimize our products.
The real-time iteration of our big data model is enabled by our big data infrastructure and algorithms. Our data platform can extract multi-dimensional features from multi-source data in a highly efficient and secure way to support modeling. We use a scalable and flexible database to support the storage and calculation of data points. We currently utilize our big data technology in the following areas:
| ● | optimize the algorithms that count the number of steps taken by eliminating the effect of certain patterns of the hand movements that are not associated with walking; |
| ● | fine-tune our algorithms for tracking sleep duration and quality and then make personalized adjustment based on users’ sleep patterns; |
| ● | enhance the performance of our built-in GPS, enabling our products to draw users’ running tracks more accurately and more quickly; |
| ● | develop insights into massive market and consumer data, empowering a more streamlined and efficient product design and optimization process; |
| ● | perform statistical analysis to identify certain characteristics that are associated with heart diseases and sleep patterns and make related recommendations to our users; |
| ● | perform statistical analysis to identify certain characteristics that are associated with users’ health and make related recommendations of training courses to our users; and |
| ● | develop the capability to perform more granular analysis on the data we collect from our users and to allow our products to recognize types of activities and sports. |
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fine-tune our algorithms for tracking sleep duration and quality and then make personalized adjustment based on users’ sleep patterns;
develop insights into massive market and consumer data, empowering a more streamlined and efficient product design process;
perform statistical analysis to identify certain characteristics that are associated with heart diseases and sleep patterns and make related recommendations to our users;
perform statistical analysis to identify certain characteristics that are associated with users’ health and make related recommendations of training courses to our users; and
develop the capability to perform more granular analysis on the data we collect from our users and to allow our products to recognize types of activities and sports.
Data Privacy and Protection
We consider the protection of the personal privacy of each of our users to be of paramount importance. We think it is crucial that our users understand how we handle their information so that they can make informed choices in deciding how such information is used and shared.shared.In 2021, we obtained the ISO/IEC 27001 information security management system certification.
To this end, we have developed a company-wide policy on data collection and use practices to preserve individual privacy rights in all respects, the key principles of which include: (i) providing adequate notice to users as to how their data is being collected and used, (ii) providing users with the option to opt out, (iii) making reasonable efforts to prevent loss/leakleakage of user data, (iv) giving users access to all information held about them, and (v) enforcing the policy with effective means.
We also partner with several leading social networks in China, including WeChat and Weibo.China. With the consent of our users, we allow them to import certain activity data collected by us to their platforms so that our users can utilize certain interactive functions offered on these social networks. In addition, our users can also import their data to third-party apps such as Apple Health Kit and Google Fit to obtain the data analytic services provided by them. Users can revoke their consent to share data with third parties at any time using their “Mi Fit”“Zepp Life” or “Amazfit”“Zepp” account settings or the account settings on such third parties’ platforms. If users choose to share their data with a third party, the data is governed by the privacy policy of the third party. We do not distribute or sellshare with third parties our users’ personal data to other companies for advertising or any other purposes without users’ permission.purposes.
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We are passionate about developing new and innovative products and services that will make the world more connected. Our research and development team and our management team co-lead the product development process, including the upgrades for our existing products and the development of new product lines. We take a user centric approach to product development. We constantly engage and communicate with our users via the “Feedback” feature in our mobile apps, customer services, forums and user chat groups and interviews to help us identify meaningful features for users and refine existing products. Our research and development team have successfully developed every aspect of the Mi Band series products, which became highly popular, reaching sales of one million pieces within three months of its release. Our research and development team has responded effectively to technological changes, and is driving continued innovation to unleash the potential of the wearable devices industry.
As of December 31, 2018,2021, our total research and development staff consisted of 428665 employees. Our global research and development team supports the design and development of our new products. Our research and development team is comprised of electrical engineers, mechanical engineers, computer scientists and mobile app developers. The team is further divided into four sub-groups,subgroups, including algorithms and AI, software engineering, hardware engineering and third-party service integration.
Algorithms and AI
Our algorithms and AI team is responsible for developing and refining our proprietary, artificial intelligence-based, computational algorithms, and leveraging the latest technology in artificial intelligence for applications in our products and services. Our algorithms and AI lab incorporateteam incorporates open source software with our robust proprietary software to form an enterprise-grade platform to deliver an integrated suite of capabilities for data management, machine learning and advanced analytics. This platform enables us to use vast amount of data from users to better serve and create value for our users and design innovative products and services. Our algorithms and AI team has developed a vibrant ecosystem around our platform, and has been building a growing range of applications on our platform, including the following:
Disease diagnosis● Disease diagnosis and health risk prediction. Machine learning is particularly suitable for processing unstructured raw data collected on individual devices by recognizing patterns and connections through which the raw data can be structured and analyzed. The vast amounts of raw data are uploaded to our cloud-based databases and then filtered by our algorithms to identify users with heightened risks of heart diseases or respiratory problems. Those results flagged by our algorithms are then verified by doctors, and the feedback from doctors is input into our algorithms to be used to analyze and filter the new data, thus forming a closed loop to allow us to continually fine-tune our algorithms to obtain more accurate assessment with each update. ● Sleep monitoring. Currently most sleep disorders can only be diagnosed in laboratories and hospitals. We are collaborating with Stanford Center for Sleep Sciences and Medicine to develop the capability to diagnose sleep disorders through consumer electronics and wearable technologies.
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| ● | Sports and fitness. We are developing algorithms to synthesize a wide variety of users’ daily activity data to understand users’ daily routines and habits and build our recommendation model accordingly through machine learning. Additionally, we also have developed the AI algorithms to recognize the daily workout or exercise, such as walking, running, cycling, rowing and elliptical training to automatically record the workout for customers and provided workout recommendations. Once the recommendation model is set up, we will be able to provide users with recommendations, such as exercise duration and intensity, running posture and foot posture, etc. We can also make personalized activity recommendations to help users achieve their fitness goals, such as weight loss. |
| ● | Biometrics. ECG is just as unique to an individual as fingerprints. We have developed ECG recognition algorithms to recognize the unique cardiac rhythms of users, which can be utilized as a biometric ID to authenticate user’s identity. Currently we are exploring new scenarios where this feature can be applied, such as account login and user identification. In addition, we have developed or are in the process of developing AI algorithms to measure various health parameters, including real time heart rates, heart rate variability, arrhythmia (including atrial fibrillation), SpO2, blood oxygen, blood pressure, body temperature and etc., with the bio-sensors embedded in our wearable devices. |
In March 2020, we jointly established a laboratory for studies on monitoring respiratory diseases using wearable devices partnered with the respiratory disease team of Dr. Nanshan Zhong, who is a global leading epidemiologist and plays a significant role as an advisor in managing the COVID-19 crisis in China. The focus at this laboratory is on the early prediction of certain respiratory diseases, in particular COVID-19, and how our smart wearables, with our AI and big data advantages, can help establish a cloud service system to provide epidemic prediction and diseases requiring monitoring. In 2022, we began to work with the laboratory to apply our smart wearable devices in the detection of asthma, obstructive sleep apnea (OSA) and in the chronic obstructive pulmonary disease (COPD) monitoring process. In May 2020, we published a research article on infectious disease prediction based on data from wearable devices in journals of Discrete Dynamics in Nature and Society by Hindawi, which indicates that the popularity of wearable devices enables a new perspective for the precaution of the infectious diseases and can be structured and analyzed. The vast amounts of raw data are uploaded to our cloud-based databases and then filtered by our algorithms to identify users with heightened risks of heart diseases or respiratory problems. Those results flagged by our algorithms are then verified by doctors, and the feedback from doctors is input into our algorithms to be used to analyze and filter the new data, thus formingfoundation for a closed loop to allow us to continually fine-tune our algorithms to obtain more accurate assessment with each iteration.
Sleep monitoring. Currently most sleep disorders can only be diagnosed in laboratories and hospitals. We are collaborating with Stanford Center for Sleep Sciences and Medicine to develop the capability to diagnose sleep disorders through consumer electronics and wearable technologies.
Sports and fitness. We are developing algorithms to synthesize a wide variety of users’ daily activity data to understand users’ daily routines and habits and build our recommendation model accordingly through machine learning. Once the recommendation model is set up, we will be able to provide users with recommendations, such as exercise duration and intensity, running posture and foot posture, etc. We can also make personalized activity recommendations to help users achieve their fitness goals, such as weight loss.
Biometric ID. ECG is just as unique to an individual as fingerprints. We have developed ECG recognition algorithms to recognize the unique cardiac rhythms of users, which can be utilized as a biometric ID to authenticate user’s identity. Currently we are exploring new scenarios where this feature can be applied, such as account login and user identification.
Huangshan-1
In September 2018, we introduced the world’s first AI-powered wearable chipset, Huangshan-1. Leveraging the world’s first RISC-V open source instruction set wearable processor, Huangshan-1 features four core artificial intelligence engines — cardiac biometrics engine, ECG, ECG Pro, and Hearth Rhythm Abnormality Monitoring Engine.
Huangshan-1 operates alongside an always-on (AON) module designed to transfer sensor data to internal static RAM without waking the primary processor, with dedicated accelerators for neural network workloads. Huangshan-1 also supports real-time movement tracking, real-time biometric identification, real-time warning, among a huge array of functions and can scan the heart rate patterns of users through cloud-based AI, helping to monitor the user’s heart rate carefully, check for any unusual patterns and update users’ health statistics even when the users are not online. With lightning performance and minimal power consumption, we believe Huangshan-1 will be an ideal chipset for the smart wearables technology.
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Although we expect to continue to make significant investments for the design and manufacture of our products, we believe the self-developed Huangshan-1 will help us to reduce reliance on our existing chipset suppliers, over which we have limited control, and decrease the costs for designing and manufacturing.surveillance system. We plan to apply Huangshan-1utilize the laboratory achievements to further develop our Amazfit-branded products beginningand services in 2019.building a comprehensive health and fitness ecosystem.
Software Engineering
Our software engineering team is responsible for developing the company-wide software platform to support the integration of our products and applications, the transmission, storage and processing of user data, the implementation of user-product interaction and the development of core technologies. To provide users with valuable data and services, we rely on our software platform to connect individual devices, our cloud-based computing system and end users’ mobile apps. The key elements of our software engineering philosophy include security, reliability and extensibility.
Hardware Engineering
Our hardware engineering team supports the system-level product design, ultralow power system design and the design of key system components, including antenna, bio-sensors, battery, integrated circuits (“IC”) for battery protection, Bluetooth Low Energy system on chip IC, energy-efficient microprocessor and product testing apparatus. Our hardware engineering team also plays a key role in identifying opportunities for strategic investments upstream.
We also continue to pursue strategic partnerships with battery companies to conduct joint research in the areas of energy harvesting and energy conversion to develop high-capacity battery for smart wearable devices. With respect to sensor technology, we currently focus on developing a new PPG sensor that can monitor both heart rate and blood oxygen level, which will form the basis to further enhance the functionalities and broaden the application scenarios of our products. In addition, we are also exploring new ways to connect our products with end users’ mobile devices besides the traditional methods such as Bluetooth and WiFi.
Third-Party Service Integration
Our third-party service integration team is responsible for exploring innovative ways to integrate social features with our products and services and introduce new third-party services to our platform. We currently focus on the opportunities in the areas of sports, fitness, health and medical care. For example, we are working with insurance companies to design insurance policies based on our users’ overall fitness and everyday activities. We are also exploring cooperation opportunities with fitness trainers to help them tailor training programs and adjust exercise intensity based on our users’ activity and fitness levels. We are also working with clinics and hospitals to directly connect doctors with users via our platform to perform diagnosis for heart diseases and provide rehabilitation services.
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Our Relationship with Xiaomi
We have been the solea major partner of Xiaomi to design and manufacture Xiaomi Wearable Products. Our strategic cooperation agreement with Xiaomi, initially entered into in October 2017 and renewed in October 2020 for another three years, grants us the most-preferred-partner status globally to develop future Xiaomi Wearable Products. We leverage Xiaomi’s brand recognition and global distribution networks for the sale of Xiaomi Wearable Products as well as products under our own brand.Products. Our sale of Xiaomi Wearable Products to Xiaomi is governed by a business cooperation agreement, pursuant to which Xiaomi is responsible for the distribution and sales of Xiaomi Wearable Products through their networks and sales channels.
We and Xiaomi discuss on, among others, functions and recommended price range throughout the development process. After we show Xiaomi of prototypes and our internal validation testing results, we start taking orders from Xiaomi for mass production. Xiaomi and us generally discuss order forecast months in advance of the delivery time, which sufficiently allows us to arrange raw material and component procurement and manufacturing. In addition to the recommended price of Xiaomi Wearable Products to be sold to users and wholesalers, we also discuss with Xiaomi and jointly determine discounts offered at promotional events from time to time. We and Xiaomi receive equal shares of gross profit from selling all Xiaomi Wearable Products.
In addition to continuing our mutually beneficial relationship with Xiaomi, we have taken a number of initiatives to extend our products’ reach to a broader range of users. Since September 2015, we have started to use the brand name “Amazfit” to market our self-branded products. We differentiate our self-branded products from Xiaomi Wearable Products by targeting mid- to high-end users, offering different functionality and setting different price points.
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Procurement and Manufacturing
We procure a majority of raw materials and components from suppliers within China, and then consign them to our manufacturers. In general, prices for our raw materials have been relatively stable. Through close coordination with our customers and manufacturers and frequent purchases of components from suppliers, we are able to carry a few raw material and in-process inventories and achieve “just in time”prompt production, minimizing inventory risk. For Xiaomi Wearable Products, Xiaomi provides us with production forecasts on a rolling basis, which serves as the primary indicator for our component procurement effort. For our self-branded products, we procure components based on our internal sales and production plan for the next one to two months at the beginning of each month.
The key components of our products typically include Bluetooth Low Energy (BLE) system-on-chip, PPG sensor, flash memory, gravity sensor, battery and screen. OneBased on the specific product requirements, some of the key components, such as BLE system-on-chip, we utilize BLE system-on-chip, is currently procured from a single source of supply. The remaining key components of our products are generally procured from two to three suppliers.
We believe that outsourcing the manufacturing of our products enables greater scale and flexibility at lower costs than establishing our own manufacturing facilities. We outsource the manufacturing of our products to a number of contract manufacturers. We assign the production of the Mi Band series, and the Mi Smart Scale series to multiple manufacturers while each ofand our self-branded product lines is assigned to a number of corresponding manufacturer.manufacturers. Our manufacturers produce our products using design specifications and standards that we establish.
We evaluate on an ongoing basis our current contract manufacturers and component suppliers, including whether or not to utilize new or alternative contract manufacturers or component suppliers. We do not maintain purchase commitments with our suppliers. The terms of the supply agreements with our suppliers generally are two to three years. Our suppliers generally also provide direct order fulfillment services with logistics that include delivery of parts and assembly to our manufacturers.
Prior to entering commercial production, our new products need to go through three phases, including engineering validation testing, design validation testing and production validation testing. During the initial period after launch, we typically maintain low production volume to test the market and then gradually ramp up based on market reception of such new products.
Quality Assurance
We are committed to maintaining the highest level of quality in our products. We have designed and implemented a quality management system that provides the framework for continual improvement of products and processes.
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For our new product lines, we conduct thorough examinations of product samples and each of their components at the product verification testing stage to make sure they satisfy all the technical requirements set forth in our structure design and industrial design. The examination results are recorded on a set of product sample documents, which are further reviewed and approved before they are handed over to our manufacturers to begin commercial production.
For our existing product lines, we also have a quality assurance team that establishes, communicates and monitors quality standards by product category. Suppliers are kept apprised of quality assurance expectations through a vendor management portal environment. In addition, we have quality assurance personnel stationed at the facilities of our key manufacturers to perform sampling inspection to ensure that our manufacturers fully adhere to our quality standards in the production process.
Collaboration with PAI Health and Investments
In June 2018,2020, we beganidentified that miniaturization and artificial intelligence engineering expertise could be applied to collaborateemerging medical imaging technology. In the second half of 2020, we announced partnerships and investments with PAI Health, a heart health software company, to deliver health risk assessment servicesseveral early-stage companies pioneering new, disruptive imaging systems, including Aspen State Imaging, which is pioneering in portable X-ray systems, and Promaxo, which is pioneering in low field strength MRI technology for the insurance industry. This collaboration aims to integrate our high quality smart wearable devices and digital experiences with PAI Health’s unique algorithms for providing a personalized guide for optimal levels of physical activity. PAI Health offers insurers a scientifically validated approach to assess and monitor some of the health risks typically associateddoctor’s office with an inactive lifestyle,initial focus on urology.In 2021 February, we invested in Hyperfine Research, Inc., a growing global health problem. The services we intend to deliver together to insurers include customer acquisition and engagement tools which improve health and reduce costs.
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Strategic Collaboration with Timex
In November 2018, we began to collaborate with Timex Group, a global leader in watchmaking for more than 160 years. We and Timex will explore opportunities to develop new products and increase global presencepioneer in the smart wearables marketplace, pairing Timex’s longstanding expertise as watchmakers with our artificial intelligence technology, App design and manufacturing capabilities, to develop a new generationMRI imaging technologies that offers its portable Swoop system. At the end of smart watches that deliver2021, the Class A common stock of Hyperfine, Inc. commenced trading on performance, style, craftsmanship and price. In addition, Timex and we will explore and develop value-added services, including e-payment, weight management, sports, fitness, and health care related services for users by leveraging our cloud service platform and AI technology and Timex’s vertical integration capabilities in watchmaking.
Strategic Collaboration with McLaren Applied Technologies
In January 2019, we entered into a strategic collaboration arrangement with McLaren Applied Technologies, a global leader in high-performance design and technology solutions, to jointly develop co-branded intelligent, data-driven, customized performance optimization solutions and wearable technologies. We expect these co-developed, co-branded products to work seamlessly with mobile applications to provide users with a comprehensive view of their biometric and activity data, particularly in relation to health and wellness-based activities and competitive e-sports, a market segment with growing popularity. The collaboration will also exploreNasdaq under the application of metrics-driven wearables that contribute to the optimization of human performance in the field of racing, such as body sensors and AI technology.symbol “HYPR.”
Sales and Marketing
Xiaomi directly handles the sales and distributions of Xiaomi Wearable Products and also bears the associated advertising and marketing costs. However, we also play an important role in driving the sales strategy for Xiaomi Wearable Products. For example, we and Xiaomi work together to determine the quantity to be produced, the final selling price, the distribution channel and promotional events.
Since September 2015, we have started to use the brand name “Amazfit” to market our self-branded products. In August 2020, we introduced a new brand name, “Zepp”, for our self-branded products. In 2020, we engaged in various marketing and branding activities, both in China and globally, to promote our Amazfit brand and Zepp brand. In 2021, we promoted our Amazfit products sold in China as Chinese characters “跃我” and promote a slogan “up your game”. We seek to further increase our brand awareness by expanding our marketing efforts, strengthening our competitive differentiation, and providing our users with consistent and high quality products.
Our self-branded products are sold via both online and offline channels. In terms of online platforms, we operate storefront on e-commerce platforms including Xiaomi, JD.com and TMall in addition to directly selling to certain of these e-commerce platforms who subsequently distribute to end users. For our offline network, we work with both well-established distributors to create points of purchase at their retail stores. In addition, our products have international versions that are manufactured for sales and distribution in overseas markets. TheIn 2021, we expanded domestic and international versions of our products are first sold to our domestic distributors, who subsequently distribute to international distributors. We leverage Xiaomi’s strong sales and distribution channelmarketing channels for our Amazfit products and Zepp products on our own, and we plan to keep doing so in China and globally to distribute our self-branded products.the foreseeable future.
Customer Service
User experience is a key focus for our business. We strive to provide personalized support for our users, including support from live customer service representatives.
The first point of contact for customer service inquiries is our self-service “Feedback” function embedded in our mobile apps. Our “Feedback” feature works 24/7 to collect complaints from our users. Representatives of Xiaomi and our distribution channels, especially those that manage our e-commerce channels, also provide customer services to users who purchased our products through their channels. These representatives are required to complete mandatory training on product knowledge, complaint handling and communication skills. In addition, we also maintain an internala call center to provide support to our users.
Additionally, we have set up mobile chat groups to connect with users who are also enthusiastic followers of our products, and conduct focus group study periodically to better understand what our users desire from our products.
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Intellectual Property
Protection of our intellectual property is a strategic priority for our business. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights. Except for certain licenses for the off-the-shelf software used in connection with our day-to-day operations, we generally do not rely on third-party licenses of intellectual property for use in our business.
As of March 31, 2019,February 28, 2022, we had obtained 223665 patents and had submitted 284359 additional patent applications. Our issued PRC patents will expire between 20242022 and 20362040 and our issued foreign patents will expire between 20202024 and 2043.2046. As of March 31, 2019,February 28, 2022, we had registered 5381,788 trademarks and had submitted 399651 additional trademark applications. Our registered PRC trademarks will expire between 20232021 and 20292032 but can be renewed. Our registered foreign trademarks will expire between 20212023 and 2033 but can be renewed. As of March 31, 2019,February 28, 2022, we had obtained 1574 software copyrights.
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In addition to the foregoing protections, we generally control access to and use of our proprietary and other confidential information through the use of internal and external controls, such as use of confidentiality agreement with our employees and outside consultants.
Competition
We compete with other companies in every aspect of our business, particularly with companies that are in the smart wearables market. The smart wearables market has a multitude of participants, including consumer electronics companies specialized in smart wearable technology, such as Fitbit and Garmin, large, broad-based consumer electronics companies that either compete in our market or adjacent markets, or have announced plans to do so, such as Huawei, Apple, Samsung and Samsung,Fitbit, traditional health and fitness companies and traditional watch companies. We also face competition from local providers of similar products in the different regions and countries where our products are distributed.
We believe that the principal competitive factors impacting the market for our products include:
| ● | brand recognition; |
| ● | breadth of product offerings; |
| ● | functionality; |
| ● | sales and distribution; |
| ● | data accuracy; |
| ● | sensor technology and algorithms; |
| ● | user services; and |
| ● | pricing. |
brand recognition;
breadth of product offerings;
functionality;
sales and distribution;
data accuracy;
sensor technology and algorithms;
user services; and
pricing.
We believe we can compete favorably with our competitors on the basis of these factors. We believe we have one of the largest accumulative registered user bases in the global wearable devices industry as a result of our large shipment volume. The large amount of data we collect from our user base allows us to continuously improve our proprietary algorithms to enhance the performance of our products. We plan to establish our own brands as lifestyle brands by consistently introducing innovative products that offer increasingly rich premium services and functionalities for our self-branded products while continuing toproducts. While we leverage Xiaomi’s brand recognition and sales channel for Xiaomi Wearable Products.
We have also developed proprietary chipsets that are extremely power efficient. For example, Mi Band 3 can run upProducts, we continue to 20 days under normal usage after a full charge. Additionally, this feature allowsexpand our own sales channels for our Amazfit products to sample more data from users more frequently, enabling them to even more accurately track the measures while at the same time ensuring stable data transmission.and Zepp products, both in China and globally.
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However, the industry in which we compete is evolving rapidly and is becoming increasingly competitive. For additional information, see “Item 3. Key Information—D. Risk Factors—We operate in highly competitive markets and the scale and resources of some of our competitors may allow them to compete more effectively than we can, which could result in a loss of our market share and a decrease in our revenue and profitability.”
Our Environmental, Social and Governance Initiatives
We are committed to promoting various aspects of our environmental, social and governance (“ESG”) initiatives. With the guidelines of the United Nation Global Compact Sustainable Development Goals, Global Reporting Initiative, and Greenhouse Gas Protocol, we have identified three important pillars in our ESG initiatives: Environmental Sustainability, Social Responsibility and Corporate Governance. We actively support the ESG and we aim at achieving the ESG initiatives by utilizing the unique characteristics of our business and products.
Environmental Sustainability
We leverage our technology, infrastructure and relationships with users and suppliers to reduce the environmental impacts of our business. To make a positive contribution to better protect the environment, we have taken a series of measures in energy-saving, recycling, and sustainable product design. Lower power consumption is always a key strategy of us. We strive to leverage our technological capabilities to improve the battery life and optimize the power consumption of our products. We also continue to increase the utilization of recyclable materials and reduce the use of packaging materials. For instance, we have begun to gradually replace paper user manuals with digital ones for our products.
Social Responsibility
We are fully committed to be socially responsible and make positive impact on the society. Our mission is to connect health with technology and our key strategy is to help our users to live healthier lives. We are consistently developing product functions that can track and help users’ health status. We have been making efforts to raise public awareness of the importance of sports and health by co-hosting a series of sports activities in the community, and we keep encouraging employees to maintain a healthy and joyful lifestyle. For example, on the first Friday of each month, we arrange various indoor and outdoor sports activities for our employees.
Corporate Governance
We have established an environmental, social and governance communications and management mechanism to comprehensively protect the environment, benefit the society and improve our corporate governance. As a vital part of our company, our management and directors contribute their insights into the strategic decision-making process, by drawing on their own gender perspective and diversified background. Our board is composed of highly reputable members, including a female director. We have also established a Privacy and Ethics Committee and appointed Mr. Hongjiang Zhang as the chair, who is newly selected as an international member of the U.S. National Academy of Engineering.
We have been continuously improving our environmental, social and governance initiatives under the guidance of our sustainability framework. We appreciate the oversight, guidance and feedback from different parties and are committed to collaborating closely with domestic and international organizations to support broader industry-wide ESG practices, to explore multi-dimensional use cases for our technologies, to empower traditional industries with our capabilities and to promote a healthier and joyful lifestyle and the long-term sustainability of our society.
Seasonality
Our business has historically been subject to seasonal fluctuations, which may be caused by product launches and various promotional events hosted by our distributors. Although we have historically experienced higher sales during the fourth quarter, primarily due to (i) holiday sales for Black Friday and Cyber Monday and during the lead-up to Christmas and (ii) the “Singles’ Day” online shopping festival organized by TMall, this pattern does not repeat itself every year. We typically experience our lowest sales volume and incur losses in the first quarter of each year.
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Regulation
This section sets forth a summary of the most significant rules and regulations that affect our business activities in China or our shareholders’ rights to receive dividends and other distributions from us.
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Regulation on Foreign Investment
Investment activities in the PRC by foreign investors are principally governed by the Catalogue of Industries for Encouraging Foreign Investment, or the Encouraging Catalogue, and the Special Management Measures (Negative List) for the GuidanceAccess of Foreign Investment, Industry, or the Catalogue,Negative List, both of which waswere promulgated and isare amended from time to time by the Ministry of Commerce, or the MOFCOM, and the National DevelopmentNDRC. The Encouraging Catalogue and Reform Commission, or NDRC, and together with Existing FIE Laws and their respective implementation rules and ancillary regulations. The Catalogue laysthe Negative List lay out the basic framework for foreign investment in China, classifying businesses into three categories with regard to foreign investment: “encourage,”“encourage”, “restricted” and “prohibited.”“prohibited”. Industries not listed in the catalogEncouraging Catalogue and the Negative List are generally deemed as falling into a fourth category “permitted” unless specifically restricted by other PRC laws. In addition, on June 28, 2018 the
On December 27, 2020, MOFCOM and the NDRC jointly promulgatedreleased the Catalog of Industries for Encouraging Foreign Investment (2020 Version), which became effective on January 27, 2021, to replace the previous Encouraging Catalogue. On December 27, 2021, MOFCOM and the NDRC released the Special Management Measures (Negative List) for the Access of Foreign Investment or the 2018 Negative List,(2021 Version), which became effective on July 28, 2018January 1, 2021, to amend the Guidance Catalog andreplace the previous negative list thereunder.Negative List. Furthermore, the Article 6 of the Negative List (2021 Version) provides that any domestic enterprise engaged in the business where foreign investment is “prohibited” shall apply to the relevant authorities for their review and approval as to its offering and listing in overseas markets, and overseas investors shall not participate in the operation and management of such domestic enterprise.
On March 15, 2019, the National People’s Congress promulgated the FIL, which will comecame into effect on January 1, 2020 and upon thenreplaced the FIL will replace the ExistingOutdated FIE Laws. The FIL embodies an expected regulatory trend in PRC to rationalize its foreign investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for both foreign and domestic investments. The FIL, by means of legislation, establishes the basic framework for the access, promotion, protection and administration of foreign investment in view of investment protection and fair competition.
According to the FIL, foreign investment shall enjoy pre-entry national treatment, except for those foreign-invested entities that operate in industries deemed to be either “restricted” or “prohibited” in the “negative list”. The FIL provides that foreign-invested entities operating in foreign “restricted” or “prohibited” industries will require entry clearance and other approvals. However, it is unclear whether the “negative list” will differ from the 2018 Negative List. In addition, the FIL does not comment on the concept of “de facto control” or contractual arrangements with variable interest entities, however, it has a catch-all provision under definition of “foreign investment” to include investments made by foreign investors in China through means stipulated by laws or administrative regulations or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions to provide for contractual arrangements as a form of foreign investment. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.”
The FIL also provides several protective rules and principles for foreign investors and their investments in the PRC, including, among others, that local governments shall abide by their commitments to the foreign investors; foreign-invested enterprises are allowed to issue stocks and corporate bonds; except for special circumstances, in which case statutory procedures shall be followed and fair and reasonable compensation shall be made in a timely manner, expropriate or requisition the investment of foreign investors is prohibited; mandatory technology transfer is prohibited; foreign investors’ funds are allowed to be freely transferred out and into the territory of PRC, which run through the entire lifecycle from the entry to the exit of foreign investment; and providing an all-around and multi-angle system to guarantee fair competition of foreign-invested enterprises in the market economy. In addition, foreign investors or the foreign investment enterprise should be imposed legal liabilities for failing to report investment information in accordance with the requirements. Furthermore, the FIL provides that foreign-invested enterprises established according to the existing laws regulating foreign investment may maintain their structure and corporate governance within five years after the implementing of the FIL, which means that foreign-invested enterprises may be required to adjust the structure and corporate governance in accordance with the current PRC Company Law and other laws and regulations governing the corporate governance.
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On December 26, 2019, the State Council promulgated the Implementation Rules to the Foreign Investment Law, which became effective on January 1, 2020. The implementation rules further clarified that the State Council encourages and promotes foreign investment, protects the lawful rights and interests of foreign investors, regulates foreign investment administration, continues to optimize foreign investment environment and advances a higher-level opening.
On December 30, 2019, the MOFCOM and State Administration for Market Regulation jointly promulgated the Measures for Information Reporting on Foreign Investment, which became effective on January 1, 2020. Pursuant to the Measures for Information Reporting on Foreign Investment, in the case that a foreign investor carries out investment activities in China directly or indirectly, the foreign investor or the foreign invested enterprise shall submit the investment information to the competent commerce department.
On December 19, 2020, the MOFCOM and the NDRC jointly promulgated the Measures for the Security Review of Foreign Investments, which took effect on January 18, 2021. Pursuant to the measures, for foreign investments which affect or may affect national security, security review shall be conducted in accordance with the provisions of the measures. The State establishes a working mechanism, or the Working Mechanism, for the security review of foreign investments to be responsible for organizing, coordinating and guiding the security review of foreign investments. For foreign investments related to important cultural products and services, important information technology and internet products and services, and others, the foreign investors who obtains the actual controlling stake in the investee enterprise or relevant parties in the PRC shall declare to the office of the Working Mechanism prior to proceeding with the investments.
Regulation on Product Quality
The PRC Product Quality Law, amended by the Standing Committee of National People’s Congress in December 2018, applies to all production and sale activities in China. PursuantChina.Pursuant to this law, products offered for sale must satisfy the relevant quality and safety standards. Enterprises may not produce or sell counterfeit products in any fashion. Violations of state or industrial standards for health and safety and any other related violations may result in civil liabilities and administrative penalties, such as compensation for damages, fines, suspension or shutdown of business, as well as confiscation of products illegally produced and sold and the proceeds from such sales. Severe violations may subject the responsible individual or enterprise to criminal liabilities. Where a defective product causes physical injury to a person or damage to another person’s property, the victim may claim compensation from the manufacturer or from the seller of the product. If the seller pays compensation and it is the manufacturer that should bear the liability, the seller has a right of recourse against the manufacturer. Similarly, if the manufacturer pays compensation and it is the seller that should bear the liability, the manufacturer has a right of recourse against the seller.
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Regulation on Consumer Protection
The PRC Consumer Protection Law, as amended on October 25, 2013 and effective on March 15, 2014, sets out the obligations of business operators and the rights and interests of the consumers. Pursuant to this law, business operators must guarantee that the commodities they sell satisfy the requirements for personal or property safety, provide consumers with authentic information about the commodities, and guarantee the quality, function, usage and term of validity of the commodities. Failure to comply with the Consumer Protection Law may subject business operators to civil liabilities such as refunding purchase prices, exchange of commodities, repairing, ceasing damages, compensation, and restoring reputation, and even subject the business operators or the responsible individuals to criminal penalties if business operators commit crimes by infringing the legitimate rights and interests of consumers. The amended PRC Consumer Protection Law further strengthens the protection of consumers and imposes more stringent requirements and obligations on business operators, especially on the business operators through the Internet. For example, the consumers are entitled to return the goods (except for certain specific goods) within seven days upon receipt without any reasons when they purchase the goods from business operators via the Internet. The consumers whose interests have been damaged due to their purchase of goods or acceptance of services on online marketplace platforms may claim damages from sellers or service providers.
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Regulation on Torts
Under the Tort LawCivil Code of the PRC, which was issued by the National Congress and became effective on July 1, 2010, if2021, where damages to other persons are caused by defective products, the infringed person may claim compensation against the producers or the sellers of the product. Where the defection is due to the fault of the producers, the sellers who have paid compensation to the infringed person shall have the right to indemnification against the producers. Where damages to other persons are caused by defective products due to the fault of a third party, such as the parties providing transportation or warehousing, the producers and the sellers of the products have the right to recover their respective losses from such third parties. If defective products are identified after they have been put into circulation, the producers or the sellers shall take remedial measures such as issuance of aceasing the sale, warning and recall of products, etc. in a timely manner. The producers or the sellers shall be liable under tort if they fail to take remedial measures in a timely manner or have not made efforts to take remedial measures, thus causing damages. If the products are produced or sold with known defects, causing deaths or severe adverse health issues, the infringed party has the right to claim punitive damages in addition to compensatory damages.
Regulation on Intellectual Property Rights
The PRC has adopted comprehensive legislation governing intellectual property rights, including patents, trademarks, copyrights and domain names.
Patents
Pursuant to the PRC Patent Law, most recently amended on December 27, 2008, or the PRC Patent Law (2008 version), and its implementation rules, most recentlylast amended on January 9, 2010, patents in China fall into three categories: invention, utility model and design. An invention patent is granted to a new technical solution proposed in respect of a product or method or an improvement of a product or method. A utility model is granted to a new technical solution that is practicable for application and proposed in respect of the shape, structure or a combination of both of a product. A design patent is granted to the new design of a certain product in shape, pattern or a combination of both and in color, shape and pattern combinations aesthetically suitable for industrial application. Under the PRC Patent Law (2008 version), the term of patent protection starts from the date of application. Patents relating to invention are effective for twenty years, and utility models and designs are effective for ten years from the date of application. The PRC Patent Law (2008 version) adopts the principle of ”first-to-file”“first-to-file” system, which provides that where more than one person files a patent application for the same invention, a patent will be granted to the person who files the application first.
Existing patents can become narrowed, invalid or unenforceable due to a variety of grounds, including lack of novelty, creativity, and deficiencies in patent application. In China, a patent must have novelty, creativity and practical applicability. Under the PRC Patent Law (2008 version), novelty means that before a patent application is filed, no identical invention or utility model has been publicly disclosed in any publication in China or overseas or has been publicly used or made known to the public by any other means, whether in or outside of China, nor has any other person filed with the patent authority an application that describes an identical invention or utility model and is recorded in patent application documents or patent documents published after the filing date. Creativity means that, compared with existing technology, an invention has prominent substantial features and represents notable progress, and a utility model has substantial features and represents any progress. Practical applicability means an invention or utility model can be manufactured or used and may produce positive results. Patents in China are filed with the State Intellectual Property Office, or SIPO. Normally, the SIPO publishes an application for an invention patent within 18 months after the filing date, which may be shortened at the request of applicant. The applicant must apply to the SIPO for a substantive examination within three years from the date of application.
Article 20 of the PRC Patent Law (2008 version) provides that, for an invention or utility model completed in China, any applicant (not just Chinese companies and individuals), before filing a patent application outside of China, must first submit it to the SIPO for a confidential examination. Failure to comply with this requirement will result in the denial of any Chinese patent for the relevant invention. This added requirement of confidential examination by the SIPO has raised concerns by foreign companies who conduct research and development activities in China or outsource research and development activities to service providers in China.
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On October 17, 2020, the PRC Patent Law was further amended by the Standing Committee of the National People’s Congress, or the PRC Patent Law (2020 version), and took effect on June 1, 2021, pursuant to which invention patents are valid for twenty years, while design patents are valid for fifteen years and utility model patents are valid for ten years, commencing from the date of application. Where a patent right for invention is granted after three years from the date of request for substantial examination of a patent for invention and after four years from the filing date, the patent administrative department under the State Council shall grant compensation for the duration of the patent right due to any unreasonable delay in grant of patent rights at the request of the patentee, except for any unreasonable delay caused by the applicant. In addition, the PRC Patent Law (2020 version) provides a criterial for compensation amount for intentional patent infringement of one to five times of actual loss suffered by the rights holder due to the infringement or the gains obtained by the infringer from the infringement, and the extension of the limitation of action for patent infringement of up to three years.
Unauthorized use of patents without consent from owners of patents, forgery of the patents belonging to other persons, or engagement in other patent infringement acts, will subject the infringers to infringement liability. Serious offences such as forgery of patents may be subject to criminal penalties.
When a dispute arises out of infringement of the patent owner’s patent right, Chinese law requires that the parties first attempt to settle the dispute through mutual consultation. However, if the dispute cannot be settled through mutual consultation, the patent owner, or an interested party who believes the patent is being infringed, may either file a civil legal suit or file an administrative complaint with the relevant patent administration authority. A Chinese court may issue a preliminary injunction upon the patent owner’s or an interested party’s request before instituting any legal proceedings or during the proceedings. Damages for infringement are calculated as the loss suffered by the patent holder arising from the infringement, and if the loss suffered by the patent holder arising from the infringement cannot be determined, the damages for infringement shall be calculated as the benefit gained by the infringer from the infringement. If it is difficult to ascertain damages in this manner, damages may be determined by using a reasonable multiple of the license fee under a contractual license. Statutory damages may be awarded in the circumstances where the damages cannot be determined by the above mentioned calculation standards. The damage calculation methods shall be applied in the aforementioned order. Generally, the patent owner has the burden of proving that the patent is being infringed. However, if the owner of an invention patent for manufacturing process of a new product alleges infringement of its patent, the alleged infringer has the burden of proof.
As of March 31, 2019,February 28, 2022, we had 140349 patents granted and 175239 patent applications pending in China, 83316 patents granted and 109120 patent applications pending outside China.
Trademark Law
The PRC Trademark Law and its implementation rules protect registered trademarks. The PRC Trademark Office of StateNational Intellectual Property Administration of Industry and Commerce is responsible for the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted a ”first-to-file”“first-to-file” principle with respect to trademark registration. As of March 31, 2019,February 28, 2022, we owned 4401,108 registered trademarks in different applicable trademark categories and were in the process of applying to register 129263 trademarks in China, 98680 registered trademarks in different applicable trademark categories and were in the process of applying to register 270388 trademarks outside China.
In addition, pursuant to the PRC Trademark Law, counterfeit or unauthorized production of the label of another person’s registered trademark, or sale of any label that is counterfeited or produced without authorization will be deemed as an infringement to the exclusive right to use a registered trademark. The infringing party will be ordered to stop the infringement immediately, a fine may be imposed and the counterfeit goods will be confiscated. The infringing party may also be held liable for the right holder’s damages, which will be equal to the gains obtained by the infringing party or the losses suffered by the right holder as a result of the infringement, including reasonable expenses incurred by the right holder for stopping the infringement. If the gains or losses are difficult to determine, the court may render a judgment awarding damages of no more than RMB3.0RMB5.0 million.
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Software Copyright Law
In order to further implement the Computer Software Protection Regulations promulgated by the State Council on December 20, 2001, and latest amended subsequently,on January 30, 2013, the State Copyright Bureau issued the Computer Software Copyright Registration Procedures on February 20, 2002, which apply to software copyright registration, license contract registration and transfer contract registration. As of March 31, 2019,February 28, 2022, we havehad registered 1574 computer software copyrights in China.
Regulation on Domain Name
The domain names are protected under the Administrative Measures on the Internet Domain Names promulgated by the Ministry of Industry and Information Technology, or the MIIT, effective on November 1, 2017. MIIT is the major regulatory body responsible for the administration of the PRC Internet domain names, under supervision of which China Internet Network Information Center, or CNNIC, is responsible for the daily administration of CN domain names and Chinese domain names. On September 25, 2002,June 18, 2019, CNNIC promulgated the Implementation Rules of Registration of Country Code Top-level Domain Name, or the CNNICccTLD Registration Rules, which was renewedtook effect on June 5, 2009 and May 29, 2012, respectively.the same day. Pursuant to the Administrative Measures on the Internet Domain Names and the CNNICccTLD Registration Rules, the registration of domain names adopts the “first to file” principle and the registrant shall complete the registration via the domain name registration service institutions. In the event of a domain name dispute, the disputed parties may lodge a complaint to the designated domain name dispute resolution institution to trigger the domain name dispute resolution procedure in accordance with the CNNIC Measures onChina ccTLD Resolution of the Top Level Domains Disputes,Policy promulgated by CNNIC, file a suit to the People’s Court or initiate an arbitration procedure. As of March 31, 2019,February 28, 2022, we havehad registered 71139 domain names.
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Regulation on Radio Transmission Equipment
The Regulations on Radio Administration of the PRC jointly issued by the State Council and the Central Military Commission on November 11, 2016 and became effective on December 1, 2016, provide requirements concerning verification and approval of the models of radio transmission equipment. Pursuant to this law, except for micro-power short-range radio transmission equipment, whoever manufactures or imports other radio transmission equipment for sales or use on the domestic market shall apply to the State Radio Administration for model verification and approval. Whoever manufactures or imports radio transmission equipment that has not obtained model verification and approval for sales or use on the domestic market shall be ordered by the relevant radio administration to make correction and subject to fines. To comply with these laws and regulations, we have obtained the necessary Radio Transmission Equipment Type Approval Certificates for all of our products manufacturing and selling in the PRC.
Regulation on Advertising Business
The State Administration for Industry and Commerce,Market Regulation, or the SAIC,SAMR, is the government agency responsible for regulating advertising activities in the PRC.
According to the PRC laws and regulations, companies that engage in advertising activities must obtain from SAICSAMR or its local branches a business license which specifically includes operating an advertising business within its business scope. The business license of an advertising company is valid for the duration of its existence, unless the license is suspended or revoked due to a violation of any relevant law or regulation. PRC advertising laws and regulations set forth certain content requirements for advertisements in the PRC including, among other things, prohibitions on false or misleading content, superlative wording, socially destabilizing content or content involving obscenities, superstition, violence, discrimination or infringement of the public interest. Advertisers, advertising agencies, and advertising distributors are required by PRC advertising laws and regulations to ensure that the content of the advertisements they prepare or distribute is true and in full compliance with applicable law. In providing advertising services, advertising operators and advertising distributors must review the supporting documents provided by advertisers for advertisements and verify that the content of the advertisements complies with applicable PRC laws and regulations. Prior to distributing advertisements that are subject to government censorship and approval, advertising distributors are obligated to verify that such censorship has been performed and approval has been obtained. The release or delivery of advertisements through the Internet shall not impair the normal use of the network by users. The advertisements released in pop-up form on the webpage of the Internet and other forms shall indicate the close flag in prominent manner and ensure one-key close. Violation of these regulations may result in penalties, including fines, confiscation of advertising income, orders to cease dissemination of the advertisements and orders to publish an advertisement correcting the misleading information. In circumstances involving serious violations, SAICSAMR or its local branches may revoke violators’ licenses or permits for their advertising business operations.
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On July 4, 2016, the SAICState Administration of Industry and Commerce, the predecessor of SAMR, issued the Interim Measures for the Administration of Internet Advertising to regulate internet advertising activities. According to these measures, no advertisement of any medical treatment, medicines, food for special medical purpose, medical apparatuses, pesticides, veterinary medicines, dietary supplement or other special commodities or services subject to examination by an advertising examination authority as stipulated by laws and regulations may be published unless the advertisement has passed such examination. In addition, no entity or individual may publish any advertisement of over-the-counter medicinesprescription drugs or tobacco on the internet. An internet advertisement must be identifiable and clearly identified as an “advertisement” to the consumers. Paid search advertisements are required to be clearly distinguished from natural search results. In addition, the following internet advertising activities are prohibited: providing or using any applications or hardware to intercept, filter, cover, fast forward or otherwise restrict any authorized advertisement of other persons; using network pathways, network equipment or applications to disrupt the normal data transmission of advertisements, alter or block authorized advertisements of other persons or load advertisements without authorization; or using fraudulent statistical data, transmission effect or matrices relating to online marketing performance to induce incorrect quotations, seek undue interests or harm the interests of others. Internet advertisement publishers are required to verify relevant supporting documents and check the content of the advertisement and are prohibited from publishing any advertisement with unverified content or without all the necessary qualifications. Internet information service providers that are not involved in internet advertising business activities but simply provide information services are required to block any attempt to publish an illegal advisement that they are aware of or should reasonably be aware of through their information services.
To comply with these laws and regulations, we have obtained a business license, which allows us to operate advertising businesses, and adopted several measures. Our advertising contracts require that substantially all advertising agencies or advertisers that contract with us must examine the advertising content provided to us to ensure that such content areis truthful, accurate and in full compliance with PRC laws and regulations.
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The Regulations on Supervision and Administration of Medical Devices, issued by the State Council in on January 4, 2000, and further amended on March 7, 2014, and on May 4, 2017, respectively, divide medical devices into three types. For Class I medical devices, the record-filing management shall be implemented, while for Class II and Class III ones, the registration management shall be implemented. In case of the application for registration of Class II medical devices, the applicant for registration shall submit the registration application materials to the CFDA at the province, autonomous region or municipality level. In case of the application for registration of Class III medical devices, the applicant for registration shall submit the registration application materials to the CFDA. The medical device registration certificate for Class II and Class III medical devices is valid for five years. Where engaging in production of Class II and Class III medical devices, the manufacturing party shall obtain the medical device production license. In addition, where engaging in operation of Class II medical devices, an operating enterprise shall also make a record-filing with the food and drug supervision and administration department.
Currently, Anhui Huami Healthcare Co., Ltd., a subsidiary of Anhui Huami, has engaged in the development of an ECG sensors-enabled smart band, which will be deemed as Class II medical devices for monitoring ECGs. We have completed the record-filing for operating Class II medical devices. We have also obtained the medical device production license and the CFDA Class II medical devices certification for such ECG sensors-enabled smart band.
Regulation on Information Security
The Standing Committee of the National People’s Congress promulgated the Cyber Security Law of the PRC, or the Cyber Security Law, which became effective on June 1, 2017, to protect cyberspace security and order. Pursuant to the Cyber Security Law, any individual or organization using the network must comply with the constitution and the applicable laws, follow the public order and respect social moralities, and must not endanger cyber security, or engage in activities by making use of the network that endanger the national security, honor and interests, or infringe on the fame, privacy, intellectual property and other legitimate rights and interests of others. The Cyber Security Law sets forth various security protection obligations for network operators, which are defined as “owners and administrators of networks and network service providers”, including, among others, complying with a series of requirements of tiered cyber protection systems; verifying users’ real identity; localizing the personal information and important data gathered and produced by key information infrastructure operators during operations within the PRC; and providing assistance and support to government authorities where necessary for protecting national security and investigating crimes.
On June 10, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Data Security Law, which became effective in September 2021. The PRC Data Security Law provides for data security and privacy obligations on entities and individuals carrying out data activities and introduces a data classification and hierarchical protection system based on the importance of data in economic and social development, as well as the degree of harm it will cause to national security, public interests, or legitimate rights and interests of individuals or organizations when such data is tampered with, destroyed, leaked, or illegally acquired or used. The appropriate level of protection measures is required to be taken for each respective category of data. For example, a processor of important data shall designate the personnel and the management body responsible for data security, carry out risk assessments for its data processing activities and file the risk assessment reports with the competent authorities. In addition, the PRC Data Security Law provides a national security review procedure for those data activities which affect or may affect national security and imposes export restrictions on certain data and information.
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On April 13, 2020, the CAC, the NDRC and several other administrations jointly promulgated the Measures for Cybersecurity Review, or the Review Measures, which became effective on June 1, 2020. The Review Measures establish the basic framework for national security reviews of network products and services, and provide the principal provisions for undertaking cyber security reviews. In addition, on July 22, 2020, the Ministry of Public Security issued the Guiding Opinions on Implementing the Cyber Security Protection System and Critical Information Infrastructure Security Protection System to further improve the national cyber security prevention and control system. On December 28, 2021, the CAC, together with certain other PRC governmental authorities, jointly released the Revised Cybersecurity Review Measures, which took effect on February 15, 2022. Pursuant to the Revised Cybersecurity Review Measures, operators of critical information infrastructure that intend to purchase network products and services, or online platform operators that conduct data processing activities, that affect or may affect national security must apply for a cybersecurity review. In addition, any online platform operator holding over one million users’ individual information must apply for a cybersecurity review before listing abroad. The cybersecurity review will evaluate, among others, the risk of critical information infrastructure, core data, important data, or the risk of a large amount of personal information being influenced, controlled or maliciously used by foreign governments after going public, and cyber information security risk. The Revised Cybersecurity Review Measures set out certain general factors which would be the focus in assessing the national security risk during a cybersecurity review. However, the scope of network product or service or data processing activities that will or may affect national security is still unclear, and the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws, rules and regulations.
On July 30, 2021, the PRC State Council promulgated the Regulations on Security Protection of Critical Information Infrastructures, which took effect on September 1, 2021 and provide that “critical information infrastructures” shall mean any important network facilities or information systems of important industries or fields such as public communication and information service, energy, communications, water conservation, finance, public services, e-government affairs and national defense science, and any other important network facilities or information systems which may endanger national security, people’s livelihood and public interest in case of damage, function loss or data leakage. In addition, relevant administration departments of each critical industry and sector, or Protection Departments, shall be responsible to formulate eligibility criteria and determine the critical information infrastructure operator in the respective industry or field. The operators shall be informed about the final determination as to whether they are categorized as critical information infrastructure operators. The regulations further require critical information infrastructures operators, among others, (i) to report to the competent Protection Departments in a timely manner when the identification result may be affected due to material changes in the critical information infrastructures; (ii) to plan, construct or put into use the security protection measures and the critical information infrastructures simultaneously; and (iii) to report to the competent Protection Departments in a timely manner in the event of merger division or dissolution, and deal with critical information infrastructures as required by the competent Protection Departments. Operators in violation of the regulations may be ordered to rectify, subject to warnings, fines and other administrative penalties or even criminal liabilities, and the directly responsible personnel in charge may also be imposed on fines or other liabilities.
To comply with these laws and regulations, we have adopted security policies and measures to protect our cyber system and user information.
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In addition, on October 29, 2021, the CAC has publicly solicited opinions on the Measures for the Security Assessment of Data Cross-border Transfer (Draft for Comments), which requires that any data processor providing important data collected and generated during operations within the territory of the PRC or personal information that should be subject to security assessment according to law to an overseas recipient shall conduct security assessment. The Measures for the Security Assessment of Data Cross-border Transfer (Draft for Comments) provides five circumstances, under any of which data processors shall, through the local cyberspace administration at the provincial level, apply to the national cyberspace administration for security assessment of data cross-border transfer. These circumstances include: (i) where the data to be transferred to an overseas recipient are personal information or important data collected and generated by operators of critical information infrastructure; (ii) where the data to be transferred to an overseas recipient contain important data; (iii) where a personal information processor that has processed personal information of more than one million people provides personal information overseas; (iv) where the personal information of more than 100,000 people or sensitive personal information of more than 10,000 people are transferred overseas accumulatively; or (v) other circumstances under which security assessment of data cross-border transfer is required as prescribed by the national cyberspace administration. Furthermore, on 14 November 2021, the CAC publicly solicited opinions on the Regulations on the Administration of Cyber Data Security (Draft for Comments), or the Draft Data Security Regulations. According to the Draft Data Security Regulations, data processors shall, in accordance with relevant state provisions, apply for cyber security review when carrying out the following activities:(i) the merger, reorganization or separation of Internet platform operators that have acquired a large number of data resources related to national security, economic development or public interests, which affects or may affect national security; (ii) data processors that handle the personal information of more than one million people intends to be listed abroad; (iii) the data processor intends to be listed in Hong Kong, which affects or may affect national security; (iv) other data processing activities that affect or may affect national security. However, substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation of the Measures for the Security Assessment of Data Cross-border Transfer (Draft for Comments) and the Regulations on the Administration of Cyber Data Security (Draft for Comments).
Regulation on Internet Privacy
The Administrative Measures on Internet Information Services, issued by the State Council on January 8, 2011, prohibit ICP service operators from insulting or slandering a third party or infringing upon the lawful rights and interests of a third party. Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT on December 19, 2011, an ICP operator may not collect any user personal information or provide any such information to third parties without the consent of a user. An ICP service operator must expressly inform the users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for the provision of its services. An ICP service operator is also required to properly keep the user personal information, and in case of any leak or likely leak of the user personal information, the ICP service operator must take immediate remedial measures and, in severe circumstances, to make an immediate report to the telecommunications regulatory authority. In addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the Standing Committee of the National People’s Congress on December 28, 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT on July 16, 2013, any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes. An ICP service operator must also keep such information strictly confidential, and is further prohibited from divulging, tampering or destroying of any such information, or selling or proving such information to other parties. Any violation of the above decision or order may subject the ICP service operator to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities.
Furthermore, on June 28, 2016, the State Internet Information Office issued the Administrative Provisions on Mobile Internet Applications Information Services, which became effect on August 1, 2016, to further strengthen the regulation of the mobile applications information services. Pursuant to these provisions, owners or operators of mobile applications that provide information services are required to be responsible for information security management, establish and improve the protective mechanism for user information, observe the principles of legality, rightfulness and necessity, and expressly state the purpose, method and scope of, and obtain user consent to, the collection and use of users’ personal information. In addition, the Cyber Security Law also requires network operators to strictly keep confidential users’ personal information that they have collected and to establish and improve user information protective mechanism.
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In addition, the Announcement of Launching Special Crackdown Against Illegal Collection and Use of Personal Information by Apps was issued with effect on January 23, 2019, and commenced a coordinated effort among the CAC, the MIIT, the Ministry of Public Security and the SAMR to combat the illegal collection and use of personal information by mobile apps throughout the PRC. On October 31, 2019, the MIIT issued the Notice on the Special Rectification of Apps Infringing Users’ Rights and Interests, pursuant to which app providers were required to promptly rectify issues the MIIT designated as infringing app users’ rights such as collecting personal information in violation of PRC regulations and setting obstacles for user account deactivation. On July 22, 2020, MIIT issued the Notice on Carrying out Special Rectification Actions in Depth against the Infringement upon Users’ Rights and Interests by Apps to rectify the following problems (i) illegal processing of personal information of users by the APP and the SDK; (ii) the conduct of setting up obstacles and frequently harassing users; (iii) cheating and misleading users; and (iv) inadequate implementation of application distribution platforms’ responsibilities.
Pursuant to the Civil Code of the PRC which came into effect on January 1, 2021, the personal information of a natural person shall be protected by the law. Any organization or individual that needs to obtain personal information of others shall obtain such information legally and ensure the safety of such information, and shall not illegally collect, use, process or transmit personal information of others, or illegally purchase or sell, provide or make public personal information of others.
On August 20, 2021, the Standing Committee of the National People’s Congress promulgated the PRC Personal Information Protection Law, which became effective from November 1, 2021. Pursuant to the PRC Personal Information Protection Law, personal information refers to the information related to an identified or identifiable individual recorded electronically or by other means, excluding the anonymized information, and processing of personal information includes among others, the collection, storage, use, handling, transmission, provision, disclosure, deletion of personal information. The PRC Personal Information Protection Law explicitly sets forth the circumstances where it is allowed to process personal information, including (i) the consent from the individual has been obtained; (ii) it is necessary for the conclusion and performance of a contract under which an individual is a party, or it is necessary for human resource management in accordance with the labor related rules and regulations and the collective contracts formulated or concluded in accordance with laws; (iii) it is necessary to perform statutory duties or statutory obligations; (iv) it is necessary to respond to public health emergencies, or to protect the life, health and property safety of individuals in emergencies; (v) carrying out news reports, public opinion supervision and other acts for the public interest, and processing personal information within a reasonable scope; (vi) processing personal information disclosed by individuals or other legally disclosed personal information within a reasonable scope in accordance with this law; or (vii) other circumstances stipulated by laws and administrative regulations. In addition, this law emphasizes that individuals have the right to withdraw their consent to process their personal information, and the processors must not refuse to provide products or services on the grounds that the individuals do not agree to the processing of their personal information or withdraw their consent, unless processing of personal information is necessary for the provision of products or services. Before processing the personal information, the processors should truthfully, accurately and completely inform individuals of the following matters in a conspicuous manner and in clear and easy-to-understand language: (i) the name and contact information of the personal information processor; (ii) the purpose of processing personal information, processing method, type of personal information processed, and the retention period; (iii) methods and procedures for individuals to exercise their rights under this law; (iv) other matters that should be notified according to laws and administrative regulations. Furthermore, the law provides that personal information processors who use personal information to make automated decisions should ensure the transparency of decision-making and the fairness and impartiality of the results, and must not impose unreasonable differential treatment on individuals in terms of transaction prices and other transaction conditions.
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In addition to the aforementioned general rules, the PRC Personal Information Protection Law also introduces the rules for processing sensitive personal information, which refers to the personal information that, once leaked or illegally used, can easily lead to the infringement of the personal dignity of natural persons or harm personal and property safety, including biometrics, religious beliefs, specific identities, medical health, financial accounts, whereabouts and other information, as well as personal information of minors under the age of fourteen. Personal information processors can process sensitive personal information only if they have a specific purpose and sufficient necessity, and take strict protective measures. In addition, the law provides rules for cross-border provision of personal information. In particular, it is provided that the operators of critical information infrastructures and the personal information processors that process personal information up to the number prescribed by the national cyberspace administration shall store personal information collected and generated within the PRC. If it is really necessary to provide such personal information overseas, they shall pass the security assessment organized by the national cyberspace administration, except as otherwise stipulated by laws, administrative regulations and the national cyberspace administration. Any processor in violation of this law may be subject to administrative penalties including rectifications, warnings, fines, confiscation of illegal gains, suspension of the apps illegally processing personal information or suspension of the relevant business, revocation of business operation permits or business licenses, civil liabilities or even criminal liabilities. The directly responsible personnel in charge and other directly responsible personnel may be imposed with fines and prohibited from serving as directors, supervisors, senior management personnel and personal information protection officers of related companies within a certain period of time.
To comply with these laws and regulations, we have required our users to consent to our collecting and using their personal information, and established information security systems to protect user’s privacy.
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The Labor Law of the PRC, effective on January 1, 1995 and subsequently amended on August 27, 2009 and December 29, 2018, the PRC EmploymentLabor Contract Law, effective on January 1, 2008 and subsequently amended on December 28, 2012 and the Implementing Regulations of the Employment Contract Law, effective on September 18, 2008, provide requirements concerning employment contracts between an employer and its employees. If an employer fails to enter into a written employment contract with an employee within one year from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the execution of the written employment contract. The Labor Contract Law and its implementation rules also require compensation to be paid upon certain terminations, which significantly affects the cost of reducing workforce for employers. In addition, if an employer intends to enforce a non-compete provision in an employment contract or non-competition agreement with an employee, it has to compensate the employee on a monthly basis during the term of the restriction period after the termination or expiry of the labor contract. Employers in most cases are also required to provide severance payment to their employees after their employment relationships are terminated.
Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. According to the Social Insurance Law, an employer that fails to make social insurance contributions may be ordered to pay the required contributions within a stipulated deadline and be subject to a late fee. If the employer still fails to rectify the failure to make social insurance contributions within the stipulated deadline, it may be subject to a fine ranging from one to three times the amount overdue. According to the Regulations on Management of Housing Fund, an enterprise that fails to make housing fund contributions may be ordered to rectify the noncompliance and pay the required contributions within a stipulated deadline; otherwise, an application may be made to a local court for compulsory enforcement.
Regulation on Insurance Brokerage Business
On June 30, 1995, the Standing Committee of People’s Congress issued the PRC Insurance Law which is the most important law in the regulatory and legal framework for the PRC insurance industry. The PRC Insurance Law was last amended on April 24, 2015, which provides that an insurance broker is an entity that, in the interest of the applicant, provides intermediary services between the applicant and the insurer for the conclusion of an insurance contract and receives a commission in accordance with relevant laws. An insurance broker shall obtain an Insurance Brokerage License before it engages in insurance brokerage business.
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Since the promulgation and implementation of the PRC Insurance Law in 1995, the insurance supervision and regulatory authority has promulgated a series of departmental rules and regulations and other regulatory documents pursuant to the PRC Insurance Law, covering almost all aspects of insurance operations. Regarding the establishment of insurance brokers, there are other important laws and regulations besides the PRC Insurance Law, including the Regulatory Provisions on Insurance Brokerages, or the Insurance Brokerages Provisions, which became effective on May 1, 2018. Insurance Brokerages Provisions specify provisions regarding market access, operation rules, exit from market, industry self-discipline, monitoring and inspection and legal obligations for insurance brokers.
Regulation on Tax
PRC Enterprise Income Tax
The PRC Enterprise Income Tax Law, which was promulgated on March 16, 2007 and took effect on January 1, 2008, and further amended on February 24, 2017 and December 29, 2018, imposes a uniform enterprise income tax rate of 25% on all PRC resident enterprises, including foreign-invested enterprises, unless they qualify for certain exceptions. The enterprise income tax is calculated based on the PRC resident enterprise’s global income as determined under PRC tax laws and accounting standards. If a non-resident enterprise sets up an organization or establishment in the PRC, it will be subject to enterprise income tax for the income derived from such organization or establishment in the PRC and for the income derived from outside the PRC but with an actual connection with such organization or establishment in the PRC.
The PRC Enterprise Income Tax Law and its implementation rules, which was promulgated on December 6, 2007 and took effectamended on January 1, 2008,April 23, 2019, permit certain “high and new technology enterprises strongly supported by the state” that independently own core intellectual property and meet statutory criteria, to enjoy a reduced 15% enterprise income tax rate. On January 29, 2016, the State Administration for Taxation, or SAT, the Ministry of Science and Technology and the Ministry of Finance jointly issued the Administrative Rules for the Certification of High and New Technology Enterprises specifying the criteria and procedures for the certification of High and New Technology Enterprises.
PRC Value Added Tax
On January 1, 2012, the State Council officially launched a pilot value-added tax reform program, or the Pilot Program, applicable to businesses in selected industries. Businesses in the Pilot Program would pay value added tax, or VAT, instead of business tax. The Pilot Program initially applied only to transportation industry and “modern service industries” in Shanghai and would be expanded to eight trial regions (including Beijing and Guangdong province) and nationwide if conditions permit.
On March 23, 2016, the MOF and the SAT jointly issued the Circular on the Pilot Program for Overall Implementation of the Collection of Value Added Tax Instead of Business Tax, or Circular 36, which took effect on May 1, 2016. Pursuant to the Circular 36, all of the companies operating in construction, real estate, finance, modern service or other sectors which were required to pay business tax are required to pay VAT, in lieu of business tax. The VAT rate is 6%, except for rate of 11% for real estate sale, land use right transferring and providing service of transportation, postal sector, basic telecommunications, construction, real estate lease; rate of 17% for providing lease service of tangible property; and rate of zero for specific cross-bond activities.
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On April 4, 2018, the MOF and the SAT jointly promulgated the Circular of the Ministry of Finance and the State Administration of Taxation on Adjustment of Value-Added Tax Rates, or Circular 32, according to which, (i) for VAT taxable sales or importation of goods originally subject to value-added tax rates of 17% and 11% respectively, such tax rates shall be adjusted to 16% and 10%, respectively; (ii) for purchase of agricultural products originally subject to deduction rate of 11%, such deduction rate shall be adjusted to 10%; (iii) for purchase of agricultural products for the purpose of production and sales or consigned processing of goods subject to tax rate of 16%, such tax shall be adjusted to 12%; (iv) for exported goods originally subject to tax rate of 17% and export tax refund rate of 17%, the export tax refund rate shall be adjusted to 16%; and (v) for exported goods and cross-border taxable acts originally subject to tax rate of 11% and export tax refund rate of 11%, the export tax refund rate shall be adjusted to 10%. Circular 32 became effective on May 1, 2018 and shall supersede any previously existing provisions in case of inconsistency.
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On March 20, 2019, the MOF, the SAT and the General Administration of Customs jointly issued the Announcement on Policies for Deepening the VAT Reform, or Announcement 39, to further lower value-added tax rates. According to the Announcement 39, (i) for general VAT payers’ sales activities or imports that are subject to an existing VAT rate of 16% or 10%, the VAT rate is adjusted to 13% or 9%, respectively; (ii) for the agricultural products purchased by taxpayers to which an existing 10% deduction rate is applicable, the deduction rate is adjusted to 9%; (iii) for the agricultural products purchased by taxpayers for production or commissioned processing, which are subject to an existing VAT rate of 13%, the input VAT will be calculated at a 10% deduction rate; (iv) for the exportation of goods or labor services that are subject to an existing VAT rate of 16%, with the applicable export refund at the same rate, the export refund rate is adjusted to 13%; and (v) for the exportation of goods or cross-border taxable activities that are subject to an existing VAT rate of 10%, with the export refund at the same rate, the export refund rate is adjusted to 9%. The Announcement 39 came into effect on April 1, 2019 and will prevail in case of any conflict with existing provisions.
PRC Dividend Withholding Tax
Under the PRC tax laws effective prior to January 1, 2008, dividends paid to foreign investors by foreign-invested enterprises were exempt from PRC withholding tax. Pursuant to the EIT Law and the Implementation Rules, dividends generated after January 1, 2008 and payable by a foreign-invested enterprise in China to its foreign enterprise investors are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement. Under the China-HK Taxation Arrangement, income tax on dividends payable to a company resident in Hong Kong that holds more than a 25% equity interest in a PRC resident enterprise may be reduced to a rate of 5%. In February 2018, the State Administration of Taxation issued the “Announcement on Issues concerning Beneficial Owners in Tax Treaties”, or Circular No. 9, effective on April 1, 2018, to replace the Circular of the State Administration of Taxation on the Interpretation and the Determination of the Beneficial Owners in the Tax Treaties, effective from October 2009. Circular No. 9 provides a more elastic guidance to determine whether the applicant engages in substantive business activities. Furthermore, under the “Administrative Measures for Non-Resident EnterprisesTaxpayers to Enjoy Treatments under Tax Treaties”, non-residentor SAT Circular No. 60, nonresident taxpayers who satisfy the criteria for entitlement to tax treaty benefits may, at the time of tax declaration or withholding declaration through a withholding agent, enjoy the tax treaty benefits, and be subject to follow-up administration by the tax authorities. Where the non-resident taxpayer does not apply to the withholding agent to claim the tax treaty benefits, or the materials and the information stated in the relevant reports and statements provided to the withholding agent do not satisfy the criteria for entitlement to tax treaty benefits, the withholding agent shall withhold tax pursuant to the provisions of PRC tax laws. The SAT issued the Announcement of State Taxation Administration on Promulgation of the Administrative Measures on Non-resident Taxpayers Enjoying Treaty Benefits, or SAT Circular No. 35, on October 14, 2019, which became effective on January 1, 2020. The SAT Circular No. 35 further simplified the procedures for enjoying treaty benefits and replaced the SAT Circular No. 60. According to the SAT Circular No. 35, no approvals from the tax authorities are required for a non-resident taxpayer to enjoy treaty benefits, where a non-resident taxpayer self-assesses and concludes that it satisfies the criteria for claiming treaty benefits, it may enjoy treaty benefits at the time of tax declaration or at the time of withholding through the withholding agent, but it shall gather and retain the relevant materials as required for future inspection, and accept follow-up administration by the tax authorities. In addition, according to a tax circular issued by SAT in February 2009, if the main purpose of an offshore arrangement is to obtain a preferential tax treatment, the PRC tax authorities have the discretion to adjust the preferential tax rate enjoyed by the relevant offshore entity. Although our WFOE is currently wholly owned by Huami HKHong Kong Zepp Holding Limited, we cannot assure you that we will be able to enjoy the preferential withholding tax rate of 5% under the China-HK Taxation Arrangement.
Regulation on Foreign Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended on August 5, 2008. Under the Foreign Exchange Administration Regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions can be made in foreign currencies without prior approval from State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from or registration with appropriate government authorities is required where RMBRenminbi is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of foreign currency-denominated loans.
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On August 29, 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular No. 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMBRenminbi by restricting how the converted RMBRenminbi may be used. SAFE Circular No. 142 provides that the RMBRenminbi capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within China. SAFE also strengthened its oversight of the flow and use of the RMBRenminbi capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMBRenminbi capital may not be changed without SAFE’s approval, and such RMBRenminbi capital may not in any case be used to repay RMBRenminbi loans if the proceeds of such loans have not been used. On March 30, 2015, SAFE issued
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SAFE Circular No. 19, which took effective and replaced SAFE Circular No. 142 on June 1, 2015. Although SAFE Circular No. 19 allows for the use of RMBRenminbi converted from the foreign currency-denominated capital for equity investments in China, the restrictions continue to apply as to foreign-invested enterprises’ use of the converted RMBRenminbi for purposes beyond the business scope, for entrusted loans or for inter-company RMBRenminbi loans. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMBRenminbi capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMBRenminbi entrusted loans to a prohibition against using such capital to issue loans to nonassociatednon-associated enterprises. Violations of SAFE Circular 19 or Circular 16 could result in administrative penalties. On October 23, 2019, SAFE issued the Circular Regarding Further Promotion of the Facilitation of Cross-Border Trade and Investment, or the SAFE Circular No. 28, pursuant to which all foreign-invested enterprises are allowed to make domestic equity investments with their capital funds in accordance with relevant laws and regulations.
On November 19, 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts (e.g., pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts), the reinvestment of lawful incomes derived by foreign investors in China (e.g., profit, proceeds of equity transfer, capital reduction, liquidation and early repatriation of investment), and purchase and remittance of foreign exchange as a result of capital reduction, liquidation, early repatriation or share transfer in a foreign-invested enterprise no longer require SAFE approval, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible before. In addition, SAFE promulgated the Circular on Printing and Distributing the Provisions on Foreign Exchange Administration over Domestic Direct Investment by Foreign Investors and the Supporting Documents in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC shall be conducted by way of registration and banks shall process foreign exchange business relating to the direct investment in China based on the registration information provided by SAFE and its branches.
On February 13, 2015, SAFE promulgated the Circular on Further Simplifying and Improving the Policies Concerning Foreign Exchange Control on Direct Investment, or SAFE Circular No. 13, which took effect on June 1, 2015. SAFE Circular No. 13 delegates the authority to enforce the foreign exchange registration in connection with the inbound and outbound direct investment under relevant SAFE rules to certain banks and therefore further simplifies the foreign exchange registration procedures for inbound and outbound direct investment.
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Regulation on Foreign Exchange Registration of Offshore Investment by PRC Residents
On July 4, 2014, SAFE issued the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, and its implementation guidelines, which abolished and superseded the Circular on Several Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investments via Overseas Special Purpose Companies, SAFE Circular 75. Pursuant to SAFE Circular 37 and its implementation guidelines, PRC residents (including PRC institutions and individuals) must register with local branches of SAFE in connection with their direct or indirect offshore investment in an overseas special purpose vehicle, or SPV, directly established or indirectly controlled by PRC residents for the purposes of offshore investment and financing with their legally owned assets or interests in domestic enterprises, or their legally owned offshore assets or interests. Such PRC residents are also required to amend their registrations with SAFE when there is a change to the basic information of the SPV, such as changes of a PRC resident individual shareholder, the name or operating period of the SPV, or when there is a significant change to the SPV, such as changes of the PRC individual resident’s increase or decrease of its capital contribution in the SPV, or any share transfer or exchange, merger, division of the SPV. Failure to comply with the registration procedures set forth in the Circular 37 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate, the capital inflow from the offshore entities and settlement of foreign exchange capital, and may also subject relevant onshore company or PRC residents to penalties under PRC foreign exchange administration regulations.
Wang Huang, Yunfen Lu, Meihui Fan, Bin Fan, Yi Zhang and Xiaojun Zhang, our PRC resident shareholders, have completed requiredall necessary registrations with the local counterpart of SAFE in relation to our financing and restructuring to our shareholding structure.branch or qualified banks as required by SAFE Circular 37.
Regulation on Employee Share Options
On December 25, 2006, the People’s Bank of China promulgated the Administrative Measures for Individual Foreign Exchange. On February 15, 2012, SAFE issued the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007. Pursuant to the Stock Option Rules, PRC residents who are granted shares or stock options by companies listed on overseas stock exchanges according to the stock incentive plans are required to register with SAFE or its local branches, and PRC residents participating in the stock incentive plans of overseas listed companies shall retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct SAFE registration and other procedures with respect to the stock incentive plans on behalf of these participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, purchase and
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sale of corresponding stocks or interests, and fund transfer. In addition, the PRC agents are required to amend SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agents or the overseas entrusted institution or other material changes. The PRC agents shall, on behalf of the PRC residents who have the right to exercise the employee share options, apply to SAFE or its local branches for an annual quota for the payment of foreign currencies in connection with the PRC residents’ exercise of the employee share options. The foreign exchange proceeds received by the PRC residents from the sale of shares under the stock incentive plans granted and dividends distributed by the overseas listed companies must be remitted into the bank accounts in the PRC opened by the PRC agents before distribution to such PRC residents. In addition, the PRC agents shall file each quarter the form for record-filing of information of the Domestic Individuals Participating in the Stock Incentive Plans of Overseas Listed Companies with SAFE or its local branches.
Our PRC citizen employees who have been granted share options or restricted shares, or PRC grantees, are subject to the Stock Option Rules. If we or our PRC grantees fail to comply with the Individual Foreign Exchange Rule and the Stock Option Rules, we and/or our PRC grantees may be subject to fines and other legal sanctions. We may also face regulatory uncertainties that could restrict our ability to adopt additional share incentive plans for our directors and employees under PRC law. In addition, the State Administration for Taxation has issued certain circulars concerning employee share awards. Under these circulars, our employees working in the PRC who exercise share options or hold the vested restricted shares will be subject to PRC individual income tax. Our PRC subsidiaries have obligations to file documents related to employee share awards with relevant tax authorities and to withhold individual income taxes of those employees who exercise their share options or hold the vested restricted shares. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we may face sanctions imposed by the tax authorities or other PRC government authorities.
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Regulation on Dividend Distributions
TheAs the Foreign Investment Law came into effect on January 1, 2020 and replaced the Outdated FIE Laws, the principal regulations governing distribution of dividends paid by wholly foreign-owned enterprises include:
include the Company Law, and the EIT Law and its implementation rules.
Under the current regulatory regime of the PRC, (1993), as amended in 1999, 2004, 2005, 2013 and 2018;
Foreign Investment Enterprise Law of the PRC (1986), as amended in 2000 and 2016; and
Administrative Rules under the Foreign Investment Enterprise Law (1990), as amended in 2001 and 2014.
Under these laws and regulations, foreign-invested enterprises in Chinathe PRC may pay dividends only out of their accumulated profits,retained earnings, if any, determined in accordance with PRC accounting standards and regulations. In addition, a wholly foreign-owned enterprise in ChinaA PRC company is required to set aside as statutory reserve funds at least 10.0%10% of its after-tax profit, based on PRC accounting standards each year to its general reserves until the accumulativecumulative amount of such reserves reach 50.0%reserve funds reaches 50% of its registered capital. These reserves are not distributable as cash dividends. The foreign-invested enterprise has the discretion to allocate a portion of its after-tax profits to staff welfarecapital unless laws and bonus funds.regulations regarding foreign investment provide otherwise. A PRC company is not permitted to distribute any profits until any losses from prior fiscal years have been offset. Profits retained from prior fiscal years may be distributed together with distributable profits from the current fiscal year.
51Regulations Relating to Overseas Issuance and Listing of Securities by Domestic Enterprises
On 6 July 2021, the General Office of the CPC Central Committee and the General Office of the State Council jointly promulgated the Opinions on Strictly Cracking Down on Illegal Securities Activities, which call for the enhanced administration and supervision of overseas-listed China-based companies, propose to revise the relevant regulation governing the overseas issuance and listing of shares by such companies and clarify the responsibilities of competent domestic industry regulators and government authorities.
On December 24, 2021, CSRC issued the Discussion Draft of the Administrative Measures for the Filings of Overseas Offering and Listing by Domestic Enterprises for Public Comments, or the Draft Administrative Provisions and the draft Administrative Measures for the Record-Filings of Overseas Issuance and Listing of Securities by Domestic Enterprises, or the Draft Filing Measures for public comments. The Draft Administrative Provisions clarify the responsibilities of the CSRC to supervise the activities of “overseas issuance and listing of securities by domestic enterprises”, and that overseas issuance and listing of domestic enterprises shall be subject to the filing procedures with the CSRC, as well as the regulatory requirements for the overseas issuance and listing of domestic enterprises. The Draft Filing Measures, as a supporting rule to the Draft Administrative Provisions, detailed the main procedures of record-filing management of domestic enterprises’ overseas issuance and listing. Pursuant to the Draft Administrative Provisions, domestic enterprises seeking overseas listing or issuance of securities directly or indirectly will both be required to go through filing procedures and report relevant information to the securities regulatory authority under the State Council. A “direct” issuance and listing of securities by a domestic enterprise refers to the overseas issuance of securities or overseas securities listing for trading by a company limited by shares incorporated in the PRC. An “indirect” issuance and listing of securities by a domestic enterprise refers to that, enterprises whose main business activities are in the PRC, in the name of overseas enterprises, issue securities overseas or list overseas based on the equity, assets, income or other similar rights and interests of domestic enterprises. Domestic enterprises seeking overseas listing or issuance of securities should operate in compliance with laws and regulations on foreign investment, state-owned asset management, industry supervision, and overseas investment. As such Draft Administrative Provisions and the Draft Filing Measures have not been adopted and it remains unclear whether the formal version to be adopted in the future will have any further material changes, or how the Draft Administrative Provisions and the Draft Filing Measures will be enacted, interpreted or implemented.
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C. Organizational Structure
The following chart illustrates our company’s organizational structure, including our principal subsidiaries and consolidated affiliated entities as of the date of this annual report:
Notes:
(1) | Messrs. Wang Huang, Yunfen Lu, Meihui Fan, Bin Fan, Yi Zhang and Xiaojun Zhang are beneficial owners of the shares of our company and hold |
(2) | Messrs. Wang Huang and Yunfen Lu are beneficial owners of the shares of our company and hold |
The following is a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Shunyuan Kaihua (our WFOE), our VIEs and their respective shareholders. Such contractual arrangements enable us to exercise effective control over, receive substantially all of the economic benefits of, and have an exclusive option to purchase all or part of the equity interest and assets in our VIEs when and to the extent permitted by PRC law. Because of these contractual arrangements, we are the primary beneficiary of our VIEs in China and hence consolidate their financial results as our consolidated affiliated entities.
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Agreements that provide us with effective control over the VIEs
Shareholder Voting Proxy Agreements and Powers of Attorney.Attorney. Pursuant to the second amended and restated Shareholder Voting Proxy Agreement, dated November 3, 2017,March 20, 2020, among our WFOE, Anhui Huami and each of the shareholders of Anhui Huami, each of the shareholders of Anhui Huami has executed a power of attorney to irrevocably authorize our WFOE or any person designated by our WFOE to act as his, her or its attorney-in-fact to exercise all of his, her or its rights as a shareholder of Anhui Huami, including, but not limited to, the right to convene and attend shareholders’ meetings, vote on any resolution that requires a shareholder vote, such as the appointment and removal of directors, supervisors and officers, as well as the sale, transfer and disposal of all or part of the equity interests owned by such shareholder. The power of attorney will remain effective until the termination of the Shareholder Voting Proxy Agreement unless otherwise instructed by our WFOE.
On November 3, 2017,March 20, 2020, our WFOE, Beijing Huami and each of the shareholders of Beijing Huami entered into anthe second amended and restated Shareholder Voting Proxy Agreement and power of attorney, which contain terms substantially similar to the Shareholder Voting Proxy Agreement and power of attorney executed by the shareholders of Anhui Huami described above.
Equity Pledge Agreements.Agreements. Pursuant to the second amended and restated Equity Pledge Agreement, dated November 3, 2017,March 20, 2020, among our WFOE, Anhui Huami and each of the shareholders of Anhui Huami, the shareholders of Anhui Huami have pledged 100% equity interests in Anhui Huami to our WFOE to guarantee the performance by the shareholders of their obligations under the Exclusive Option Agreement, the Shareholder Voting Proxy Agreement and the Equity Pledge Agreement, as well as the performance by Anhui Huami of its obligations under the Exclusive Option Agreement, the Shareholder Voting Proxy Agreement, the Exclusive Service Agreement and the Equity Pledge Agreement. In the event of a breach by Anhui Huami or any shareholder of contractual obligations under the Equity Pledge Agreement, our WFOE, as pledgee, will have the right to dispose of the pledged equity interests in Anhui Huami and will have priority in receiving the proceeds from such disposal. The shareholders of Anhui Huami also undertake that, without the prior written consent of our WFOE, they will not dispose of, create or allow any encumbrance on the pledged equity interests. Anhui Huami undertakes that, without the prior written consent of our WFOE, they will not assist or allow any encumbrance to be created on the pledged equity interests. Each shareholder has also executed a power of attorney to irrevocably authorize Wang Huang as his, her or its attorney-in-fact to sign any legal documents that are required or useful in exercising our WFOE’s rights under the Equity Pledge Agreement.
On November 3, 2017,March 20, 2020, our WFOE, Beijing Huami and each of the shareholders of Beijing Huami entered into anthe second amended and restated Equity Pledge Agreement, which contains terms substantially similar to the Equity Pledge Agreement described above.
We have completed the registration of the equity pledge of Anhui Huami and the registration of the equity pledge of Beijing Huami with the competent office of the State Administration for Industry and CommerceMarket Regulation in accordance with the PRC Property Rights Law.
Loan Agreement.Agreement. Pursuant to the loan agreement between our WFOE and Mr. Wang Huang, one of shareholders of Anhui Huami, dated November 3, 2017, our WFOE made interest-free loans in an aggregate amount of RMB15 million to Mr. Wang Huang for the exclusive purpose of acquiring equity interests in Anhui Huami. The loans can only be repaid with the proceeds derived from the sale of all of the equity interests in Anhui Huami to our WFOE or its designated representatives pursuant to the Exclusive Option Agreements. The term of the Loan Agreement is ten years from the date of the loan agreement and will be extended on a yearly basis unless otherwise instructed by our WFOE until the loan is repaid.
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Agreements that allow us to receive economic benefits from the VIEs
Exclusive Consultation and Service Agreements.Agreements. Pursuant to the second amended and restated Exclusive Consultation Service Agreement, dated November 3, 2017,March 20, 2020, between our WFOE and Anhui Huami, our WFOE has the exclusive right to provide Anhui Huami with the consulting and technical services required by Anhui Huami’ business. Without our WFOE’s prior written consent, Anhui Huami may not accept any services subject to this agreement from any third party. Anhui Huami agrees to pay our WFOE an annual service fee at an amount that is equal to 100% of its net income or the amount which is adjusted in accordance with our WFOE’s sole discretion for the relevant year as well as the mutually-agreed amount for certain other technical services, both of which should be paid within three months after the end of the relevant calendar year. Our WFOE has the exclusive ownership of all the intellectual property rights created as a result of the performance of the Exclusive Consultation and Service Agreement, to the extent permitted by applicable PRC laws. To guarantee Anhui Huami’s performance of its obligations thereunder, the shareholders have pledged their equity interests in Anhui Huami to our WFOE pursuant to the Equity Pledge Agreement. The Exclusive Consultation and Service Agreement will remain effective for an indefinite term, unless otherwise terminated pursuant to mutual agreement in writing or applicable PRC laws.
On November 3, 2017,March 20, 2020, our WFOE, Beijing Huami and each of the shareholders of Beijing Huami entered into anthe second amended and restated Exclusive Consultation and Service Agreement, which contains terms substantially similar to the Exclusive Consultation and Service Agreement described above.
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Agreements that provide us with the option to purchase the equity interests in and assets of the VIEs
Exclusive Option Agreements.Agreements. Pursuant to the second amended and restated Exclusive Option Agreement, dated November 3, 2017,March 20, 2020, among our WFOE, Anhui Huami and each of the shareholders of Anhui Huami, the shareholders of Anhui Huami have irrevocably granted our WFOE an exclusive option to purchase all or part of their equity interests in Anhui Huami, and Anhui Huami has irrevocably granted our WFOE an exclusive option to purchase all or part of its assets. Our WFOE or its designated person may exercise such options at the lowest price permitted under applicable PRC laws. The shareholders of Anhui Huami undertake that, without our WFOE’s prior written consent, they will not, among other things, (i) create any pledge or encumbrance on their equity interests in Anhui Huami, (ii) transfer or otherwise dispose of their equity interests in Anhui Huami, (iii) change Anhui Huami’s registered capital, (iv) amend Anhui Huami’s articles of association, (v) dispose of Anhui Huami’s material assets (except in the ordinary course of business), or (vi) merge Anhui Huami with any other entity. In addition, Anhui Huami undertakes that, without our WFOE’s prior written consent, it will not, among other things, create any pledge or encumbrance on any of its assets, or transfer or otherwise dispose of its material assets (except in the ordinary course of business). The Exclusive Option Agreement will remain effective until the entire equity interests in and all the assets of Anhui Huami have been transferred to our WFOE or its designated person.
On November 3, 2017,March 20, 2020, our WFOE, Beijing Huami and each of the shareholders of Beijing Huami entered into anthe second amended and restated Exclusive Option Agreement, which contains terms substantially similar to the Exclusive Option Agreement described above.
In the opinion of Zhong Lun Law Firm, our PRC legal counsel:
| ● | the ownership structures of our VIEs in China and our WFOE comply with all existing PRC laws and regulations; and |
| ● | the contractual arrangements between our WFOE, our VIEs and their respective shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violation of PRC laws or regulations currently in effect. |
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the contractual arrangements between our WFOE, our VIEs and their respective shareholders governed by PRC law are valid, binding and enforceable, and will not result in any violationTable of PRC laws or regulations currently in effect.Contents
However, our PRC legal counsel has also advised us that there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may take a view that is contrary to the opinion of our PRC legal counsel. It is uncertain whether any new PRC laws or regulations relating to variable interest entity structures will be adopted or if adopted, what they would provide. If we or any of our VIEs are found to be in violation of any existing or future PRC laws or regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would have broad discretion to take action in dealing with such violations or failures. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure—If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations” and “—Risks Related to Doing Business in China—Uncertainties with respect to the PRC legal system and changes in laws and regulations in China could adversely affect us, and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business and results of operations.”
D.Property, Plant and Equipment |
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Our headquarters are located in Hefei, where we own and lease the office building with an aggregate floor area of approximately 6,41644,922 square meters. Our research and development facilities, including those for hardware engineering, structure design and mobile app development, and our management and operations facilities, including those for accounting, supply chain management, quality assurance and customer services, are located at our headquarters. We have sales and marketing, communication and business development personnel at our office in Beijing and supply chain management and factory management personnel at our office in Shenzhen. We also have research and development personnel who are responsible for biometric ID design and frontier technology at our office in Silicon Valley.Cupertino.
We currently lease and occupy approximately 3,5467,781 square meters of office space in Shenzhen, 6,030 square meters of office space in Beijing, approximately 3,0361,438 square meters of office space in Shenzhen, approximately 182Nanjing, 791 square meters of office space in Xi’an, approximately 254Vancouver, 365 square meters of office space in Silicon Valley, approximately 338 square meters of office space in San Diego, and approximatelyCupertino, 277 square meters of office space in Shanghai.Shanghai, 250 square meters of office space in Irvine, 125 square meters in Ra’anana, and 116 square meters of office space in Shijiazhuang. These leases vary in duration from 1 year to 36 years.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
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ITEM 5. OPERATING AND FINANCIALFINANCIAL REVIEW AND PROSPECTS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this annual report on Form 20-F. This discussion may contain forward-looking statements based upon current expectations that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Item 3. Key Information—D. Risk Factors” or in other parts of this annual report on Form 20-F.
| 90 A. Operating Results |
Key Factors Affecting Our Results of Operations
Our research and development of innovative products and services
We have dedicated and will continue to dedicate significant research and development efforts in developing innovative products and services.services, especially our self-branded products and new services as part of our healthcare initiatives. For the years ended December 31, 2016, 20172019, 2020 and 2018,2021, research and development expenses accounted for 50.3%50.0%, 49.2%46.4% and 45.9%42.5% of our total operating expenses and 8.5%7.4%, 7.5%8.4% and 7.2%8.2% of our revenues, respectively. Our future success is significantly dependent on our ability to continually launch products and services that are popular among consumers, particularly relative to those offered by our competitors. The popularity of our products and services in turn affects users’ engagement on our platform, the data of which form a critical foundation of our research and development efforts.
Relationship with Xiaomi
We have been the solea major partner of Xiaomi to design and manufacture Xiaomi Wearable Products. Our strategic cooperation agreement with Xiaomi grants us the most-preferred-partner status globally to develop future Xiaomi Wearable Products and provides us with significant business demand, allowing us to commercially launch our products and ramp up our business quickly. Xiaomi is our exclusive distribution channel for all Xiaomi Wearable Products. Historically, we derived a substantial majority of our revenues from the sales of Xiaomi Wearable Products. For the years ended December 31, 2016, 20172019, 2020 and 2018,2021, revenues from our Xiaomi Wearable Products segment represented 92.1%72.2%, 78.8%69.0% and 66.9%53.5% of our total revenues, respectively. In addition, we leverage Xiaomi’s established distribution network
Increase of brand recognition and global presence for the sales of our self-branded products
One of our important growth strategies is to attract new users and promotionincrease sales of our self-branded products through enhancing the brand recognition for our self-branded products. We plan to make the sale of self-branded products account for significant portion of our revenue in the future. To achieve the goal, we have engaged in a variety of marketing and international expansion. Therefore, maintainingbrand promotion campaigns both in China and globally, which may cause our selling and marketing expenses to increase in the near future.
International expansion also represents a closesignificant opportunity to further grow our business. We are building our own distribution network and mutually beneficial relationshippromoting our own brand with Xiaomi is criticala focus on North America, the European Union, Japan, Korea, India and Southeast Asia, which requires us to our operationsdedicate additional time and future growth.resources.
Effective control over material and manufacturing costs
Material and manufacturing costs of our products have historically accounted for the largest portion of our cost of revenues. Our ability to effectively control material and manufacturing costs, especially by enhancing our bargaining power with suppliers and manufacturers, has affected and will continue to affect our profitability significantly. We expect our material and manufacturing costs to increase in absolute amounts as we increase our smart wearable device shipment volume. However, given our efficient supply chain management and industry leading market share, we believe we have the ability to control the overall level of material and manufacturing costs as percentage of revenues.
Brand promotion and international expansionImpact of COVID-19 on Our Operations
One of our important growth strategies is to attract new users through enhancing our brand recognition, particularly for our self-branded products. To execute this strategy, we plan to engage in a variety of marketing and brand promotion campaigns in China, which may cause our selling and marketing expenses to increase in the near future. Selling and marketing expenses as a percentageThe majority of our revenues are derived from the sales of our smart wearable products in China and overseas. Our results of operations and financial condition in 2021 were low historically, but it is possible that theyaffected by the spread of COVID-19. Although COVID-19 has been largely controlled in China, there have been occasional outbreaks in several cities. In the beginning of 2022, the outbreak of COVID Omicron in certain cities in China led to an uncertain and prolonged lockdown, and business activities have been largely affected. To the extent we have service centers, sales channels or contracted manufacturing facilities in these locations, we took a series of measures in response to the outbreak, including, among others, remote working arrangement for our employees. As a result, we are susceptible to factors adversely affecting one or more of these locations as a result of COVID-19. These measures, if taken again in the future, could reduce the capacity and efficiency of our operations, which in turn could negatively affect our results of operations.
91
The COVID-19 has impact on the smart wearable industry in general, especially on consumers’ demand for smart wearable products, the manufacturing capabilities and supply chains. In particular, delays in the production of certain parts continued to affect the inventory availability for some of our new products throughout 2021, and such situation has continued in the beginning of 2022. In key European, Indian and South American markets, continued battles with infection rates and lockdowns dampened our sales results in the first half of 2021. In the third and fourth quarters of 2021, although vaccinations became more widely available globally and some restrictions were lifted, the global parts and supply chain challenges as a result of the pandemic continued. The shortages in electronic components and chips negatively affected the supply and production cycle of our products, causing delay in production and in turn decreased sales result. The prolonged pandemic has, and may increase.continue to, negatively affect our logistic network and delivery time.
International expansion also representsThe global spread of COVID-19 pandemic in a significant opportunitynumber of countries around the world has resulted in, and may intensify, global economic distress, and the extent to further growwhich it may affect our business. Withfinancial condition, results of operations, and cash flows will depend on future developments, which are highly uncertain and cannot be predicted. In addition, the worldwide pandemic has not only adversely affected our close collaborationsales performance overseas, but also led to components and raw materials shortages as we source those from south east Asia, Europe and other areas around the world. We have been actively seeking alternative sources of components and raw materials to address the shortage, and have reached agreement on the provision of components and raw materials with Xiaomi, wecertain China local suppliers. However, the adverse effect the pandemic has on our sales performance overseas continues as of the date of this annual report.
The extent to which the COVID-19 pandemic impacts our results of operations in the future may depend on the future developments of the pandemic, including new information concerning the global severity of and actions taken to contain the pandemic, which are highly uncertain and unpredictable. In addition, our results of operations could be adversely affected to the extent that the pandemic harms the Chinese and global economy and consumer activities in general. See “Item 3. Key Information—D. Risk Factors— Risks Related to Our Business and Industry—Our business, financial condition and results of operations have leveragedbeen, and plan tomay continue to leverage Xiaomi’s global distribution networkbe, adversely affected by the COVID-19 pandemic.”
Our cash position at the end of 2021 was RMB1.5 billion (US$0.2 billion). We will pay close attention to the development of the COVID-19 pandemic, perform further assessment of its impact and fan basetake relevant measures to expand into Xiaomi’s key target markets. Atminimize the same time, we are also building our own distribution network and promoting our own brand with a focus on North America, the European Union, Japan, Korea, India and Southeast Asia, which requires us to dedicate additional time and resources.impact.
Seasonality
We have historically experienced higher sales in the fourth quarter, primarily due to (i) holiday sales for Black Friday and Cyber Monday and during the lead-up to Christmas and (ii) “Singles’ Day” online shopping festival organized by TMall. Given the significant seasonality of our sales, timely and effective forecasting and product introductions for the peak seasons are critical to our operations.
55
Key Line Items and Specific Factors Affecting Our Results of Operations
Revenues
We derive our revenues from two operating segments, (i) Xiaomi Wearable Products, and (ii) our self-branded products and others. The following table sets forth our revenues by segment and as a percentage of total revenues for the periods indicated:
| | | | | | | | | | | | | | |
| | Years Ended December 31, | ||||||||||||
| | 2019 | | 2020 | | 2021 | ||||||||
|
| RMB |
| % |
| RMB |
| % |
| RMB |
| US$ |
| % |
| | (in thousands, except for percentages) | ||||||||||||
Xiaomi Wearable Products | | 4,193,665 | | 72.2 | | 4,438,081 | | 69.0 | | 3,340,857 | | 524,253 | | 53.5 |
Self-branded products and others |
| 1,618,590 |
| 27.8 |
| 1,995,282 |
| 31.0 |
| 2,909,252 |
| 456,525 |
| 46.5 |
Total revenues |
| 5,812,255 |
| 100.0 |
| 6,433,363 |
| 100.0 |
| 6,250,109 |
| 980,778 |
| 100.0 |
|
| Years Ended December 31, |
| |||||||||||||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||||||||||||||
|
| RMB |
|
| % |
|
| RMB |
|
| % |
|
| RMB |
|
| US$ |
|
| % |
| |||||||
|
| (in thousands, except for percentages) |
| |||||||||||||||||||||||||
Xiaomi Wearable Products |
|
| 1,434,136 |
|
|
| 92.1 |
|
|
| 1,614,512 |
|
|
| 78.8 |
|
|
| 2,439,534 |
|
|
| 354,816 |
|
|
| 66.9 |
|
Self-branded products and others(1) |
|
| 122,340 |
|
|
| 7.9 |
|
|
| 434,384 |
|
|
| 21.2 |
|
|
| 1,205,801 |
|
|
| 175,376 |
|
|
| 33.1 |
|
Total revenues |
|
| 1,556,476 |
|
|
| 100.0 |
|
|
| 2,048,896 |
|
|
| 100.0 |
|
|
| 3,645,335 |
|
|
| 530,192 |
|
|
| 100.0 |
|
Note:
|
|
We generate revenues primarily from sales of Xiaomi Wearable Products and our self-branded products. Our Xiaomi Wearable Products include Xiaomi-branded smart bands, watches, scales and associated accessories. Our self-branded products are our Amazfit-branded smart wearable products, which currently include smart bands, watches, modules and associated accessories.accessories, and our Zepp-branded smart wearable products, which currently include smart watches. During the past few years, we have witnessed strong growth of our self-branded products, with revenues from our self-branded products and others segment, substantially all of which was from the sales of our self-branded products, almost doubled in the past three years, representing 46.5% of our total revenues in 2021, and we expect our self-branded products to contribute to a more portion of our revenues in the future.
92
Cost of Revenues
Our cost of revenues is comprised of the following:
| ● | material costs; |
| ● | manufacturing and fulfillment costs of our products; |
| ● | an estimate of warranty costs; and |
| ● | related expenses that are directly attributable to the production of products. |
material costs;
manufacturing and fulfillment costs of our products;
an estimate of warranty costs; and
related expenses that are directly attributable to the production of products.
We procure a variety of raw materials and components from third-party suppliers, and outsource our manufacturing and order fulfillment activities to third parties. Our product costs fluctuate with the costs of raw materials and underlying product components as well as the prices we are able to negotiate with our contract manufacturers and raw material and component suppliers. Shipping costs for raw materials and components from domestic locations are borne by our suppliers and contract manufacturers. For raw materials and components procured overseas, our suppliers cover the shipping costs from place of origin to China, and we are responsible for the additional logistics costs if we consign these raw materials and components to our contract manufacturers.
For products that are sold to Xiaomi pursuant to our business cooperation agreement with Xiaomi, weWe offer an 18-month warranty which includes a six-monthproduct warranty to Xiaomi and an additional 12-month warranty to end-users.distributors of our self-branded products. For products sold directly to end users, the warranty period is 12 monthseither through Xiaomi and distributors of our self-branded products, or directly by us to end users.users, we offer a 12-month warranty. We generally elect to replace the defective products covered under the warranty. At the time revenue is recognized, an estimate of warranty costs in relation to the products sold is recorded as a component of cost of revenues.
The following table sets forth our cost of revenues by segment and as a percentage of total cost of revenues for the periods indicated:
| | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
| | Years Ended December 31, | ||||||||||||||||||||||||||||||||||||||||
| | 2019 | | 2020 | | 2021 | ||||||||||||||||||||||||||||||||||||
|
| RMB |
| % |
| RMB |
| % |
| RMB |
| US$ |
| % | ||||||||||||||||||||||||||||
|
| Years Ended December 31, |
| |||||||||||||||||||||||||||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||||||||||||||||||||||||||||
|
| RMB |
|
| % |
|
| RMB |
|
| % |
|
| RMB |
|
| US$ |
|
| % |
| |||||||||||||||||||||
|
| (in thousands, except for percentages) |
| |||||||||||||||||||||||||||||||||||||||
| | (in thousands, except for percentages) | ||||||||||||||||||||||||||||||||||||||||
Xiaomi Wearable Products |
|
| 1,182,646 |
|
|
| 92.4 |
|
|
| 1,232,792 |
|
|
| 79.3 |
|
|
| 1,883,509 |
|
|
| 273,945 |
|
|
| 69.6 |
| | 3,296,696 | | 75.9 | | 3,706,495 | | 72.7 | | 2,754,086 | | 432,176 | | 55.7 |
Self-branded products and others |
|
| 97,678 |
|
|
| 7.6 |
|
|
| 321,402 |
|
|
| 20.7 |
|
|
| 822,376 |
|
|
| 119,610 |
|
|
| 30.4 |
|
| 1,047,816 |
| 24.1 |
| 1,394,203 |
| 27.3 |
| 2,190,381 |
| 343,719 |
| 44.3 |
Total cost of revenues |
|
| 1,280,324 |
|
|
| 100.0 |
|
|
| 1,554,194 |
|
|
| 100.0 |
|
|
| 2,705,885 |
|
|
| 393,555 |
|
|
| 100.0 |
|
| 4,344,512 |
| 100.0 |
| 5,100,698 |
| 100.0 |
| 4,944,467 |
| 775,895 | | 100.0 |
56
The following table sets forth the gross profit and gross margin by segment:
| | | | | | | | |
| | Years Ended December 31, | ||||||
| | 2019 | | 2020 | | 2021 | ||
|
| RMB |
| RMB |
| RMB |
| US$ |
| | (in thousands, except for percentages) | ||||||
Xiaomi Wearable Products | | 896,969 | | 731,586 | | 586,771 | | 92,077 |
Self-branded products and others |
| 570,774 |
| 601,079 |
| 718,871 |
| 112,806 |
Total gross profit |
| 1,467,743 |
| 1,332,665 |
| 1,305,642 |
| 204,883 |
Xiaomi Wearable Products |
| 21.4 | % | 16.5 | % | 17.6 | % |
|
Self-branded products and others |
| 35.3 | % | 30.1 | % | 24.7 | % |
|
Overall gross margin |
| 25.3 | % | 20.7 | % | 20.9 | % |
|
|
| Years Ended December 31, |
| |||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| ||||
|
| (in thousands, except for percentages) |
| |||||||||||||
Xiaomi Wearable Products |
|
| 251,490 |
|
|
| 381,720 |
|
|
| 556,025 |
|
|
| 80,870 |
|
Self-branded products and others |
|
| 24,662 |
|
|
| 112,982 |
|
|
| 383,425 |
|
|
| 55,767 |
|
Total gross profit |
|
| 276,152 |
|
|
| 494,702 |
|
|
| 939,450 |
|
|
| 136,637 |
|
Xiaomi Wearable Products |
|
| 17.5 | % |
|
| 23.6 | % |
|
| 22.8 | % |
|
|
|
|
Self-branded products and others |
|
| 20.2 | % |
|
| 26.0 | % |
|
| 31.8 | % |
|
|
|
|
Overall gross margin |
|
| 17.7 | % |
|
| 24.1 | % |
|
| 25.8 | % |
|
|
|
|
93
Operating expenses
We classify our operating expenses into three categories: research and development, general and administrative, and selling and marketing.
Research and Development Expenses.Expenses. Research and development expenses primarily consist of salaries and benefits (including employee benefit expenses and share-based compensation expenses) for research and development personnel and other expenses associated with our research and development activities.
General and Administrative Expenses. General and administrative expenses primarily consist of salaries and benefits (including employee benefit expenses and share-based compensation expenses) for administrative personnel, as well as other expenses primarily relating to professional services and our facilities and other administrative expenses. We expect our general and administrative expenses to increase in absolute amounts in the foreseeable future due to the anticipated growth of our business as well as accounting, insurance, investor relations and other public company costs.
Selling and Marketing Expenses. Selling and marketing expenses primarily consist of advertising and promotion expenses (including expenses for new product launch events), salaries and benefits for selling and marketing personnel (including employee benefit expenses and share-based compensation expenses), expenses related to business development through e-commerce platforms and other expenses associated with our selling and marketing activities. We bear the advertising and marketing expenses for our self-branded products. We do not bear such expenses for Xiaomi Wearable Products. We expect our selling and marketing expenses to increase in absolute amounts as we seek to increase our brand awareness and expand the marketing efforts for our self-branded products in both China and the international markets.
Other income
Other income primarily consists of subsidies received from local government authorities to encourage technology innovation and investment.
5794
The following table sets forth a summary of our consolidated results of operations for the periods indicated, both in absolute amounts and as percentages of our total revenues. This information should be read together with our consolidated financial statements and related notes included elsewhere in this annual report. The operating results in any period are not necessarily indicative of the results that may be expected for any future period.
| | | | | | | | | | | | | | |
| | Years Ended December 31, | ||||||||||||
| | 2019 | | 2020 | | 2021 | ||||||||
|
| RMB |
| % |
| RMB |
| % |
| RMB |
| US$ |
| % |
| | (in thousands, except for percentages) | ||||||||||||
Summary of Consolidated Statements of Operating Data: | |
| |
| |
| |
| |
| |
| |
|
Revenues(1) |
| 5,812,255 |
| 100.0 |
| 6,433,363 |
| 100.0 |
| 6,250,109 |
| 980,778 |
| 100.0 |
Cost of revenues(2) |
| 4,344,512 |
| 74.7 |
| 5,100,698 |
| 79.3 |
| 4,944,467 |
| 775,895 |
| 79.1 |
Gross profit |
| 1,467,743 |
| 25.3 |
| 1,332,665 |
| 20.7 |
| 1,305,642 |
| 204,883 |
| 20.9 |
Operating expenses: |
|
|
|
|
|
|
|
|
| |
| |
|
|
Research and development(3) |
| 430,822 |
| 7.4 |
| 538,009 |
| 8.4 |
| 515,081 |
| 80,827 |
| 8.2 |
General and administrative(3) |
| 248,462 |
| 4.3 |
| 261,805 |
| 4.1 |
| 258,346 |
| 40,540 |
| 4.1 |
Selling and marketing(3) |
| 181,975 |
| 3.1 |
| 358,655 |
| 5.6 |
| 438,273 |
| 68,775 |
| 7.0 |
Total operating expenses |
| 861,259 |
| 14.8 |
| 1,158,469 |
| 18.0 |
| 1,211,700 |
| 190,142 |
| 19.4 |
Operating income |
| 606,484 |
| 10.4 |
| 174,196 |
| 2.7 |
| 93,942 |
| 14,741 |
| 1.5 |
Realized gain from investments |
| 1,822 |
| 0.0 |
| — |
| — |
| 13,507 |
| 2,120 |
| 0.2 |
Gain from deconsolidation of a subsidiary | | — | | — | | 56,522 | | 0.9 | | — | | — | | — |
Interest income |
| 33,478 |
| 0.6 |
| 46,118 |
| 0.7 |
| 16,686 |
| 2,618 |
| 0.3 |
Interest expenses | | — | | — | | (22,623) | | (0.4) | | (44,884) | | (7,043) | | (0.7) |
Gain from fair value change of long-term investments |
| — |
| — |
| 12,325 |
| 0.2 |
| — |
| — |
| — |
Impairment loss from long-term investments |
| (2,600) |
| (0.0) |
| — |
| — |
| — |
| — |
| — |
Other income/(expenses), net |
| 13,186 |
| 0.2 |
| (929) |
| (0.0) |
| 27,418 |
| 4,302 |
| 0.4 |
Income before income tax and income from equity method investments |
| 652,370 |
| 11.2 |
| 265,609 |
| 4.1 |
| 106,669 |
| 16,738 |
| 1.7 |
Provision for income taxes |
| (77,887) |
| (1.3) |
| (31,154) |
| (0.5) |
| (10,745) |
| (1,686) |
| (0.2) |
Income before income from equity method investments |
| 574,483 |
| 9.9 |
| 234,455 |
| 3.6 |
| 95,924 |
| 15,052 |
| 1.5 |
(Loss)/Income from equity method investments |
| (1,112) |
| (0.0) |
| (4,749) |
| (0.1) |
| 41,028 |
| 6,438 |
| 0.7 |
Net income |
| 573,371 |
| 9.9 |
| 229,706 |
| 3.6 |
| 136,952 |
| 21,490 |
| 2.2 |
|
| Years Ended December 31, |
| |||||||||||||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||||||||||||||
|
| RMB |
|
| % |
|
| RMB |
|
| % |
|
| RMB |
|
| US$ |
|
| % |
| |||||||
|
| (in thousands, except for percentages) |
| |||||||||||||||||||||||||
Summary Consolidated Statements of Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues(1) |
|
| 1,556,476 |
|
|
| 100.0 |
|
|
| 2,048,896 |
|
|
| 100.0 |
|
|
| 3,645,335 |
|
|
| 530,192 |
|
|
| 100.0 |
|
Cost of revenues(2) |
|
| 1,280,324 |
|
|
| 82.3 |
|
|
| 1,554,194 |
|
|
| 75.9 |
|
|
| 2,705,885 |
|
|
| 393,555 |
|
|
| 74.2 |
|
Gross profit |
|
| 276,152 |
|
|
| 17.7 |
|
|
| 494,702 |
|
|
| 24.1 |
|
|
| 939,450 |
|
|
| 136,637 |
|
|
| 25.8 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses(3) |
|
| 132,304 |
|
|
| 8.5 |
|
|
| 153,827 |
|
|
| 7.5 |
|
|
| 263,220 |
|
|
| 38,284 |
|
|
| 7.2 |
|
General and administrative expenses(3) |
|
| 102,644 |
|
|
| 6.6 |
|
|
| 114,880 |
|
|
| 5.6 |
|
|
| 213,973 |
|
|
| 31,121 |
|
|
| 5.9 |
|
Selling and marketing expenses(3) |
|
| 27,821 |
|
|
| 1.8 |
|
|
| 44,026 |
|
|
| 2.1 |
|
|
| 96,538 |
|
|
| 14,041 |
|
|
| 2.6 |
|
Total operating expenses |
|
| 262,769 |
|
|
| 16.9 |
|
|
| 312,733 |
|
|
| 15.3 |
|
|
| 573,731 |
|
|
| 83,446 |
|
|
| 15.7 |
|
Operating (loss)/income |
|
| 13,383 |
|
|
| 0.9 |
|
|
| 181,969 |
|
|
| 8.9 |
|
|
| 365,719 |
|
|
| 53,191 |
|
|
| 10.0 |
|
Realized gain from investments |
|
| — |
|
| — |
|
|
| 2,373 |
|
|
| 0.1 |
|
|
| 261 |
|
|
| 38 |
|
|
| 0.0 |
| |
Interest income |
|
| 754 |
|
|
| 0.0 |
|
|
| 3,003 |
|
|
| 0.1 |
|
|
| 11,595 |
|
|
| 1,686 |
|
|
| 0.3 |
|
Gain from fair value change of long-term investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 7,860 |
|
|
| 1,143 |
|
|
| 0.2 |
|
Impairment loss from long-term investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (7,590 | ) |
|
| (1,104 | ) |
|
| (0.2 | ) |
Other income |
|
| 14,726 |
|
|
| 0.9 |
|
|
| 4,555 |
|
|
| 0.2 |
|
|
| 8,768 |
|
|
| 1,275 |
|
|
| 0.2 |
|
(Loss)/income before income tax |
|
| 28,863 |
|
|
| 1.9 |
|
|
| 191,900 |
|
|
| 9.4 |
|
|
| 386,613 |
|
|
| 56,229 |
|
|
| 10.6 |
|
Income tax benefit/(expense) |
|
| (3,088 | ) |
|
| (0.2 | ) |
|
| (27,611 | ) |
|
| (1.3 | ) |
|
| (52,036 | ) |
|
| (7,568 | ) |
|
| (1.4 | ) |
(Loss)/income before loss from equity method investments |
|
| 25,775 |
|
|
| 1.7 |
|
|
| 164,289 |
|
|
| 8.0 |
|
|
| 334,577 |
|
|
| 48,661 |
|
|
| 9.2 |
|
(Loss)/income from equity method investments |
|
| (1,829 | ) |
|
| (0.1 | ) |
|
| 2,806 |
|
|
| 0.1 |
|
|
| 1,743 |
|
|
| 254 |
|
|
| 0.0 |
|
Net (loss)/income |
|
| 23,946 |
|
|
| 1.5 |
|
|
| 167,095 |
|
|
| 8.2 |
|
|
| 336,320 |
|
|
| 48,915 |
|
|
| 9.2 |
|
Notes:
(1) | Includes |
(2) | Includes |
(3) | Share-based compensation expenses were included in operating expenses. Our share-based compensation expenses were the result of (i) our grants of options, restricted shares and restricted share units under our share incentive plans to our employees, and (ii) the share restriction agreements entered into among our founders and our preferred shareholders in relation to our private financing transactions in January 2014 and April 2015. For the years ended December 31, |
95
Year Ended December 31, 20182021 Compared to Year Ended December 31, 20172020
Revenues
Our revenues increaseddecreased by 77.9%2.8% from RMB2,048.9RMB6,433.4 million for the year ended December 31, 20172020 to RMB3,645.3RMB6,250.1 million (US$530.2980.8 million) for the year ended December 31, 2018,2021, primarily due to an increasethe decline in the sales of Xiaomi Wearable Products, which contributed to 53.5% of our total revenues.
Xiaomi Wearable Products. Our Xiaomi Wearable Products segment revenues decreased by 24.7% from RMB4,438.1 million for the year ended December 31, 2020 to RMB3,340.9 million (US$524.3 million) for the year ended December 31, 2021. The decrease was primarily attributable to a decrease in shipment volume of both of our Xiaomi Wearable Products from approximately 41.0 million in 2020 to approximately 28.5 million in 2021.
Self-branded products and others. Our self-branded products and others segment revenues increased significantly by 45.8% from RMB1,995.3 million in particular, the2020 to RMB2,909.3 million (US$456.5 million) in 2021. The increase was primarily attributable to an increase in shipment volume of our self-branded products from approximately 1.04.7 million in 20172020 to approximately 3.17.6 million in 2018.2021.
58Cost of revenues
Our cost of revenues decreased by 3.1% from RMB5,100.7 million for the year ended December 31, 2020 to RMB4,944.5 million (US$775.9 million) for the year ended December 31, 2021.
Xiaomi Wearable Products. Costs of revenues for our Xiaomi Wearable Products segment decreased by 25.7% from RMB3,706.5 million for the year ended December 31, 2020 to RMB2,754.1 million (US$432.2 million) for the year ended December 31, 2021. The decrease was in line with a decrease in the sales of our Xiaomi Wearable Products, and was partially driven by the increasing demand for our newly introduced self-branded products.
Self-branded products and others. Cost of revenues for our self-branded products and others segment increased by 57.1% from RMB1,394.2 million for the year ended December 31, 2020 to RMB2,190.4 million (US$343.7 million) for the year ended December 31, 2021. The increase was in line with the sales growth of our self-branded products and the changes in our product mix.
Gross profit
Our gross profit decreased by 2.0% from RMB1,332.7 million for the year ended December 31, 2020 to RMB1,305.6 million (US$204.9 million) for the year ended December 31, 2021. The slight decrease was mainly driven by the decrease in the gross profit for sales of Xiaomi wearable products and change in the product mix of our self-branded wearable products.
Research and development expenses
Research and development expenses decreased by 4.3% from RMB538.0 million for the year ended December 31, 2020 to RMB515.1 million (US$80.8 million) for the year ended December 31, 2021, primarily due to (i) a decrease of RMB11.4 million (US$1.8 million) in raw material expenses incurred in research and development activities, as a result of the optimization of the integrated product development process that controls the material waste in trial production; and (ii) a decrease of RMB9.5 million (US$1.5 million) in other expenses, mainly due to a decrease in travel expenses as a result of travel restrictions led by the COVID-19 pandemic and discretionary savings.
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General and administrative expenses
General and administrative expenses decreased by 1.3% from RMB261.8 million for the year ended December 31, 2020 to RMB258.3 million (US$40.5 million) for the year ended December 31, 2021, primarily due to (i) a decrease of RMB6.4 million (US$1.0 million) in share-based compensation expenses due to the vesting of fewer options and restricted share units in 2021 as compared to 2020; (ii) a decrease of RMB5.4 million (US$0.8 million) in non-capital expenditure expenses, such as office supplies consumed, due to our cost control approach taken in 2021; (iii) a decrease of RMB3.6 million (US$0.6 million) in professional fees for investment and acquisition, partially offset by an increase of RMB9.3 million (US$1.5 million) in foreign exchange rate fluctuation.
Selling and marketing expenses
Selling and marketing expenses increased by 22.2% from RMB358.7 million for the year ended December 31, 2020 to RMB438.3 million (US$68.8 million) for the year ended December 31, 2021, primarily due to (i) an increase of RMB30.1 million (US$4.7 million) in personnel-related costs due to the increase in the proportion of overseas market sales personnel; (ii) an increase of RMB34.6 million (US$5.4 million) in advertisement promotion expenses due to the expansion of overseas market and the enhancement of the promotion for our self-branded products; and (iii) an increase of RMB8.1 million (US$1.3 million) in other expenses, mainly due to office relocation and decoration.
Operating income
As a result of the factors set out above, we recorded an operating income of RMB93.9 million (US$14.7 million) for the year ended December 31, 2021, as compared to an operating income of RMB174.2 million for the year ended December 31, 2020.
Interest income
Interest income represents interest earned on bank deposits. We had interest income of RMB16.7 million (US$2.6 million) in 2021 and RMB46.1 million in 2020.
Interest expense
Interest expense represents interest charges for bank borrowings. We had interest expense of RMB44.9 million (US$7.0 million) in 2021 and RMB22.6 million in 2020.
Gain from deconsolidation of a subsidiary
We recognized RMB56.5 million gain from deconsolidation of Shenzhen Yunding Information Technology Co., Ltd. in 2020 when we sold our 26.7% equity interest to its founder. We did not have similar transactions in 2021.
Other (expenses)/income, net
We had other expenses of RMB0.9 million in 2020 and other income of RMB27.4 million (US$4.3 million) in 2021.
Provision for income taxes
We recorded provision for income taxes in the amount of RMB31.2 million in 2020 and RMB10.7 million (US$1.7 million) in 2021. The material reconciling items between the tax expense computed by applying the PRC enterprise tax rate of 25% to income before income tax and the actual income tax expense is the tax impact from the tax holidays, which amounted to RMB41.9 million in 2020 and RMB19.4 million (US$3.0 million) in 2021.
Net income attributable to Zepp Health Corporation
As a result of the foregoing, our net income decreased by 39.8% from RMB228.8 million for the year ended December 31, 2020 to RMB137.8 million (US$21.6 million) for the year ended December 31, 2021.
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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenues
Our revenues increased by 10.7% from RMB5,812.3 million for the year ended December 31, 2019 to RMB6,433.4 million for the year ended December 31, 2020, primarily due to the continuous sales growth of Xiaomi Wearable Products and the sales growth of our self-branded products.
Xiaomi Wearable Products. Our Xiaomi Wearable Products segment revenues increased by 51.1%5.8% from RMB1,614.5RMB4,193.7 million for the year ended December 31, 20172019 to RMB2,439.5RMB4,438.1 million (US$354.8 million) for the year ended December 31, 2018.2020. The increase was primarily attributable to an increase in shipment volume of our Xiaomi Wearable Products from approximately 17.138.4 million in 20172019 to approximately 24.441.0 million in 2018.2020.
Self-branded products and others. Our self-branded products and others segment revenues increased by 177.6%23.3% from RMB434.4RMB1,618.6 million in 20172019 to RMB1,205.8RMB1,995.3 million (US$175.4 million) in 2018.2020. The increase was primarily attributable to an increase in shipment volume of our self-branded products from approximately 1.03.9 million in 20172019 to approximately 3.14.7 million in 2018.2020.
Cost of revenues
Our cost of revenues increased by 74.1%17.4% from RMB1,554.2RMB4,344.5 million for the year ended December 31, 20172019 to RMB2,705.9RMB5,100.7 million (US$393.6 million) for the year ended December 31, 2018.2020. The increase was in line with the rapid sales growth of our Xiaomi Wearable Products and self-branded products.
Xiaomi Wearable Products. Costs of revenues for our Xiaomi Wearable Products segment increased by 52.8%12.4% from RMB1,232.8RMB3,296.7 million for the year ended December 31, 20172019 to RMB1,883.5RMB3,706.5 million (US$273.9 million) for the year ended December 31, 2018.2020. The increase was in line with the sales growthdue to higher unit cost of ournewly introduced Xiaomi Wearable Products.
Self-branded products and others. Cost of revenues for our self-branded products and others segment increased by 155.9%33.1% from RMB321.4RMB1,047.8 million for the year ended December 31, 20172019 to RMB822.4RMB1,394.2 million (US$119.6 million) for the year ended December 31, 2018.2020. The increase was in line with the sales growth of our self-branded products.products and the changes in our product mix.
Gross profit
Our gross profit increaseddecreased by 89.9%9.2% from RMB494.7 million for the year ended December 31, 2017 to RMB939.5 million (US$136.6 million) for the year ended December 31, 2018.
Our gross margin increased from 24.1% to 25.8% for the same period, which was primarily attributable to improved economies of scale as a result of enhanced manufacturing experience, improved supply chain efficiencies and a change in the product mix. Gross margin for our self-branded products and others segment increased to 31.8% in 2018 from 26.0% in 2017. The increase of gross margin for our self-branded products and others segment was primarily attributable to the launch of new products resulting in greater economies of scale as the shipment volume of our self-branded products increased significantly in 2018. We expect the gross margin of the self-branded products and others segment to continue to increase as we further realize economies of scale and improve operating efficiency with the increase in sales volume of our self-branded products. However, such factors may have limited effect on gross margin once our self-branded products become more mature and the shipment volume reaches a certain level.
Research and development expenses
Research and development expenses increased by 71.1% from RMB153.8RMB1,467.7 million for the year ended December 31, 20172019 to RMB263.2RMB1,332.7 million (US$38.3 million) for the year ended December 31, 2018,2020. The decrease was mainly driven by the lower profit margin for our increasing sales of Xiaomi Wearable products, partially offset by our newly introduced self-branded products.
Research and development expenses
Research and development expenses increased by 24.9% from RMB430.8 million for the year ended December 31, 2019 to RMB538.0 million for the year ended December 31, 2020, primarily due to (i) an increase by RMB50.6of RMB96.5 million in personnel-related costs in connection with hiringdue to personnel additions for expansion of R&D activities of future products and retaining researchnew product categories; and development staff; (ii) an increase by RMB 35.2of RMB12.6 million in share-based compensation; (iii) an increasecompensation expenses due to the vest of newly granted options and restricted share units, partially offset by RMB10.8a decrease of RMB31.7 million of lower resource consumption in other expenses, including travel expensestesting procedures. The company optimized its integrated product development process to effectively develop new smart products and professional services;services to the consumers, and (iv) an increase by RMB5.5 millionbelieved that smart R&D investment was a key factor to maintain its competitive position in intellectual property protection-related expenses.the global market.
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General and administrative expenses
General and administrative expenses increased by 86.3%5.4% from RMB114.9RMB248.5 million for the year ended December 31, 20172019 to RMB214.0RMB261.8 million (US$31.1 million) for the year ended December 31, 2018,2020, primarily due to (i) an increase by RMB48.6of RMB25.4 million increase in personnel-related costs in connection with hiring and retaining administrative staff;costs; (ii) an increase by RMB32.1of RMB14.7 million and RMB5.0 million in share-based compensation;depreciation and amortization and rental fees due to office expansion; and (iii) an increase of RMB7.3 million in professional fee, partially offset by RMB8.4a decrease of RMB41.7 million in foreign exchange losses and (iv) an increase by RMB3.6 million in fees for professional services.rate fluctuation.
Selling and marketing expenses
Selling and marketing expenses increased by 119.3%97.1% from RMB44.0RMB182.0 million for the year ended December 31, 20172019 to RMB96.5RMB358.7 million (US$14.0 million) for the year ended December 31, 2018,2020, primarily due to (i) an increase by RMB21.0of RMB69.3 million in personnel-related costs in connection with hiring and retaining selling and marketing staff;costs; (ii) an increase by RMB20.2of RMB64.7 million in advertisement expenses, including expenses for promoting our products on e-commerce platformsadvertising and promotional fees; and (iii) an increase of RMB29.4 million in e-commerce platform service fee. The increase for selling and marketing expenses was driven by RMB4.3 million share-based compensation.investments in global expansion of Amazfit and Zepp-branded products.
59
As a result of the factors set out above, we recorded an operating income of RMB365.7RMB174.2 million (US$53.2 million) for the year ended December 31, 2018,2020, as compared to an operating income of RMB182.0RMB606.5 million for the year ended December 31, 2017.2019.
Interest income
Interest income represents interest earned on bank deposits. We had interest income of RMB11.6 million (US$1.7 million) in 2018 and RMB3.0RMB46.1 million in 2017.2020 and RMB33.5 million in 2019.
Gain from deconsolidation of a subsidiary
We recognized RMB56.5 million gain from deconsolidation of Shenzhen Yunding Information Technology Co., Ltd. in 2020 when we sold our 26.7% equity interest to its founder. We did not have similar transactions in 2019.
Other incomeincome/(expenses), net
We had other income of RMB4.6RMB13.2 million in 20172019 and RMB8.8other expenses of RMB0.9 million (US$1.3 million) in 2018.2020.
Income tax benefits/(expenses)Provision for income taxes
We recorded provision for income tax expensestaxes in the amount of RMB27.6RMB77.9 million in 20172019 and RMB52.0RMB31.2 million in 2018.2020. The increasedecrease in income tax expenses for the year ended December 31, 20182020 was attributable to an increasea decrease in taxable income. The material reconciling items between the tax expense computed by applying the PRC enterprise tax rate of 25% to income before income tax and the actual income tax expense is the tax impact from the tax holidays, which amounted to RMB72.4 million in 2019 and RMB41.9 million in 2020.
Net income attributable to Zepp Health Corporation
As a result of the foregoing, our net income increased by 101.3%60.2% from RMB167.1RMB575.2 million for the year ended December 31, 20172019 to RMB336.3 million (US$48.9 million) for the year ended December 31, 2018.
Year Ended December 31, 2017 Compared to Year Ended December 31, 2016
Revenues
Our revenues increased by 31.6% from RMB1,556.5RMB228.8 million for the year ended December 31, 2016 to RMB2,048.9 million for the year ended December 31, 2017, primarily due to an increase in the sales of both self-branded products and Xiaomi wearable products.
Xiaomi Wearable Products. Our Xiaomi Wearable Products segment revenues increased by 12.6% from RMB1,434.1 million in 2016 to RMB1,614.5 million in 2017. The increase was primarily attributable to an increase in average revenue per unit of Xiaomi Wearable Products by 16.1% from RMB81.6 in the year ended December 31, 2016 to RMB94.7 in the year ended December 31, 2017.
Self-branded products and others. Our self-branded products and others segment revenues increased from RMB122.3 million in 2016 to RMB434.4 million in 2017. The increase was primarily attributable to an increase in shipment volume of our self-branded products from approximately 253,000 in the year ended December 31, 2016 to approximately 1.0 million in the year ended December 31, 2017.
Cost of revenues
Our cost of revenues increased by 21.4% from RMB1,280.3 million for the year ended December 31, 2016 to RMB1,554.2 million for the year ended December 31, 2017.
Xiaomi Wearable Products. Costs of revenues for our Xiaomi Wearable Products segment increased by 4.2% from RMB1,182.6 million in 2016 to RMB1,232.8 million in 2017. This increase was primarily attributable to the shift in production focus from Mi Band 1 to Mi Band 2 during the year ended December 31, 2017 and the higher per unit cost of Mi Band 2 compared to Mi Band 1.
Self-branded products and others. Cost of revenues for our self-branded products and others segment increased from RMB97.7 million in 2016 to RMB321.4 million in 2017 which was in line with the increase of sales of our self-branded products.
Gross profit
Our gross profit increased by 79.1% from RMB276.2 million for the year ended December 31, 2016 to RMB494.7 million for the year ended December 31, 2017.
60
Our gross margin increased from 17.7% to 24.1% for the same period, which was primarily attributable to improved economies of scale as a result of enhanced manufacturing experience, improved supply chain efficiencies and a change in the product mix. Gross margin for our Xiaomi Wearable Products segment increased from 17.5% in 2016 to 23.6% in 2017 primarily due to the increase in sales volume of Mi Band 2, which had a higher suggested retail price than Mi Band 1, as well as greater economies of scale and stronger negotiating power with our suppliers and manufacturers. Gross margin for our self-branded products and others segment increased to 26.0% in 2017 from 20.2% in 2016. The increase of gross margin for our self-branded products and others segment was primarily attributable to the launch of new products resulting in greater economies of scale as the shipment volume of our self-branded products increased significantly in the year ended December 31, 2017. We are currently in the early stage of developing our self-branded products, and we expect the gross margin of the self-branded products and others segment to continue to increase as we further realize economies of scale and improve operating efficiency with the increase in sales volume of our self-branded products. However, such factors may have limited effect on gross margin once our self-branded products become more mature and the shipment volume reaches a certain level.
Research and development expenses
Research and development expenses increased by 16.3% from RMB132.3 million for the year ended December 31, 2016 to RMB153.8 million for the year ended December 31, 2017, primarily due to the RMB7.8 million increase in expenditures on application development as well as the RMB5.0 million increase in share-based compensation and personnel-related costs to retain the technology-related personnel. For the year ended December 31, 2017, research and development expenses, as a percentage of revenues, decreased to 7.5% from 8.5% for the year ended December 31, 2016.
General and administrative expenses
General and administrative expenses increased by 11.9% from RMB102.6 million for the year ended December 31, 2016 to RMB114.9 million for the year ended December 31, 2017. Share-based compensation is a large component of our general and administrative expenses. General and administrative expenses included share-based compensation expenses of RMB55.1 million for the year ended December 31, 2016, and RMB55.8 million for the year ended December 31, 2017. The increase in general and administrative expenses was primarily due to a RMB10.2 million increase in personnel-related costs, a RMB8.4 million increase in government fees and charges and a RMB3.5 million increase in professional service fees, partially offsetting by a RMB6.6 million decrease in foreign exchange losses as a result of operational transactions. For the year ended December 31, 2017, general and administrative expenses, as a percentage of revenues, decreased to 5.6% from 6.6% for the year ended December 31, 2016.
Selling and marketing expenses
Selling and marketing expenses increased by 58.2% from RMB27.8 million for the year ended December 31, 2016 to RMB44.0 million for the year ended December 31, 2017, primarily due to a RMB13.9 million increase in expenses to promote self-branded products through e-commerce platforms and a RMB5.1 million increase in personnel-related costs. For the year ended December 31, 2017, selling and marketing expenses, as a percentage of revenues, increased to 2.1% from 1.8% for the year ended December 31, 2016.
Operating (loss)/income
As a result of the factors set out above, we recorded an operating income of RMB182.0 million for the year ended December 31, 2017, as compared to an operating income of RMB13.4 million for the year ended December 31, 2016.
Interest income
Interest income represents interest earned on bank deposits. We had interest income of RMB0.8 million in 2016 and RMB3.0 million in 2017.
Other income
We had other income of RMB14.7 million in 2016 and RMB4.6 million in 2017, primarily as a result of subsidies income we recorded for the periods.
Income tax benefits/(expenses)
We recorded income tax expenses in the amount of RMB3.1 million in 2016 and RMB27.6 million in 2017. The increase in income tax expenses for the year ended December 31, 2017 was attributable to an increase in taxable income.
61
As a result of the foregoing, our operating result improved from a net income of RMB23.9 million for the year ended December 31, 2016 to a net income of RMB167.1 million for the year ended December 31, 2017.2020.
Taxation
We generate the majority of our operating income from our PRC operations. Income tax liability is calculated based on a separate return basis as if we had filed separate tax returns for all the periods presented.
99
The Cayman Islands
We are not subject to income or capital gains tax under the current laws of the Cayman Islands. There are no other taxes likely to be material to us levied by the government of the Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.payments and have no estate duty, inheritance tax or gift tax.
Hong Kong
Our subsidiary incorporatedsubsidiaries, Galaxy Trading Platform Limited and Hong Kong Zepp Holding Limited, are located in Hong Kong, Huami HKKong. Galaxy Trading Platform Limited is subject to 16.5% Hong Kong profita two-tiered income tax on itsrates for taxable income generated from operationsearned in Hong Kong for the years of assessment 2015/2016, 2016/2017 and 2017/2018. Commencing from the year of assessment 2018/2019, theKong. The first HK$2.0 million of profits earned by Huami HKGalaxy Trading Platform Limited will be taxed at half the current tax rate (i.e., 8.25%) while the remaining profits will continue to be taxed at the existing 16.5% tax rate. Hong Kong Zepp Holding Limited is subject to a 16.5% income tax rate. Under the Hong Kong tax laws, we are exempted from the Hong Kong income tax on our foreign-derived income. In addition, payments of dividends from Huami HKHong Kong Zepp Holding Limited to us are not subject to any Hong Kong withholding tax.
PRC
Generally, our PRC subsidiaries, VIEs and their subsidiaries are subject to enterprise income tax on their taxable income in China at a statutory rate of 25%. A “high and new technology enterprise” is entitled to a favorable statutory tax rate of 15% and such qualification is reassessed by relevant governmental authorities every three years. Anhui Huami began to qualify as a high and new technology enterprise, or HNTE, since 2015 and renewed the HNTE certificate in October 2018.July 2018 and in September 2021. Anhui Huami Health Technology Co., Ltd. began to qualify as a HNTE since August 2020. Shunyuan Kaihua began to qualify as a HNTE since December 2021. Accordingly, Anhui Huami was subject to a tax rate of 15% during the years ended December 31, 2016, 20172019, 2020 and 2018.2021. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and accounting standards.
We are subject to value added tax, or VAT, at a rate of 17% (before May 1, 2018), 16% (on and after May 1, 2018 and before April 1, 2019), and 13% (on and after April 1, 2019) on sales and/or import goods and at a rate of 6% on the services (research and development services, technology services, information technology services and/or culture and creativity services), in each case less any deductible VAT we have already paid or borne. We are also subject to surcharges on VAT payments in accordance with PRC law.
Dividends paid by our wholly foreign-owned subsidiaries in China to our intermediary holding company in Hong Kong will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity satisfies all the requirements under the Arrangement between the PRC and the Hong Kong Special Administrative Region on the Avoidance of Double Taxation and Prevention of Fiscal Evasion with respect to Taxes on Income and Capital and other related regulations, including Circular No. 9, and receives approval from the relevant tax authority. If Huami HKHong Kong Zepp Holding Limited satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. Effective from November 1, 2015, the above mentioned approval requirement has been abolished, but a Hong Kong entity is still required to file application package with the relevant tax authority, and settle the overdue taxes if the preferential 5% tax rate is denied based on the subsequent review of the application package by the relevant tax authority. According to the SAT Circular No. 35, effective from January 1, 2020, a Hong Kong entity shall adopt the method of “self-discrimination, declaration of enjoyment, and retention of relevant materials for future reference,” and the above mentioned requirement of filing application package with the relevant tax authority has been abolished. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.”
If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item“Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.”
62100
B. Liquidity and Capital Resources
The following table sets forth the movements of our cash flows for the periods presented:
| | | | | | | | |
| | Years Ended December 31, | ||||||
| | 2019 | | 2020 | | 2021 | ||
|
| RMB |
| RMB |
| RMB |
| US$ |
| | (in thousands) | ||||||
Selected Consolidated Cash Flow Data: | |
| |
| |
| |
|
Net cash provided by (used in) operating activities | | 427,999 |
| 157,302 |
| (232,435) |
| (36,474) |
Net cash used in investing activities | | (112,703) |
| (206,880) |
| (1,069,289) |
| (167,796) |
Net cash provided by financing activities | | 25,609 |
| 564,671 |
| 551,077 |
| 86,477 |
Net increase/(decrease) in cash and cash equivalents and restricted cash | | 340,905 |
| 515,093 |
| (750,647) |
| (117,793) |
Exchange rate effect on cash and cash equivalents | | 11,274 |
| (43,334) |
| (15,564) |
| (2,442) |
Cash, cash equivalents and restricted cash at the beginning of year | | 1,451,812 |
| 1,803,991 |
| 2,275,750 |
| 357,115 |
Cash, cash equivalents and restricted cash at end of year | | 1,803,991 |
| 2,275,750 |
| 1,509,539 |
| 236,880 |
As of December 31, 2019, 2020 and 2021, our cash, cash equivalents and restricted cash were RMB1,804.0 million, RMB2,275.8 million and RMB1,509.5 million (US$236.9 million), respectively, out of which RMB717.6 million, RMB609.7 million and RMB435.2 million (US$68.3 million) were held in U.S. dollars, and RMB1,084.3 million, RMB1,618.7 million and RMB1,030.7 million (US$161.7 million) were held in Renminbi, as of December 31, 2019, 2020 and 2021 respectively. Our cash, cash equivalents and restricted cash primarily consist of cash at banks and on hand. 69.3% of our cash, cash equivalents and restricted cash as of December 31, 2021 were held in China, and 65.8% of our cash, cash equivalents and restricted cash were held by our VIEs.
We believe our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. We may decide to enhance our liquidity position or increase our cash reserve for future investments through additional capital and finance funding. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations.
Although we consolidate the results of our VIEs and their subsidiaries, we only have access to the assets or earnings of our VIEs and their subsidiaries through our contractual arrangements with our consolidated variable interest entities and their shareholders. See “Item 4. Information on the Company—C. Organizational Structure.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure.”
In utilizing the proceeds we received from our initial public offering and our ADS offering in April 2019, and the other cash that we hold offshore, we may make additional capital contributions to our PRC subsidiaries, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, make loans to our PRC subsidiaries, or acquire offshore entities with business operations in China in offshore transactions. However, most of these uses are subject to PRC regulations and approvals. For example:
| ● | capital contributions to our PRC subsidiaries must be approved by the Ministry of Commerce or its local counterparts; and |
| ● | loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local branches. |
See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Foreign Exchange.”
A substantial portion of our future revenues are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, Renminbi may be converted into foreign exchange for current account items, including profit distributions, interest payments and trade-and service-related foreign exchange transactions.
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Our PRC subsidiaries may convert Renminbi amounts that they generate in their own business activities, including technical consulting and related service fees pursuant to their contracts with the consolidated variable interest entities, as well as dividends they receive from their own subsidiaries, into foreign exchange and pay them to their non-PRC parent companies in the form of dividends. However, current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, capital account transactions, which include foreign direct investment and loans, must be registered with SAFE and its local branches. The total amount of loans we can make to our PRC subsidiaries cannot exceed statutory limits and must be registered with the local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is either (i) two and half times of the net assts of such foreign-invested company, or (ii) the difference between the amount of total investment and the amount of registered capital of such foreign-invested company, as the company wishes to choose.
Operating activities
Net cash used in operating activities for the year ended December 31, 2021 was RMB232.4 million (US$36.5 million). The difference between our net income of RMB137.0 million (US$21.5 million) and the net cash used in operating activities was primarily due to additional used in working capital, partially offset by the adjustment of non-cash items, which primarily consisted of shared-based compensation, depreciation and amortization expenses and provision and write off for excess and obsolete inventories. Changes in working capital for the year ended December 31, 2021 primarily consisted of a decrease by RMB673.2 million (US$105.6 million) in accounts payable, which was due to the lower material purchase volume in fourth quarter 2021 compared with it was in fourth quarter 2020, partially offset and optimize by a net decrease of RMB304.7 million (US$47.8 million) in amount due from related parties and accounts receivable.
Net cash provided by operating activities for the year ended December 31, 2020 was RMB157.3 million. The difference between our net income of RMB229.7 million and the net cash provided by operating activities was primarily due to additional RMB210.0 million used in working capital, partially offset by the adjustment of RMB137.6 million in non-cash items, which primarily consisted of inventory provision and write-off and share-based compensation. Changes in working capital for the year ended December 31, 2020 primarily consisted of an increase by RMB410.7 million in inventories, a decrease by RMB149.4 million in accrued expense and other current liabilities, an increase by RMB131.2 million in accounts receivable, and an increase by RMB80.0 million in prepaid expenses and other current assets, partially offset by a decrease by RMB583.5 million in amount due from related parties.
Net cash provided by operating activities for the year ended December 31, 2019 was RMB428.0 million. The difference between our net income of RMB573.4 million and the net cash provided by operating activities was primarily due to additional RMB249.7 million used in working capital, partially offset by the adjustment of RMB104.3 million in non-cash items, which primarily consisted of inventory write-off and share-based compensation. Changes in working capital for the year ended December 31, 2019 primarily consisted of an increase by RMB771.0 million in amount due from related parties, an increase by RMB433.0 million in inventories, and an increase by RMB130.0 million in accounts receivable, partially offset by an increase by RMB935.8 million in accounts payable and an increase by RMB86.2 million in accrued expense and other current liabilities.
As of December 31, 2019, 2020 and 2021, we had amount due from related parties of RMB1,421.2 million, RMB860.2 million and RMB295.6 million (US$46.4 million), respectively, among which RMB1,418.6 million, RMB833.2 million and RMB287.1 million(US$45.1 million) were from Xiaomi and its affiliates, respectively. Xiaomi usually places significant product orders in the fourth quarter of each year relating to major promotional events, and this results in high inventories and account receivables from Xiaomi at the end of each year. All of the amount due from Xiaomi as of December 31, 2019, 2020 and 2021 was collected in the first quarter of 2020, 2021 and 2022, respectively.
Investing activities
Net cash used in investing activities was RMB1,069.3 million (US$167.8 million) for the year ended December 31, 2021, primarily due to purchase of long-term investments of RMB1,072.8 million (US$168.3 million) mainly used in acquiring equity interests in Jiangsu Yitong, and purchase of property, plant and equipment of RMB46.1 million (US$7.2 million), partially offset by disposal of long-term investments of RMB20.0 million (US$3.1 million).
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Net cash used in investing activities was RMB206.9 million for the year ended December 31, 2020, primarily due to purchase of term deposits of RMB212.1 million, purchase of property, plant and equipment of RMB83.6 million, purchase of long-term investments of RMB82.2 million and acquisition of businesses and assets of RMB26.7 million, partially offset by proceeds from the maturity of term deposits of RMB207.1 million.
Net cash used in investing activities was RMB112.7 million for the year ended December 31, 2019, primarily due to purchase of long-term investments of RMB180.9 million, purchase of property, plant and equipment of RMB34.3 million and purchase of intangible assets of RMB11.8 million, partially offset by proceeds from the maturity of term deposits of RMB97.0 million.
Financing activities
Net cash provided by financing activities for the year ended December 31, 2021 was RMB551.1 million (US$86.5 million), primarily due to bank borrowings of RMB1,473.6 million (US$231.2 million), including an RMB 540.0 million loan with a term of seven years used in acquiring equity interests in Jiangsu Yitong, partially offset by the repayment of bank borrowings of RMB953.4 million (US$149.6 million).
Net cash provided by financing activities for the year ended December 31, 2020 was RMB564.7 million, primarily due to bank borrowings of RMB1,207.8 million, partially offset by the repayment of bank borrowing of RMB643.1 million.
Net cash provided by financing activities for the year ended December 31, 2019 was RMB25.6 million, primarily due to the proceeds of RMB49.2 million from the offering of our ADSs in April 2019, partially offset by the repayment of bank borrowings of RMB20.0 million.
Capital expenditures
Our capital expenditures primarily consist of purchases of property, plant and equipment and intangible assets. Our capital expenditures were RMB46.1 million, RMB84.8 million and RMB53.1 million (US$8.3 million) in the years ended December 31, 2019, 2020 and 2021, respectively. We will continue to make capital expenditures to meet the expected growth of our business.
Material cash requirements
Our material cash requirements as of December 31, 2021 and any subsequent interim period primarily include bank borrowings and operating lease obligations.
Bank borrowings. As of December 31, 2021, we had outstanding bank loans with terms of one to seven years for an aggregate balance of RMB1.1 billion, including RMB544.9 million short-term bank loans and long-term bank loans used for our daily operations and RMB540.0 million long-term bank loans for the Jiangsu Yitong acquisition.
Operating lease. We have operating lease arrangements for administrative office spaces in various cities in the PRC and overseas, and financial lease that is immaterial. As of December 31, 2021, we had RMB51.9 million of payables within the next 12 months.
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. We do not have retained or contingent interests in assets transferred. We have not entered into contractual arrangements that support the credit, liquidity or market risk for transferred assets. We do not have obligations that arise or could arise from variable interests held in an unconsolidated entity, or obligations related to derivative instruments that are both indexed to and classified in our own equity, or not reflected in the statement of financial position.
Other than as discussed above, we did not have any significant capital and other commitments, long-term obligations or guarantees as of December 31, 2021.
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Holding Company Structure
Zepp Health Corporation is a holding company with no material operations of its own. We conduct our operations in China primarily through our PRC subsidiaries, our VIEs and their subsidiaries in China. As a result, Zepp Health Corporation’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and our VIEs in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, each of our wholly foreign-owned subsidiaries in China may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our VIEs may allocate a portion of their after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.
The table below sets forth the respective revenues contribution and assets of Zepp and our wholly-owned subsidiaries and our VIEs as of the dates and for the periods indicated:
| | | | | | | | | | | |
| | Revenues(1) | | Total assets(1) |
| ||||||
| | For the Year Ended December 31, | | As of December 31, |
| ||||||
|
| 2019 |
| 2020 |
| 2021 |
| 2020 |
| 2021 |
|
Zepp and its wholly-owned subsidiaries |
| 0.2 | % | 2.1 | % | 16.5 | % | 27.7 | % | 39.4 | % |
VIEs |
| 99.8 | % | 97.9 | % | 83.5 | % | 72.3 | % | 60.6 | % |
Total |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
Note:
(1)The percentages exclude the inter-company transactions and balances between our subsidiaries and our VIEs.
C.Research and Development, Patents and Licenses, Etc.
See “Item 4. Information On the Company—B. Business Overview—Research and Development” and “—Intellectual Property.”
D.Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since January 1, 2021 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
E. Critical Accounting PoliciesEstimates
We prepare our financial statements in accordance with U.S. GAAP, which requires our management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosures of contingent assets and liabilities at the balance sheet dates and the reported amounts of revenues and expenses during the reporting periods. We continually evaluate these judgments and estimates based on our own historical experience, knowledge and assessment of current business and other conditions, our expectations regarding the future based on available information and assumptions that we believe to be reasonable, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
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The selection of critical accounting policies, the judgments and other uncertainties affecting application of those policies and the sensitivity of reported results to changes in conditions and assumptions are factors that should be considered when reviewing our financial statements. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements. You should read the following description of critical accounting policies, judgments and estimates in conjunction with our consolidated financial statements and other disclosures included in this annual report.
Revenue recognitionInventories, net
On January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue Contracts with Customers (Topic 606), “Topic 606” applying the modified retrospective method to all contracts that were not completed as of January 1, 2018.
After Adoption of Topic 606
Nature of Goods and Services
We generate substantially all of our revenues from sales of smart, wearable devices. We also generate a small amount of our revenues from our subscription-based services. For the year ended December 31, 2018, we generated 66.9% of revenue from one customer for sales of exclusively designed and manufactured smart wearable devices and 33.1% of revenue from sales of our self-branded products. Revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for the goods or services. We recognized revenue, net of estimated sales returns and value-added taxes (“VAT”).
We have determined that our contracts with our customers include multiple performance obligations that we account for separately as those are distinct from other items in the contract. The first performance obligation is the smart wearable device and embedded firmware that is essential to the functionality of the device, which the customer can benefit from it on its own or with other resources that are readily available to the customer. The second performance obligation is the software services included with the products, which are provided free of charge and enable users to sync, view, and access real-time data on our mobile apps. The third performance obligation is the embedded right included with the purchase of the device to receive, on a when-and-if-available basis, future unspecified firmware upgrades and features relating to the product’s essential firmware.
We allocate the transaction price to all performance obligations based on their relative standalone selling prices. The standalone selling prices are determined based on the expected cost plus margin as we determined that no observable price is available for any of its performance obligation. We considered multiple factors in the process of determining its cost plus margin including consumer behaviors and our internal pricing model. The cost plus margin estimated selling price for the smart and wearable devices comprised the majority of the transaction. The cost plus margin estimated selling price for the software services and software upgrades was estimated from RMB1.77 to RMB5.68 per unit for the year ended December 31, 2018. We recognize revenue for the amounts allocated to the connected smart and wearable devices when the customer obtains control of our product, which occurs at a point of time, typically upon delivery to the reseller and acceptance by the reseller, who has been identified as our customer. Amounts allocated to the software services and unspecified upgrade rights are deferred and recognized over time as the customer simultaneously receives and consumes the benefit over an estimated nine-month period.
Sales of self-branded products
For the year ended December 31, 2018, we generated 33.1% of revenues from sales of our self-branded products to retailers, distributors and end users. Our revenue recognition for its self-branded products was consistent with that described in the preceding paragraphs.
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Cooperation Agreement with One Customer
For the year ended December 31, 2018, we generated 66.9% of revenues from one customer for sales of exclusively designed and manufactured smart wearable devices. That customer is also the sole distributor for such smart wearable devices and is one of our shareholders. Under the cooperation agreement with this customer, we produce and assemble final product for shipments of wearable devices to that customer, who are then responsible for commercial distribution and sale of the product. The arrangement includes two payment installments. The first payment installment is priced to recover the costs incurred by us in developing and shipping the devices to the customer and is due from the customer to us once the products have been delivered and the customer has accepted the products. We allocate the initial payment installment between the hardware device, the software services, and the software upgrades based on their standalone selling price and recognizes revenue based on its recognition policy further described in the preceding paragraph. We are also entitled to receive a potential second installment payment calculated as 50 percent of the future net profits from commercial sales made by the customer. We have determined that the second installment consideration constitutes variable consideration and includes the amount in the transaction price to the extent it is not constrained and it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period (see below for further details). The second installment is also allocated between the hardware device, the software services, and the software upgrades based on the relative standalone price and is recognized based on our recognition policy further described in the preceding paragraph. Our revenue recognition policy of its products under our cooperation agreement is substantially consistent with that for our sales of self-branded products except that the installment payments arrangement under the cooperation agreement is not available to the self-branded products.
Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimate of variable consideration which result from our cooperation agreement with one customer (see above for more details). The amount of variable consideration is included in the transaction price to the extent it is not constrained and that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we will adjust these estimates, which would affect revenue and earnings in the period such variances are known.
Sales Incentive
Starting in 2018, we provide sales incentives to certain of our customers for self-branded products, including reduced sales prices and volume-based discounts. Volume discounts are negotiated on a contract-by-contract basis with customers and the discount will increase depending upon the volume purchased over the period. The sales incentives are discounts to be applied to future sales to the customer which cannot be exchanged for cash. To the extent that the volume discount or sales incentive represents a material right or options to acquire additional goods or services at a discount in the future period, the material right is recognized as a separate performance obligation at the outset of the arrangement based on the most likely amount of incentive to be provided to the customer. Amounts allocated to a material right are recognized as revenue when those future goods are sold to the customers.
Practical Expedients and Exemptions
We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling and marketing expenses. In addition, we do not disclose the value of unsatisfied performance obligations as all of its contracts have an original expected length of one year or less.
Period Prior to January 1, 2018
We recognized revenue when persuasive evidence of an arrangement exists, delivery has occurred and the services have been rendered, the sales price is fixed or determinable, and collection is reasonably assured. We recognized revenue, net of estimated sales returns and value-added taxes (“VAT”).
Our contracts with our customers included multiple element arrangements. The first deliverable was the smart wearable device and embedded firmware that was essential to the functionality of the device. The second deliverable was the software services included with the products, which were provided free of charge and enabled users to sync, view, and access real-time data on our mobile apps. The third deliverable was the embedded right included with the purchase of the device to receive, on a when-and-if-available basis, future unspecified firmware upgrades and features relating to the product’s essential firmware.
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We allocated revenue to all deliverables based on their relative selling prices. We used a hierarchy to determine the selling price to be used for allocating revenue to the deliverables: (i) vendor-specific objective evidence (“VSOE”) of fair value, (ii) third-party evidence (“TPE”), and (iii) best estimate of the selling price (“BESP”). Because we did not have neither VSOE nor TPE for any of its deliverables, revenue was allocated to the deliverables on our BESP as if each deliverable was sold regularly on a stand-alone basis. Our process for determining its BESP considered multiple factors including consumer behaviors and our internal pricing model. The BESP for the smart and wearable devices comprised the majority of the arrangement consideration. The BESP for the software services and software upgrades was estimated from RMB0.43 to RMB2.82 per unit and from RMB1.30 to RMB5.69 per unit for the years ended December 31, 2016 and 2017, respectively. We recognized revenue for the amounts allocated to the connected smart and wearable devices at the time of delivery and acceptance (except as noted below), provided the other conditions for revenue recognition have been met. Revenue for products sold through distributors or retailers was recognized on a sell-in basis. Amounts allocated to the software services and unspecified upgrade rights were deferred and recognized on a straight-line basis over their estimated usage period which approximately 9 months.
Sales of self-branded products
For the years ended December 31, 2016 and 2017, we generated 7.9% and 21.2% of revenues from sales of our self-branded products to retailers, distributors and end users. Our revenue recognition for its self-branded products was consistent with that described in the preceding paragraphs.
Cooperation agreement with one customer
For the years ended December 31, 2016 and 2017, we generated 92.1% and 78.8% of revenues from one customer for sales of exclusively designed and manufactured smart wearable devices. That customer was also the sole distribution channel for such smart wearable devices and is one of our shareholders. Under the cooperation agreement with this customer, we produce and assemble final product for shipments of wearable devices to that customer, who are then responsible for commercial distribution and sale of the product. The arrangement includes two payment installments. The first payment installment is priced to recover the costs incurred by us in developing and shipping the devices to the customer and is due from the customer to us once the products have been delivered and the customer has accepted the products. We allocate the initial payment installment between the hardware device, the software services, and the software upgrades based on their relative fair value and recognizes revenue based on its recognition policy further described in the preceding paragraph. We are also entitled to receive a potential second installment payment calculated as 50 percent of the future net profits from commercial sales made by the customer. Given the revenue from the profit sharing arrangement is contingent on the commercial sale, we recognized revenue from the second installment in the period following the commercial sale by the customer, which is when the fee was fixed and determinable. The fee related to the second installment was usually earned by we between 30 to 45 days after initial shipment of the product to the customer. The second installment was also allocated between the hardware device, the software services, and the software upgrades based on their relative fair value and is recognized based on our recognition policy further described in the preceding paragraph. Our revenue recognition policy of our products under our cooperation agreement was substantially consistent with that for its sales of self-branded products except that the installment payments arrangement under our cooperation agreement is not available for the self-branded products.
Rights of return
We offer limited sales returns for self-branded products sold directly to our customers. We estimate the amount of our products sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related revenue is recognized. We currently estimate product return liabilities using our own historical sales information. For the years ended December 31, 2017 and 2018, returns have been insignificant.
Product Warranty
We offer a standard product warranty that the product will operate under normal use. For products sold to the one customer under the business cooperation agreement, the warranty period is 18 months which includes a six-month warranty to that customer and an additional 12-month warranty to end-users. For products sold directly to end users, the warranty period includes a 12-month warranty to end users. We have the obligation, at our option, to either repair or replace the defective product.
At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenues. The reserves established are regularly monitored based upon historical experience and any actual claims charged against the reserve. Warranty reserves are recorded as a cost of revenue.
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Our inventories consist of raw materials, finished goods and work in process. Inventories are stated at the lower of cost or net realizable value on a weighted average basis. Inventory costs include expenses that are directly or indirectly incurred in the purchase, including shipping and handling costs charged to us by suppliers, and production of manufactured product for sale. Expenses includesale, such as the cost of materials and supplies used in production, direct labor costs and allocated overhead costs such as depreciation, insurance, employee benefits and indirect labor. Cost is determined using the weighted average method.
Inventories are written down if the estimated net realizable value is less than the recorded value. We assessreview the valuationcarrying cost of inventory andinventories by product to determine the adequacy of reserves for obsolescence. In accounting for inventories, we must make estimates regarding the estimated realizable value of inventory. The estimate is based, in part, on the product life cycle resulting in periodically write down and write off the value for estimated excess and obsolete inventory based uponinventories. Significant judgement is involved to assess the product life cycle. For the fiscal years ended December 31, 2016, 2017 and 2018, the inventories write-down was RMB1.0 million, RMB2.4 million and nil, respectively.
Acquired intangible asset
Acquired intangible assets other than goodwill consistvaluation of the domain name for our website www.huami.com, trademark and patents. The domain name is recognized as an intangible asset with indefinite life and evaluated for impairment at least annually or if events or changes in circumstances indicate that the asset might be impaired. Such impairment test compares the fair value of asset with its carrying value, and an impairment loss is recognized if and when the carrying amount exceed the fair value. The estimates of values of the intangible asset not subject to amortization are determined using discounted cash flow valuation approach. Significant assumptions are inherent in this process, including estimates of discount rates. The patents and trademark are recognized as intangible assets with finite lives and are amortized on a straight-line basis over their expected useful economic lives. Amortization is calculated on a straight-line basis overinventory which include the estimated useful lifeforecasts of 10 years.
Goodwill
Goodwill represents thefuture sales. If actual conditions are less favorable than those we haves projected, we may need to increase our reserves for excess of the purchase price over the fair value of identifiable net assets acquired in business combinations. Goodwill is not amortized but is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired.
Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or change in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant changeobsolete inventories. Any increase in the stock prices, business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
Application ofreserves will adversely impact the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The estimation of fair value of each reporting unit using a discounted cash flow methodology also requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for our business, estimation of the useful life over which cash flows will occur, and determination of our weighted average cost of capital. The estimates used to calculate the fair value of a reporting unit change from year to year based on results of operations and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.
We perform a two-step goodwill impairment test. The first step compares the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill is not considered impaired and the second step will not be required. If the carrying amount of a reporting unit exceeds its fair value, the second step compares the implied fair value of the affected reporting unit’s goodwill to the carrying amount of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss is recognized for any excess in the carrying amount of goodwill over the implied fair value of goodwill.
In 2018, we recognized nil impairment loss on goodwill.
Long-term investments
Our long-term investments consist of equity securities without readily determinable fair value, equity method investments and available-for-sale securities investments.
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(a) Equity securities without readily determinable fair value.
On January 1, 2018, we adopted ASU No. 2016-01 and 2018-03. Prior to 2018, for investee companies over which we do not have significant influence or a controlling interest, equity securities without determinable fair value were accounted for using the cost method of accounting, measured at cost less other-than-temporary impairment. Starting in 2018, these securities are measured and recorded using a measurement alternative that measures the securities at cost minus impairment, if any, plus or minus changes resulting from qualifying observable price changes.
We review our equity securities without readily determinable fair value for impairment at each reporting period by considering factors including, but not limited to, current economic and market conditions, the operating performance of the companies including current earning trends and other company specific information. During the years ended December 31, 2016, 2017 and 2018, we did not record any impairment losses on its equity securities without readily determinable fair values
(b) Equity Method Investment.
For an investee company over which we have the ability to exercise significant influence, but do not have a controlling interest, we account for the investment under the equity method. Significant influence is generally considered to exist when we have an ownership interest in the voting stock of the investee between 20% and 50%. Other factors, such as representation on the investee’s board of directors, voting rights and the impact of commercial arrangements are also considered in determining whether the equity method of accounting is appropriate.
Under the equity method of accounting, the investee company’s accounts are not reflected within our consolidated balance sheets and statements of operations; however, our share of the earnings or losses of the investee company is reflected in the caption “(loss)/income from equity method investments” in the consolidated statements of operations.
An impairment charge is recorded if the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. We estimated the fair value of the investee company based on comparable quoted price for similar investment in active market, if applicable, or discounted cash flow approach which requires significant judgments, including the estimation of future cash flows, which is dependent on internal forecasts, the estimation of long-term growth rate of a company’s business, the estimation of the useful life over which cash flows will occur, and the determination of the weighted average cost of capital. We recorded nil, nil and RMB4.1 million (US$0.6 million) impairment losses on its equity method investments during the years ended December 31, 2016, 2017 and 2018.
(c) Available-for-sale Investments.
For investments which are determined to be debt securities, we account for them as long-term available-for-sale investments when it is not classified as either trading or held-to-maturity investments.
Available-for-sale investment is carried at its fair value and the unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive income.
We review our investments for other than temporary impairment based on the specific identification method. We consider available quantitative and qualitative evidence in evaluating potential impairment of our investments. If the cost of an investment exceeds the investment’s fair value, we consider, among other factors, general market conditions, government economic plans, the duration and the extent to which the fair value of the investment is less than the cost, our intent and ability to hold the investment, and the financial condition and near term prospects of the investees. We recorded nil, nil and RMB3.5 million (US$0.5 million) impairment losses on our available-for-sale investments during the years ended December 31, 2016, 2017 and 2018.
Income taxesDeferred income tax
Current income taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxes are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized.
We account for uncertainrecognize deferred tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expectedassets to be taken in a tax return. Tax benefits are recognized from uncertain tax positions whenthe extent that we believe that it isthese assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax position will be sustainedasset valuation allowance, which would reduce the provision for income taxes. Significant judgment is required in determining the valuation allowance. In assessing the need for a valuation allowance, we consider all sources of taxable income, including projected future taxable income, reversing taxable temporary differences and ongoing tax planning strategies. If it is determined that we are unable to realize a deferred tax asset, we would adjust the valuation allowance in the period in which such a determination is made, with a corresponding decrease to earnings.
Revenue
We have determined that our contracts with our customers include multiple performance obligations that we account for separately as those are distinct from other items in the contract, which include the smart and wearable device, the software services and the software updates. Significant judgements included in revenue recognition include:
| ● | the allocation of the transaction price to all the performance obligations based on the relative standalone selling prices; and |
| ● | variable consideration |
We allocate the transaction price to all performance obligations based on examination by the taxing authoritiestheir relative standalone selling prices. The standalone selling prices are determined based on the technical meritsexpected cost plus margin as we determined that no observable price is available for any of our performance obligation. As such, we considered multiple factors when estimating the standalone selling price, which includes consumer behaviors and our internal pricing model. The estimated selling price for the smart and wearable devices comprised the majority of the position. We recognize interest and penalties, if any, related to unrecognized tax benefitstransaction. Any significant changes in income tax expense.those estimates would result in changes in the in allocation of revenue which could have an impact on revenue.
67105
Share-based payment transactionsAdditionally, revenues from product sales are recorded at the net sales price (transaction price), which includes estimate of variable consideration which result from our cooperation agreement with employees, such as share options are measured based onone major customer. The amount of variable consideration is included in the grant date fair value oftransaction price to the equity instrument. We elected to recognize compensation expenses using the straight-line method for all employee equity awards granted with graded vesting providedextent it is not constrained and that it is probable that a significant reversal in the amount of compensation costthe cumulative revenue recognized at any date is at least equal to the portionwill not occur in a future period. Actual amounts of the grant-date value of the options that are vested at that date, over the requisite service period of the award, which is generally the vesting period of the award.
We estimated the fair value of share options using the binomial option-pricing model with the assistanceconsideration ultimately received may differ from an independent valuation firm. The fair value of each option grant is estimated on the date of grant with the following key assumptions:
|
| June 14, 2016 |
|
| September 8, 2016 |
|
| May 31, 2017 |
|
| August 27, 2017 |
|
| March 25, 2018 |
|
| June 3, 2018 |
| December 24, 2018 |
| ||||||
Risk-free interest rate |
|
| 1.62 | % |
|
| 2.85 | % |
| 2.11% - 2.28% |
|
| 2.07% - 2.17% |
|
| 2.04% - 2.82% |
|
| 2.79% - 2.83% |
|
| 2.57 | % | |||
Contractual term (number of years) |
|
| 10 |
|
|
| 10 |
|
|
| 10 |
|
|
| 10 |
|
| 1 - 10 |
|
| 7 - 10 |
|
| 10 |
| |
Expected volatility |
|
| 46.09 | % |
|
| 47.82 | % |
| 45.8% - 49.5% |
|
| 49.2% - 49.5% |
|
| 36% - 49% |
|
| 50.3% - 52.5% |
|
| 50.6 | % | |||
Expected dividend yield |
|
| 0 | % |
|
| 0 | % |
|
| 0% |
|
|
| 0% |
|
|
| 0% |
|
| 0% |
|
| 0 | % |
We estimate the fair value of our restricted shares and restricted share units based on the fair value of our ordinary shares on the date of grant. For the years ended December 31, 2016, 2017 and 2018, we recorded share-based compensation expenses of RMB6.5 million, RMB6.6 million and RMB29.4 million (US$4.3 million) related to restricted shares and restricted share units.
Restricted shares owned by the founders
As one of the conditions to the closing of our preferential equity investments in January 2014, two founders entered into a share restriction agreement with the preferential equity interests shareholders. Pursuant to this agreement, those founders are prohibited from transferring, selling, assigning, pledging or disposing in any way their equity interestestimates. If actual results in the Company before such interest is vested. The equity interest held byfuture vary from our estimates, we will adjust these founders were 50% converted to restricted equity interestestimates, which would affect revenue and vest in 24 equal and continuous monthly installments for each month starting from January 2014, provided that those founders remain full-time employees of our Company at the end of such month. A total of 45,567,164 restricted shares were held by those founders as of April 2015. In April 2015, as one of the condition of the closing of the preferred shareholders agreement, the agreement was amended to (1) restrict additional shares and extend the vesting period for an additional 48 months and (2) restrict shares held by four other founders similar to the restrictions imposed in January 2014. We also obtained an irrevocable and exclusive option to repurchase all of the restricted shares held by those founders at par value both in January 2014 and April 2015.
We accounted for the share restriction agreement between the founders and us as a grant of restricted stock award under a stock-based compensation plan. Accordingly, we measured the fair value of the restricted shares of the founders at the grant date and recognizes the amount as compensation expense over the service period. Additionally, we accounted for the modification of the restriction in April 2015 as a modification of share-based compensation. We calculated the incremental fair value resulting from the modification and recorded it as share-based compensation over the revised vesting term.
We determined that the non-vested restricted shares are participating securities as the holders of the non-vested restricted shares have a non-forfeitable right to receive dividends with all ordinary shares but the non-vested restricted shares do not have a contractual obligation to fund or otherwise absorb our losses.
For the years ended December 31, 2016, 2017 and 2018 we recorded share-based compensation expenses of RMB50.8 million, RMB51.5 million and RMB55.3 million (US$8.0 million) related to the unvested shares of the founders.
Fair Value of Ordinary Shares
Prior to our initial public offering, we were a private company with no quoted market prices for our ordinary shares. We made estimates of the fair value of our ordinary shares at various dates as one of the inputs into determining the grant date fair value of share-based compensation awards. In determining the fair value of our ordinary shares, we have considered the guidance prescribed by the AICPA Audit and Accounting Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, or the Practice Aid, which sets forth the preferred types of valuation that should be used. These estimates are no longer necessary to determine the fair value of our ordinary shares after our ADSs begin trading.
68
The following table sets forth the fair value of our ordinary shares estimated at different dates in 2016 and 2017:
Date |
| Class of Shares |
| Fair Value |
|
| Purpose of valuation |
| DLOM |
|
| Discount Rate |
| |||
June 14, 2016 |
| Ordinary Share |
| $ | 1.08 |
|
| share options |
|
| 15 | % |
|
| 21 | % |
September 8, 2016 |
| Ordinary Share |
| $ | 1.08 |
|
| share options |
|
| 15 | % |
|
| 21 | % |
May 31, 2017 |
| Ordinary Share |
| $ | 1.61 |
|
| share options |
|
| 13 | % |
|
| 19.5 | % |
August 27, 2017 |
| Ordinary Share |
| $ | 1.93 |
|
| share options |
|
| 10 | % |
|
| 19.5 | % |
In determining the fair value of our ordinary shares in 2016 and 2017, our independent third-party appraiser used the DCF method of the income approach to derive the fair value of our ordinary shares. The determination of the fair value of our ordinary shares required complex and subjective judgments to be made regarding our projected financial and operating results, our unique business risks, the liquidity of our shares and our operating history and prospects at the time of valuation. We also applied a discount for lack of marketability, or DLOM, with a range of 10%-20% to reflect the fact that there is no ready market for shares in a closely-held company like us. Subsequent to our initial public offering, we use the closing market price of our underlying shares on the grant date to determine fair value of our ordinary shares
The increaseearnings in the fair value of our ordinary shares from US$1.08 per share as of June 14, 2016 to US$1.61 per share as of May 31, 2017, and further to US$1.93 per share as of August 27, 2017, was primarily attributable to continuous organic growth of our business and more certainty over the timing of our initial public offering. The financing not only strengthened our financial status and resources but also indicated an increase in investor’s confidence in our business prospects.
Consolidation of Variable Interest Entity
We conduct substantially all of our business in the PRC through contractual arrangements with Anhui Huami and its subsidiary and Beijing Huami.
We believe we have the power to control Anhui Huami and Beijing Huami through a series of contractual arrangements that we have entered into through Shunyuan Kaihua, our WOFE. Those contractual terms enable us to exercise effective control over them, receive substantially all of the economic benefits and have an exclusive option to purchase all or part of the equity interests and assets in Anhui Huami and its subsidiary and Beijing Huami when and to the extent permitted by PRC law. We also believe that the minimum amount of consideration permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for us to exercise our rights under the exclusive call option agreement. To exercise our rights under the exclusive call option agreement does not require the consent of shareholders of Anhui Huami and its subsidiary or Beijing Huami. Therefore, we believe this gives us the power to direct the activities that most significantly impact the economic performance of our affiliated entities.
We believe that our ability to exercise effective control, together with the exclusive consulting and service agreement and the equity pledge agreement, give us the rights to receive substantially all of the economic benefits from our affiliated entities in consideration for the services provided by our subsidiaries in China. Accordingly, as the primary beneficiary of the affiliated entities and in accordance with U.S. GAAP, we consolidate their financial results and assets and liabilities in our combined and consolidated financial statements.
As advised by Zhong Lun Law Firm, our PRC counsel, our corporate structure in China complies with all existing PRC laws and regulations. However, our PRC legal counsel has also advised us that as thereperiod such variances are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, and we cannot assure you that the PRC government would agree that our corporate structure or any of the above contractual arrangements comply with current or future PRC laws or regulations. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities may have broad discretion in interpreting these laws and regulations.known.
Recent Accounting Pronouncements
For a summary of recently issued accounting pronouncements, see Note 2 to the consolidated financial statements of HuamiZepp Health Corporation and its subsidiaries pursuant to Item 17 of Part III of this annual report.
69Off-balance Sheet Arrangements
The following table sets forth the movements of our cash flows for the periods presented:
|
| Years Ended December 31, |
| |||||||||||||||||
|
| 2015 |
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| |||||
|
| (in thousands) |
| |||||||||||||||||
Selected Consolidated Cash Flow Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in)/provided by operating activities |
|
| (6,767 | ) |
|
| 17,266 |
|
|
| 238,336 |
|
|
| 707,605 |
|
|
| 102,917 |
|
Net cash used in investing activities |
|
| (4,911 | ) |
|
| (99,387 | ) |
|
| (38,881 | ) |
|
| (324,841 | ) |
|
| (47,246 | ) |
Net cash provided by financing activities |
|
| 214,063 |
|
|
| 10,024 |
|
|
| 20,089 |
|
|
| 639,170 |
|
|
| 92,963 |
|
Net increase/(decrease) in cash and cash equivalents |
|
| 202,385 |
|
|
| (72,097 | ) |
|
| 219,544 |
|
|
| 1,021,934 |
|
|
| 148,634 |
|
Exchange rate effect on cash and cash equivalents |
|
| 10,226 |
|
|
| 5,262 |
|
|
| (3,175 | ) |
|
| 60,357 |
|
|
| 8,779 |
|
Cash, cash equivalents and restricted cash at the beginning of year |
|
| 7,376 |
|
|
| 219,987 |
|
|
| 153,152 |
|
|
| 369,521 |
|
|
| 53,744 |
|
Cash, cash equivalents and restricted cash at end of year |
|
| 219,987 |
|
|
| 153,152 |
|
|
| 369,521 |
|
|
| 1,451,812 |
|
|
| 211,157 |
|
As of December 31, 2016, 2017 and 2018, our cash, cash equivalents and restricted cash were RMB153.2 million, RMB369.5 million and RMB1,451.8 million (US$211.2 million), respectively, out of which RMB98.5 million, RMB66.5 million and RMB513.5 (US$74.7 million) were held in U.S. dollars, and RMB54.6 million, RMB303.0 million and RMB937.7 million (US$136.4 million) were held in Renminbi, as of December 31, 2016, 2017 and 2018, respectively. Our cash, cash equivalents and restricted cash primarily consist of cash at banks and on hand. 66.0% of our cash, cash equivalents and restricted cash as of December 31, 2018 were held in China, and 63.8% of our cash, cash equivalents and restricted cash were held by our VIEs.
We believe the net proceeds we receive from our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. We may decide to enhance our liquidity position or increase our cash reserve for future investments through additional capital and finance funding. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations.
Although we consolidate the results of our VIEs and their subsidiaries, we only have access to the assets or earnings of our VIEs and their subsidiaries through our contractual arrangements with our consolidated variable interest entities and their shareholders. See “Item 4. Information on the Company—C. Organizational Structure.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure.”
In utilizing the proceeds we received from our initial public offering and the other cash that we hold offshore, we may make additional capital contributions to our PRC subsidiaries, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, make loans to our PRC subsidiaries, or acquire offshore entities with business operations in China in offshore transactions. However, most of these uses are subject to PRC regulations and approvals. For example:
capital contributions to our PRC subsidiaries must be approved by the Ministry of Commerce or its local counterparts; and
loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local branches.
See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Foreign Exchange.”
A majority of our future revenues are likely to continue to be in the form of Renminbi. Under existing PRC foreign exchange regulations, Renminbi may be converted into foreign exchange for current account items, including profit distributions, interest payments and trade-and service-related foreign exchange transactions.
70
Our PRC subsidiaries may convert Renminbi amounts that they generate in their own business activities, including technical consulting and related service fees pursuant to their contracts with the consolidated variable interest entities, as well as dividends they receive from their own subsidiaries, into foreign exchange and pay them to their non-PRC parent companies in the form of dividends. However, current PRC regulations permit our PRC subsidiaries to pay dividends to us only out of their accumulated profits, if any, determined in accordance with Chinese accounting standards and regulations. Each of our PRC subsidiaries is required to set aside at least 10% of its after-tax profits after making up previous years’ accumulated losses each year, if any, to fund certain reserve funds until the total amount set aside reaches 50% of its registered capital. These reserves are not distributable as cash dividends. Furthermore, capital account transactions, which include foreign direct investment and loans, must be approved by and/or registered with SAFE and its local branches. The total amount of loans we can make to our PRC subsidiaries cannot exceed statutory limits and must be registered with the local counterpart of SAFE. The statutory limit for the total amount of foreign debts of a foreign-invested company is the difference between the amount of total investment as approved by the Ministry of Commerce or its local counterpart and the amount of registered capital of such foreign-invested company. As of December 31, 2015, profit appropriation made by our PRC subsidiaries to the reserve fund reached the maximum required amount of 50% of their registered capital. As a result, during the years ended December 31, 2016, 2017 and 2018, no additional profit appropriation was required to be made to the reserve fund.
Operating activities
Net cash provided by operating activities for the year ended December 31, 2018 was RMB707.6 million (US$102.9 million). The difference between our net income of RMB336.3 million (US$48.9 million) and the net cash provided by operating activities was primarily due to (i) an adjustment of RMB111.6 million in non-cash items, which primarily consisted of depreciation and amortization, share-based compensation and deferred income taxes, and (ii) an increase by RMB259.7 million in working capital. Changes in working capital for the year ended December 31, 2018 primarily consisted of an increase by RMB356.3 million in accounts payable, an increase by RMB119.9 million in accrued expense and other current liabilities, an increase by RMB51.3 million in other non-current liability and an increase by RMB32.4 million in income tax payable, partially offset by an increase by RMB234.9 million in inventories, an increase by RMB45.1 million in amount due from related parties, and an increase by RMB26.1 million in accounts receivable.
Net cash provided by operating activities for the year ended December 31, 2017 was RMB238.3 million. The difference between our net income of RMB167.1 million and the net cash provided by operating activities was primarily due to (i) an adjustment of RMB45.0 million in non-cash items, which primarily consisted of depreciation and amortization, share-based compensation and deferred income taxes, and (ii) an increase of RMB21.3 million in working capital. Changes in working capital for the year ended December 31, 2017 primarily consisted of an increase of RMB181.6 million in accounts payable, and an increase of RMB45.6 million in accrued expense and other current liabilities partially offset by an increase of amount due from related parties of RMB109.8 million, an increase of inventories of RMB57.6 million, and an increase of prepaid expenses and other current assets of RMB33.0 million.
Net cash provided by operating activities for the year ended December 31, 2016 was RMB17.3 million. The difference between our net income of RMB23.9 million and the net cash provided by operating activities was primarily due to (i) an adjustment of RMB63.0 million in non-cash items, which primarily consisted of depreciation and amortization and share-based compensation, and (ii) an increase of RMB69.7 million in working capital. Changes in working capital for the year ended December 31, 2016 primarily consisted of an increase of RMB103.5 million in inventories, and an increase of RMB287.7 million in amount due from related parties partially offset by an increase of accounts payable of RMB272.0 million.
As of December 31, 2016, 2017 and 2018, we had amount due from related parties of RMB476.7 million, RMB578.5 million and RMB656.4 million (US$95.5 million), respectively, among which RMB460.6 million, RMB567.6 million and RMB648.4 million (US$94.3 million) were from Xiaomi and its affiliates, respectively. Xiaomi usually places significant product orders in the fourth quarter of each year relating to major promotional events, and this results in high inventories and account receivables from Xiaomi at the end of each year. All of the amount due from Xiaomi as of December 31, 2016, 2017 and 2018 was collected in the first quarter of 2017, 2018 and 2019, respectively.
Investing activities
Net cash used in investing activities was RMB324.8 million (US$47.2 million) for the year ended December 31, 2018, primarily due to purchase of term deposits of RMB385.0 million, purchase of long term investments of RMB109.9 million, purchase of short term investments of RMB41.3 million and purchase of intangible assets of RMB52.0 million, partially offset by proceeds from the maturity of term deposits of RMB288.8 million.
Net cash used in investing activities was RMB38.9 million for the year ended December 31, 2017, primarily due to purchase of property, plant and equipment of RMB21.5 million and loans provided to others of RMB12.9 million.
Net cash used in investing activities was RMB99.4 million for the year ended December 31, 2016, primarily due to purchase of property, plant and equipment of RMB10.3 million and purchase of long-term investments of RMB62.9 million.
71
Net cash provided by financing activities for the year ended December 31, 2018 was RMB639.2 million (US$93.0 million), primarily due to the proceeds of RMB657.1 million from the initial public offering of our ADSs.
Net cash provided by financing activities for the year ended December 31, 2017 was RMB20.1 million, which was primarily due to a one-year bank borrowing of RMB30.0 million in 2017, and offset by the RMB10.0 million repayment of bank borrowings in 2016.
Net cash provided by financing activities for the year ended December 31, 2016 was primarily due to a one-year bank borrowing of RMB10.0 million.
Capital Expenditures
Our capital expenditures are primarily incurred for purchases of property, plant and equipment and intangible assets. Our capital expenditures were RMB11.5 million, RMB24.5 million and RMB69.2 million (US$10.1 million) in the years ended December 31, 2016, 2017 and 2018, respectively. We will continue to make capital expenditures to meet the expected growth of our business.
Holding Company Structure
Huami Corporation is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiaries, our VIEs and their subsidiaries in China. As a result, Huami Corporation’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and our VIEs in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, each of our wholly foreign-owned subsidiaries in China may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our VIEs may allocate a portion of their after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.
The table below sets forth the respective revenues contribution and assets of Huami and our wholly-owned subsidiaries and our VIEs as of the dates and for the periods indicated:
|
| Revenues(1) |
|
| Total assets(1) |
| ||||||||||||||
|
| For the Year Ended December 31, |
|
| As of December 31, |
| ||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| 2017 |
|
| 2018 |
| |||||
Huami and its wholly-owned subsidiaries |
|
| 0.3 | % |
|
| 0.3 | % |
|
| 0.2 | % |
|
| 10.8 | % |
|
| 26.5 | % |
VIEs |
|
| 99.7 | % |
|
| 99.7 | % |
|
| 99.8 | % |
|
| 89.2 | % |
|
| 73.5 | % |
Total |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
|
| 100.0 | % |
Note:
|
|
|
|
See “Item 4. Information On the Company—B. Business Overview—Research and Development” and “—Intellectual Property.”
|
|
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events since January 1, 2018 that are reasonably likely to have a material adverse effect on our net revenues, income, profitability, liquidity or capital resources, or that caused the disclosed financial information to be not necessarily indicative of future operating results or financial conditions.
72
We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any unconsolidated third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
|
|
The following table sets forth our contractual obligations as of December 31, 2018:
|
| Payment due by December 31, |
| |||||||||
|
| Total |
|
| 2019 |
|
| 2020 and after |
| |||
|
| (in thousands of RMB) |
| |||||||||
Lease commitments(1)(2) |
|
| 26,152 |
|
|
| 16,333 |
|
|
| 9,819 |
|
Total |
|
| 26,152 |
|
|
| 16,333 |
|
|
| 9,819 |
|
Notes:
|
|
|
|
|
|
See “Forward-Looking Statements” on page 2 of this annual report.
73
ITEM 6. DIRECTORS, SENIOR
A.Directors and Senior Management |
|
The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
Directors and Executive Officers | Age | Position/Title | |||
Wang Huang | |
| | Chairman of the Board of Directors and Chief Executive Officer | |
|
|
| |||
De Liu | |
| | Director | |
Yunfen Lu | |
| | Director | |
|
|
| |||
Xiaojun Zhang | |
| | Director | |
Jimmy Lai | |
| | Independent Director | |
Hongjiang Zhang | |
| | Independent Director | |
| |
| | Independent Director | |
Leon Cheng Deng | | 39 | | Chief Financial Officer | |
Mike Yan Yeung | |
| | Chief Operating Officer | |
Meihui Fan | | 43 | | Chief Technology Officer | |
Hui Wang | |
| | Vice President of | |
Pengtao Yu | |
| | Chief Industrial Designer | |
106
Mr. Wang Huang is our founder and has served as the chairman of our board of directors and our chief executive officer since our inception. Mr. Huang is a serial entrepreneur with significant experience and expertise in the technology and Internet sectors in China. Mr. Huang founded Anhui Huami in December 2013 to develop, manufacture and sell smart wearable devices. Prior to that, Mr. Huang founded Hefei Huaheng Electronic Technology Co., Ltd., a company focused on the development of tablets and tablet-based mobile apps and provision of e-magazine network services, and led the team that rolled out China’s first tablet. In 2002, Mr. Huang founded Hefei Huakai Yuanheng Information Technology Co., Ltd., a company focused on the development of embedded Linux software and hardware. In addition, Mr. Huang has served as the director, the executive director or the general manager at several other technology companies in Hefei. Mr. Huang previously was a research and development engineer at Huawei Technologies Co. Ltd., a leading global information and communications technology solutions provider, where he played an instrumental role in the development of high-speed switching and routing equipment. Mr. Huang has received many honors in the business world as well. To name a few, he was awarded “Anhui Economic Person of the Year 2015,” “ Leading Talents of Strategic Emerging Industry Technology in Anhui” and “Hefei Youth Entrepreneurship.” Mr. Huang received his bachelor’s degree in applied physics from the University of Science and Technology of China in 1997. Mr. Huang is appointed as a director to our board by HHtech Holdings Limited, Haiyu Holding Limited, Fandler Holding Limited, Forest Mountain Holding Limited, Wenshui Holding Limited and Shu Hill Holdings, which we collectively refer to as the Co-Founder Entities in this annual report. Pursuant to the Memorandum and Articles, the Co-Founders Entities will be entitled to appoint three directors so long as they continue to beneficially own no less than 60% of the shares they beneficially owned as of January 12, 2018.
Mr. Tian Cheng has served as our director since April 2015. Since July 2014, Mr. Cheng has served as a partner of Shunwei Capital, a China-based venture capital firm that focuses on investments in internet and technology industries. Prior to that, Mr. Cheng was an associate director of the Investment Group of Temasek Holdings (Private) Limited, a sovereign wealth fund of the Government of Singapore, specializing in growth capital, restructuring and divestiture transactions. Mr. Cheng received his bachelor’s degree in business administration and master’s degree in management from Fudan University. Mr. Cheng is appointed as a director to our board by Shunwei High Tech Limited. Pursuant to the Memorandum and Articles, Shunwei High Tech Limited will be entitled to appoint one director so long as it continues to beneficially own no less than 10% of the issued and outstanding shares of our company.
Mr. De Liu has served as our director since April 2015. Mr. Liu is one of the co-founders and a senior vice president of Xiaomi, a mobile Internet company, where he is responsible for the organization department and serves as the secretary of the party committee. Mr. Liu is a leading figure in industrial design in China and has received numerous industrial design awards together with his team, including 5 Red Dot Design Awards (Germany), 18 iF Design Awards (Germany) and 10 Red Star Design Awards (Mainland, China). Mr. Liu also holds various positions, including the vice-chairman of China Industrial Design Association and a member of National Manufacturing Strategy Advisory Committee. He also serves as a director of Viomi Technology Co., Ltd., a Nasdaq-listed company. Mr. Liu has received many honors in the business world as well. To name a few, he was awarded “Zhongguancun Top Talent” in 2015 and “Beijing Top Innovative and Entrepreneurial Leading Talent” in 2016. Mr. Liu received his bachelor’s degree in industrial design and master’s degree in mechanical design and theory from Beijing Institute of Technology in 1996 and 2001, respectively, and his master’s degree in industrial design from the Art Center College of Design in 2010. Mr. Liu is appointed as a director to our board by People Better Limited. Pursuant to the currently effective memorandum and articles of association, People Better Limited will be entitled to appoint one director so long as it continues to beneficially own no less than 10% of the issued and outstanding shares of our company.
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Ms. Yunfen Lu has served as our director since April 2015. Ms. Lu also serves as the director of Anhui Huami, Beijing Huami, Hong Kong Zepp Holding Limited, Shenzhen Yunding Information Technology Co., Ltd. and Huami HK Limited. Ms. Lu has a wealth of experience in financial accounting and supply chain management. From April 2009 to December 2013,Jiangsu Yitong High-tech Co., Ltd., (Shenzhen: 300211). Ms. Lu served as the financial controller of Hefei Huaheng Electronic Technology Co., Ltd. From November 2002 to March 2009, Ms. Lu worked at Hefei Huakai Yuanheng Information Technology Co., Ltd, where she was responsible for overseeing financial accounting, procurement, administrative affairs and manufacturing management. Ms. Lu received her secondary vocational degree in accounting from Shanghai Lixin Vocational School of Accounting (now Shanghai Lixin University of Accounting and Finance) in 1986. Ms. Lu is appointed as a director to our board by the Co-Founder Entities. Pursuant to the Memorandum and Articles, the Co-Founders Entities will be entitled to appoint three directors so long as they continue to beneficially own no less than 60% of the shares they beneficially owned as of January 12, 2018.
Mr. Bin Yue has served as our director since April 2015. Mr. Yue is one of the founding partners of Banyan Capital, a venture capital firm specializing in investing in technology, media and telecommunications sectors. Prior to founding Banyan Capital in February 2014, Mr. Yue was a vice president at IDG Capital Partners from January 2010 to January 2014. Prior to IDG Capital Partners, Mr. Yue worked at China Renaissance, a leading China-based investment bank. Mr. Yue received his bachelor’s and master’s degree in computer science from Peking University.
Mr. Xiaojun Zhang has served as our director since April 2015. In addition to this role, Mr. Zhang has also served as vice president of Anhui Huami since January 2014, where he is responsible for overseeing human resources and corporate strategy.resources. Prior to joining us, Mr. Zhang served as the vice president of Hefei Huaheng Electronic Technology Co., Ltd from October 2011 to December 2013. From September 2010 to October 2011, Mr. Zhang served as deputy general manager of Anhui Mei Bang Investment Management Co., Ltd. From July 2009 to September 2010, Mr. Zhang served as head of the human resources and administrative affairs department at the Anhui branch of Sunshine Insurance Group Corporation Limited. Prior to that, Mr. Zhang worked at the Immigration Office of Anhui Provincial Public Security Department, where he held multiple positions including clerk, deputy chief officer and chief officer, from July 1994 to July 2009. Mr. Zhang received his bachelor’s degree in Chinese language and literature from Anhui University in 1994. Mr. Zhang is appointed as a director to our board by the Co-Founder Entities. Pursuant to the Memorandum and Articles, the Co-Founders Entities will be entitled to appoint three directors so long as they continue to beneficially own no less than 60% of the shares they beneficially owned as of January 12, 2018.
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Mr. Jimmy Lai has served as our director since February 2018. In addition to this role, Mr. Lai also serves as chief financial officer of a biotechnology company, Acepodia, Inc., since March 2021. Mr. Lai has served as the chief financial officer of China Online Education Group, aan NYSE-listed company and an online English language education services provider in China, from June 2015 to December 2018. In addition to his role at China Online Education, Mr. Lai serves as an independent director on the board of directors of PPDAI Group Inc., aan NYSE-listed company and an online consumer finance provider in China. Prior to joining China Online Education Group, Mr. Lai served as the chief financial officer of Chukong Technologies Corp., a mobile entertainment platform company in China, from 2013 to 2015. Mr. Lai served as the chief financial officer of Gamewave Corporation, a webgame company in China, from 2011 to 2013. Prior to that, Mr. Lai served as the chief financial officer of Daqo New Energy Corp., an NYSE-listed company and a polysilicon manufacturer based in China, from 2009 to 2011. From 2008 to 2009, Mr. Lai served as the chief financial officer of Linktone Ltd., a Nasdaq-listed company and a provider of wireless interactive entertainment services to consumers in China. From 2006 to 2008, Mr. Lai was the chief financial officer of Palm Commerce Holdings, an information technology solution provider for the China lottery industry. Prior to that, he served as an associate vice president of investor relations at Semiconductor Manufacturing International Corporation, a company listed on the NYSE and the Hong Kong Stock Exchange, from 2002 to 2006, and as a controller and director of financial planning at AMX Corporation from 1997 to 2001. Mr. Lai received his bachelor’s degree in statistics from the National Cheng Kung University in Taiwan and his MBA from the University of Texas atin Dallas. Mr. Lai is a certified public accountant licensed in the State of Texas.
Dr. Hongjiang Zhang has served as our director since February 2018. Currently, Dr. Zhang is a venture partner at Source Code Capital, a venture capital firm with a focus on early stage start-up in technology sectors. Dr. Zhangsenior advisor of Carlyle Group. He also serves as an independent non-executive director of BabyTree Group, (01761.HK), Digital China (000034.SZ),a Hong Kong listed company, and is currently the non-executive chairman of AAC Technologies Holdings Inc. (02018.HK). In addition to his role at Source Code Capital, Dr. Zhang also serves as director at various public companies listed in the United States, including Cheetah Mobile Inc., a NYSE-listed mobile internet company based in China, Xunlei Limited, a Nasdaq-listed cloud-based acceleration technology company in China, and 21Vianet Group, Inc., a Nasdaq-listed provider of carrier-neutral internet data center services in China. PriorHong Kong. From October 2011 to joining Source Code Capital,November 2016, Dr. Zhang had served as an executive director and the chief executive officer of Kingsoft Corporation Limited, a Chinese software and internet services company listed on the Hong Kong Stock Exchange, from October 2011 to December 2016.Exchange. Dr. Zhang also served as a director and the chief executive officer of Kingsoft Cloud, a subsidiary of Kingsoft Corporation Limited, from January 2012 to December 2016. In addition, during his service to Kingsoft, he also served as a director at various public companies listed in the United States, including Cheetah Mobile Inc., Xunlei Limited and 21 Vianet Group, Inc., all listed in the United States. Prior to joining Kingsoft, Dr. Zhang was the chief technology officer for Microsoft Asia-Pacific Research and Development Group from January 2006 to October 2011, the managing director of the Microsoft Advanced Technology Center from January 2004 to October 2011, and the assistant managing director of Microsoft Research Asia from April 1999 to December 2003. Prior to joining Microsoft, Dr. Zhang was a research manager at Hewlett-Packard Labs at Palo Alto, California from October 1995 to March 1999. Before that, Dr. Zhang was a research staff of the Institute of Systems Science at the National University of Singapore. Dr. Zhang received his bachelor’s degree in electrical engineering from Zhengzhou University in 1982 and Ph.D. in electrical engineering from the Technical University of Denmark in 1991.
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TableMr. Bing Xie has served as our director since November 2020. Prior to that, Mr. Xie was senior vice president and executive officer of ContentsTexas Instrument from 2013 to 2020, leading the worldwide sales and applications teams. Mr. Xie started his career at Hewlett-Packard, and later joined Bay Networks and 3Com. He has lived and worked in China, Italy, America and Canada. Mr. Xie holds a bachelor of science degree in electronics engineering from Xidian University, and an MBA from Clemson University.
Mr. David CuiLeon Cheng Deng has served as our chief financial officer since August 2017.October 2020. Mr. Cui has also served as an independent non-executive director of Inke Limited, a leading Chinese mobile live streaming company listed on the Hong Kong Stock Exchange, since June 23, 2018. Mr. CuiDeng has extensive experience in public accounting, financial management, manufacturing, and financial management. From August 2015international business with Royal Philips. He was the head of finance in Philips’ business group of domestic appliances from July 2019 to April 2017, Mr. Cui isOctober 2020 and the chief financial officerhead of China Digital Video Holdings Limited, a company listed onfinance in the Hong Kong Stock Exchange.business group of personal care from September 2018 to July 2019. Prior to that, Mr. Cui was an independent financial advisor to high growth companies on business strategies, fund raising, corporate governance and accounting matters. From April 2011 to August 2013, Mr. CuiDeng was the chiefhead of corporate finance and financial officerrisks in iKang Healthcare Group, Inc.,Philips’ treasury group. Mr. Deng also played a company listed on the Nasdaq. He was an audit senior manager of Deloitte Touche Tohmutsu, China from April 2007 to April 2011. Prior to that, Mr. Cui was the financial reporting manager of Symantec Corporation. From April 2004 to August 2006, he served as an audit manager of Ernst & Young, California. Mr. Cui was a senior auditorcritical leadership role in the Auditdivestiture of Philips’ TV and Advisory Services practiceAudio divisions, the Philips Lighting separation, and a series of Health Net, Inc., California from May 2001 to April 2004. From January 1996 to May 2001, Mr. Cui worked in public accounting in Canada and the United States. Mr. Cui has a bachelor’s degree in business administration from Simon Fraser University, Canada and is a licensed CPAacquisitions in the United Statespast. Mr. Deng holds a CPA certificate in Australia, and Canada.a Chartered Global Management Accountant certification from CIMA. He earned a Bachelor of Finance degree from Shanghai International Studies University, and a Master of International Finance degree from the University of Amsterdam.
Mr. Mike Yan Yeunghas served as our chief operating officer since January 2015. Prior to joining us, Mr. Yeung served as a vice president of Shunwei Capital, a China-based venture capital firm, where he was a key member of an investment team with a focus on mobile Internet applications, smart home technologies, smart wearables, IoT and online health care, and served as a board member of several portfolio companies. From 2012 to 2014, Mr. Yeung served as the principal group program manager of Microsoft, where he was responsible for managing the software development of Microsoft’s key digital advertising products and defining and implementing the Microsoft online ads platform strategy in China. Prior to that, Mr. Yeung held several positions in Monster.com, TGC Inc., China.com Corp., Netscape Communications Corporation and Oracle Corporation from 1992 to 2012. Mr. Yeung received his bachelor’s degree and master’s degree in computer science from the University of California, Berkeley in 1992 and Stanford University in 1994, respectively.
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Mr. Meihui Fan has gained extensive experience in the information technology industry. Prior to being appointed as our chief technology officer, he served as the President of Global Innovation Center and worked in other roles in our company from January 2014 to July 2021. He was in charge of all software related technical architecture and management of the entire research and development team. Prior to joining our company, Mr. Fan served as the technical director at Hefei Huaheng Electronic Technology Co., Ltd. from May 2009 to December 2013. From July 2004 to April 2009, Mr. Fan worked as the embedded system software development engineer, senior engineer and chief engineer in Hefei Huakaiyuanheng Information Technology Co., Ltd. Mr. Fan obtained a Bachelor’s Degree with a Double Major in Molecular Biology & Cell Biology and Signal & Information Systems at the University of Science and Technology of China.
Dr. Hui Wang has served as our vice president of health & medical business groupcorporate strategy and general manager of Beijing operations since August 2014. Prior to joining us, Mr.Dr. Wang worked at Lenovo Group Ltd. from 2007 to 2014, first as a researcher and later as its chief product director. Prior to joining Lenovo, Mr.Dr. Wang worked at NEC Labs China from 2005 to 2007. Mr.Dr. Wang received his bachelor’s degree in electronic and information engineering and Ph.D. in communication and information system from the University of Science and Technology of China in 2000 and 2005, respectively.
Mr. Pengtao Yuhas served as our chief industrial designer since October 2014. Prior to joining us, Mr. Yu worked at Moov Inc., a smart wearable device start-up company, as an industrial design consultant from June to October 2014 and played an instrumental role in designing and developing Moov’s fitness tracker. Prior to that, Mr. Yu was an industrial designer at Bould Design from October 2012 to June 2014, where his responsibilities included developing and designing consumer electronic products, such as thermostat and smoke alarm, for various Silicon Valley companies. From February 2012 to August 2012, Mr. Yu was an industrial design consultant of Harman International, where he worked closely with the marketing team in developing a new generation of earphones. Mr. Yu has received many awards in recognition of his industrial design accomplishments. He is a four-time Bronze winner of the International Design Excellence Award, and a three-time winner of the iF Design Award (Germany). He also received the Red Dot Design Award (Germany) in 2011 and 2016. Mr. Yu received his bachelor’s degree in engineering from Beijing Institute of Technology in 2003, and his bachelor’s degree in product design and master’s degree in industrial design from the Art Center College of Design in 2008 and 2011, respectively.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain acts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent or dishonest acts to our detriment, or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s employment without cause upon three-month advance written notice. In such case of termination by us, we will provide severance payments to the executive officer as expressly required by applicable law of the jurisdiction where the executive officer is based. The executive officer may resign at any time with a three-month advance written notice.
Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable law, any of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients, or the confidential or proprietary information of any third party received by us and for which we have confidential obligations. The executive officers have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during the executive officer’s employment with us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents, copyrights and other legal rights for these inventions, designs and trade secrets.
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In addition, each executive officer has agreed to be bound by non-solicitation restrictions during the term of his or her employment and typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approach our suppliers, clients, customers or contacts or other persons or entities introduced to the executive officer in his or her capacity as a representative of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons or entities; or (ii) seek directly or indirectly, to solicit the services of any of our employees who is employed by us on or after the date of the executive officer’s termination, or in the year preceding such termination, without our express consent.
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We have also entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being a director or officer of our company.
B. Compensation |
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For the fiscal year ended December 31, 2018,2021, we paid an aggregate of approximately RMB8.1RMB15.4 million (US$1.22.4 million) in cash to our executive officers and RMB2.3RMB1.4 million (US$0.30.2 million) to our non-executive directors. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our directors and executive officers. Our PRC subsidiaries and VIEs are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.
2015 Share Incentive Plan
In October 2015, our shareholders and board of directors approved the 2015 Share Incentive Plan, which we refer to as the 2015 Plan in this annual report, to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants, and promote the success of our business. The 2015 Plan consists of a share incentive plan for U.S. service providers and a share incentive plan for PRC service providers. The maximum aggregate number of Class A ordinary shares that may be issued pursuant to all awards under the 2015 Plan is 14,328,358 Class A ordinary shares. As of March 31, 2019,February 28, 2022, awards to purchase 13,808,02813,586,319 Class A ordinary shares have been granted and are outstanding under the 2015 Plan, excluding awards that were forfeited or cancelled after the relevant grant dates. Grantees of our share incentive awards under the 2015 Plan resident in China were not permitted to exercise their options prior to the completion of our initial public offering.
The following paragraphs describe the principal terms of the 2015 Plan.
Types of Awards.Awards. The 2015 Plan permits the awards of options, restricted shares and restricted share units.
Plan Administration. Our board of directors or a committee of one or more members of the board of directors will administer the 2015 Plan. The committee or the full board of directors, as applicable, will determine the participants to receive awards, the type and number of awards to be granted to each participant, and the terms and conditions of each award grant.
Award Agreement. Awards granted under the 2015 Plan are evidenced by an award agreement that sets forth the terms, conditions and limitations for each award, which may include the term of the award, the provisions applicable in the event that the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Eligibility. We may grant awards to our employees, consultants and directors.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement.
Exercise of Options. The plan administrator determines the exercise price for each award, which is stated in the relevant award agreement. Options that are vested and exercisable will terminate if they are not exercised prior to the time as the plan administrator determines at the time of grant. However, the maximum exercisable term is ten years from the date of grant. Grantees resident in China are not legally allowed to exercise their options prior to the completion of our initial public offering.
Transfer Restrictions. Awards may not be transferred in any manner by the participant other than in accordance with the exceptions provided in the 2015 Plan or the relevant award agreement or otherwise determined by the plan administrator, such as transfers by will or the laws of descent and distribution.
Termination and Amendment of the 2015 Plan. Unless terminated earlier, the 2015 Plan has a term of ten years. With the approval of our board of directors, the plan administrator has the authority to terminate, amend or modify the 2015 Plan, provided that shareholder approval is obtained in certain circumstances set forth in the relevant award agreement. However, without the prior written consent of the participant, no such action may adversely affect in any material way any award previously granted pursuant to the 2015 Plan.
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In January 2018, our shareholders and board of directors adopted the 2018 Share Incentive Plan, which we refer to as the 2018 Plan in this annual report, to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants and promote the success of our business. The maximum aggregate number of shares which may be issued initially pursuant to all awards under the 2018 Plan is 9,559,607 ordinary shares. The number of shares reserved for future issuances under the 2018 Plan will be increased by (i) a number equal to 1.0% of the total number of outstanding shares immediately after our initial public offering, or (ii) such number of shares as may be determined by our board of directors, on the first day of each calendar year during the term of the 2018 Plan beginning in 2018. The number of Class A ordinary shares available for future issuance upon the exercise of future grants under the 2018 Share Incentive Plan was 2,060,58219,119,213 as of January 1, 2019.2022. As of March 31, 2019,February 28, 2022, awards to purchase 7,160,02520,300,122 Class A ordinary shares under the 2018 Plan have been granted and outstanding, excluding awards that were forfeited or cancelled after the relevant grant dates.
The following paragraphs describe the principal terms of the 2018 Plan.
Types of Awards. The 2018 Plan permits the awards of options, restricted shares, restricted share units, or any other type of awards that the committee decides.
Plan Administration. Our board of directors or a committee of one or more members of the board of directors will administer the 2018 Plan. The committee or the full board of directors, as applicable, will determine the participants to receive awards, the type and number of awards to be granted to each participant, and the terms and conditions of each award grant.
Award Agreement. Awards granted under the 2018 Plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each award, which may include the term of the award, the provisions applicable in the event of the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Eligibility. We may grant awards to our employees, directors and consultants of our company. However, we may grant options that are intended to qualify as incentive share options only to our employees and employees of our parent companies and subsidiaries.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement.
Exercise of Options. The plan administrator determines the exercise price for each award, which is stated in the award agreement. The vested portion of option will expire if not exercised prior to the time as the plan administrator determines at the time of its grant. However, the maximum exercisable term is ten years from the date of a grant. Grantees resident in China are not legally allowed to exercise their options prior to the completion of our initial public offering.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than by will or the laws of descent and distribution, except as otherwise provided by the plan administrator.
Termination and Amendment of the 2018 Plan. Unless terminated earlier, the 2018 Plan has a term of seven years. Our board of directors has the authority to amend or terminate the plan. However, no such action may adversely affect in any material way any awards previously granted unless agreed by the recipient.
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The following table summarizes, as of March 31, 2019,February 28, 2022, the awards granted under our 2015 Plan and 2018 Plan to several of our executive officers, excluding awards that were forfeited or cancelled after the relevant grant dates:
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| Ordinary Shares Underlying
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| | | |||||||
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| Restricted Shares |
| Exercise Price | | | | | |||||||
Name | | Units | | (US$/Share) | | Date of Grant | | Date of Expiration | |||||||
Mike Yan Yeung |
| *(1) |
| — | March 3, 2015 |
| — |
|
| ||||||
|
| * |
| 0.79 |
|
|
|
| February | ||||||
| | *(1) | | — | | August 18, 2020 | | — | |||||||
Leon Cheng Deng | | *(1) | | — | | August 31, 2020 | | — | |||||||
Hui Wang | | * | | — | | August 20, 2014 | | August 20, 2024 | |||||||
| | * | | — | | August 18, 2020 | | August 18, 2030 | |||||||
Pengtao Yu | | *(1) | | — | | March 3, 2015 | | — | |||||||
| | *(1) | | — | | August 18, 2020 | | — | |||||||
Yunfen Lu | * | — | August 18, 2020 | August 18, 2030 | |||||||||||
Xiaojun Zhang | * | — | August 18, 2020 | August 18, 2030 | |||||||||||
Meihui Fan | | * | | — | | May 13, 2021 | | May 6, 2031 | |||||||
Total | 10,474,700 |
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Notes:
| * Less than one percent |
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Table of Contentsour total outstanding shares.
(1) Restricted share units
As of March 31, 2019,February 28, 2022, other employees as a group held outstanding options to purchase 13,343,23012,782,653 Class A ordinary shares of our company, at a weighted average exercise price of US$0.230.08 per share, 3,489,4172,076,217 restricted shares, and 2,794,0813,170,794 restricted share units.
| C. Board Practices |
Our board of directors consists of eightseven directors. A director is not required to hold any shares in our company to qualify to serve as a director. A director may vote with respect to any contract, proposed contract or arrangement in which he is materially interested provided (a) such director, if his interest in such contract or arrangement is material, has declared the nature of his interest at the earliest meeting of the board at which it is practicable for him to do so, either specifically or by way of a general notice, (b) such director has not been disqualified by the chairman of the relevant board meeting, and (c) if such contract or arrangement is a transaction with a related party, such transaction has been approved by the audit committee in accordance with the rules of the New York Stock Exchange. The directors may exercise all the powers of the company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service.
Committees of the Board of Directors
We have established three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.
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Audit Committee.Committee. Our audit committee consists of Mr. Jimmy Lai, and Dr. Hongjiang Zhang.Zhang and Mr. Bing Xie. Mr. Lai is the chairman of our audit committee. We have determined that Mr. Jimmy Lai, and Dr. Hongjiang Zhang, and Mr. Bing Xie satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-310A3 under the Exchange Act. We have determined that Mr. Lai qualifies as an “audit committee financial expert.” The audit committee oversees our accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for, among other things:
| ● | appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors; |
| ● | reviewing with the independent auditors any audit problems or difficulties and management’s response; |
| ● | discussing the annual audited financial statements with management and the independent auditors; |
| ● | reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures; |
| ● | reviewing and approving all proposed related party transactions; |
| ● | meeting separately and periodically with management and the independent auditors; and |
| ● | monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance. |
appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the independent auditors;
reviewing with the independent auditors any audit problems or difficulties and management’s response;
discussing the annual audited financial statements with management and the independent auditors;
reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor and control major financial risk exposures;
reviewing and approving all proposed related party transactions;
meeting separately and periodically with management and the independent auditors; and
monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our procedures to ensure proper compliance.
Compensation Committee.Committee. Our compensation committee consists of Mr. Wang Huang, Mr. Jimmy Lai, and Dr. Hongjiang Zhang.Zhang and Mr. Bing Xie. Dr. Zhang is the chairman of our compensation committee. We have determined that Mr. Jimmy Lai, and Dr. Hongjiang Zhang, and Mr. Bing Xie satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:
reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers;
reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors;
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| reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers; |
| ● | reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors; |
| ● | reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and |
| ● | selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management. |
selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s independence from management.
Nominating and Corporate Governance Committee.Committee. Our nominating and corporate governance committee consists of Mr. Wang Huang, Mr. Jimmy Lai, and Dr. Hongjiang Zhang.Zhang and Mr. Bing Xie. Mr. Huang is the chairperson of our nominating and corporate governance committee. Mr. Jimmy Lai, and Dr. Hongjiang Zhang, and Mr. Bing Xie satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:
| ● | selecting and recommending to the board nominees for election by the shareholders or appointment by the board; |
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reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity;
making recommendations on the frequency and structureTable of board meetings and monitoring the functioning of the committees of the board; andContents
| ● | reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge, skills, experience and diversity; |
| ● | making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the board; and |
| ● | advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken. |
advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and on any remedial action to be taken.
Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly, and a duty to act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our directors also have a duty to exercise the skills they actually possess and such care diligence and skillsdiligence that a reasonably prudent person would exercise in comparable circumstances. In fulfilling their duty of care to us, our directors must ensure compliance with our Memorandum and Articles, as amended and restated from time to time, and the class rights vested thereunder in the holders of the shares. In certain limited exceptional circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached.
Our board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and powers of our board of directors include, among others:
| ● | convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings; |
| ● | declaring dividends and distributions; |
| ● | appointing officers and determining the term of office of the officers; |
| ● | exercising the borrowing powers of our company and mortgaging the property of our company; and 106 |
| ● | approving the transfer of shares in our company, including the registration of such shares in our share register. |
convening shareholders’ annual general meetings and reporting its work to shareholders at such meetings;
declaring dividends and distributions;
appointing officers and determining the term of office of the officers;
exercising the borrowing powers of our company and mortgaging the property of our company; and
approving the transfer of shares in our company, including the registration of such shares in our share register.
Terms of Directors and Officers
Our officers are elected by and serve at the discretion of the board of directors. Our directors are not subject to a term of office, unless such term is expressly specified in a written agreement between the company and the director or otherwise, and hold office until such time as they are removed from office by ordinary resolution of the shareholders or by the board. A director will be removed from office automatically if, among other things, the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; or (ii) dies or is found by our company to be or becomes of unsound mind.
80114
D. Employees
We had 376, 4161,132, 1,507 and 6941,227 employees as of December 31, 2016, 20172019, 2020 and 2018,2021, respectively. The following table sets forth the numbers of our employees categorized by function as of December 31, 2018:2021:
| | | ||
| As of
| |||
| | December 31, | ||
| | 2021 | ||
Function: |
|
| ||
Research and development |
|
| 665 | |
Selling and marketing |
|
| 299 | |
Administrative |
|
| 208 | |
Supply chain management |
|
| 55 | |
Total |
|
| 1,227 |
As of December 31, 2018,2021, we had 299443 employees in Shenzhen, 330 employees in Hefei, 200237 employees in Beijing, 167109 employees in Shenzhen, 14Nanjing, 16 employees in Xi’an, 4other cities in mainland China, 52 employees in Shanghai, 7North America, 28 employees in Silicon Valley and 3Europe, 11 employees in San Diego.other countries in Asia and one employee in South America.
We believe we offer our employees competitive compensation packages and a merit-based work environment that encourages initiative, and as a result, we have generally been able to attract and retain qualified personnel and maintain a stable core management team.
As required by PRC regulations, we participate in various government statutory employee benefit plans, including social insurance funds, namely a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund. We are required under PRC law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a maximum amount specified by the local government from time to time. We have not made adequate employee benefit payments. We may be required to make up the contributions for these plans as well as to pay late fees and fines but have made adequate provisions. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing4. Information on the Company—B. Business in China—Our failure to fully comply with PRC labor-related laws may expose us to potential penalties.Overview—Regulation— Regulation on Employment.”
We enter into standard labor agreements with our employees and, in addition, enter into confidentiality and non-compete agreements with our key employees. The non-compete restricted period typically expires two years after the termination of employment, and we agree to compensate the employee with a certain percentage of his or her pre-departure salary during the restricted period.
We believe that we maintain a good working relationship with our employees, and we have not experienced any major labor disputes.
E. Share Ownership
|
|
The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 2019February 28, 2022 by:
| ● | each of our directors and executive officers; and |
| ● | each person known to us to own beneficially 5% or more of our total outstanding shares. |
each of our directors and executive officers; and
each person known to us to own beneficially more than 5% of our total outstanding shares.
The calculations in the table below are based on 57,358,793131,815,396 Class A ordinary shares (excluding the 5,762,444 Class A ordinary shares issued to the depositary bank for bulk issuance of ADSs reserved for future issuances upon the exercise or vesting of awards granted under the 2015 Share Incentive Plan and 184,376,679the 2018 Share Incentive Plan and the 4,833,680 treasury shares in the form of ADSs that we repurchased under our share repurchase program) and 117,208,247 Class B ordinary shares outstanding as of March 31, 2019, excluding Class A ordinary shares issuable upon the exercise of outstanding share options and Class A ordinary shares reserved for issuance under our 2015 Plan and 2018 Plan.February 28, 2022.
81115
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.
| | | | | | | | | | | |
| | Ordinary Shares |
| ||||||||
| | Beneficially Owned |
| ||||||||
|
| |
| |
| |
| |
| Percentage |
|
| | | | | | | | Percentage | | of |
|
| | Class A | | Class B | | Total | | of total | | aggregate |
|
| | ordinary | | ordinary | | ordinary | | ordinary | | voting |
|
| | shares | | shares | | shares | | shares | | power† |
|
Directors and Executive Officers:** |
|
|
|
|
|
|
|
|
|
| |
Wang Huang(1) |
| 4,260,076 |
| 81,347,127 |
| 85,607,203 |
| 34.4 | % | 62.7 | % |
De Liu |
| — |
| — |
| — |
| — |
| — | |
Yunfen Lu(2) |
| * |
| 3,450,746 |
| 3,690,746 |
| 1.5 | % | 2.6 | % |
Xiaojun Zhang(3) |
| * |
| 2,107,463 |
| 2,387,463 |
| * |
| 1.6 | % |
Jimmy Lai(4) |
| * |
| — |
| * |
| * |
| * | |
Hongjiang Zhang |
| — |
| — |
| — |
| — |
| — | |
Bing Xie | | — | | — | | — | | — | | — | |
Leon Cheng Deng |
| — |
| — |
| — |
| — |
| — | |
Mike Yan Yeung(5) |
| * |
| — |
| * |
| * |
| * | |
Meihui Fan(6) | | * | | 3,450,746 | | 4,050,746 | | 1.6 | % | 2.6 | % |
Hui Wang(7) |
| * |
| — |
| * |
| * |
| * | |
Pengtao Yu(8) |
| * |
| — |
| * |
| * |
| * | |
All Directors and Executive Officers as a Group |
| 9,234,776 |
| 81,347,127 |
| 90,581,903 |
| 36.0 | % | 62.9 | % |
Principal Shareholders: |
| |
| |
| |
| |
| | |
HHtech Holdings Limited(9) |
| 4,200,000 |
| 81,347,127 |
| 85,547,127 |
| 34.4 | % | 62.7 | % |
People Better Limited(10) |
| — |
| 35,861,112 |
| 35,861,112 |
| 14.4 | % | 27.5 | % |
Allspring Entities(11) |
| 23,331,540 |
| — |
| 23,331,540 |
| 9.4 | % | 1.8 | % |
Shunwei High Tech Limited(12) |
| 16,598,560 |
| — |
| 16,598,560 |
| 6.7 | % | 1.3 | % |
|
| Ordinary Shares Beneficially Owned |
| |||||||||||||||||
|
| Class A ordinary shares |
|
| Class B ordinary shares |
|
| Total ordinary shares |
|
| Percentage of total ordinary shares |
|
| Percentage of aggregate voting power† |
| |||||
Directors and Executive Officers:** |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wang Huang(1) |
|
| — |
|
|
| 87,134,327 |
|
|
| 87,134,327 |
|
|
| 36.0 | % |
|
| 45.8 | % |
Tian Cheng |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
De Liu |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Yunfen Lu(2) |
|
| — |
|
|
| 3,450,746 |
|
|
| 3,450,746 |
|
|
| 1.4 | % |
|
| 1.8 | % |
Bin Yue |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Xiaojun Zhang(3) |
|
| — |
|
|
| 2,107,463 |
|
|
| 2,107,463 |
|
| * |
|
|
| 1.1 | % | |
Jimmy Lai(4) |
| * |
|
|
| — |
|
| * |
|
| * |
|
| * |
| ||||
Hongjiang Zhang(5) |
| * |
|
|
| — |
|
| * |
|
| * |
|
| * |
| ||||
David Cui(6) |
| * |
|
|
| — |
|
| * |
|
| * |
|
| * |
| ||||
Mike Yan Yeung(7) |
| * |
|
|
| — |
|
| * |
|
| * |
|
| * |
| ||||
Hui Wang(8) |
| * |
|
|
| — |
|
| * |
|
| * |
|
| * |
| ||||
Pengtao Yu(9) |
| * |
|
|
| — |
|
| * |
|
| * |
|
| * |
| ||||
All Directors and Executive Officers as a Group |
|
| 3,384,840 |
|
|
| 87,134,327 |
|
|
| 90,519,167 |
|
|
| 37.0 | % |
|
| 45.9 | % |
Principal Shareholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HHtech Holdings Limited(10) |
|
| — |
|
|
| 87,134,327 |
|
|
| 87,134,327 |
|
|
| 36.0 | % |
|
| 45.8 | % |
Wells Fargo & Company(11) |
|
| 51,488,368 |
|
|
| — |
|
|
| 51,488,368 |
|
|
| 21.3 | % |
|
| 2.7 | % |
Shunwei High Tech Limited(12) |
|
| — |
|
|
| 37,981,760 |
|
|
| 37,981,760 |
|
|
| 15.7 | % |
|
| 20.0 | % |
People Better Limited(13) |
|
| — |
|
|
| 35,861,112 |
|
|
| 35,861,112 |
|
|
| 14.8 | % |
|
| 18.9 | % |
Banyan Capital Holdings Co., Ltd.(14) |
|
| — |
|
|
| 18,719,582 |
|
|
| 18,719,582 |
|
|
| 7.7 | % |
|
| 9.8 | % |
Notes:
| † For each person and group included in this column, percentage of voting power is calculated by dividing the voting power beneficially owned by such person or group by the voting power of all of our Class A and Class B ordinary shares as a single class. Each holder of Class A ordinary shares is entitled to one vote per share and each holder of our Class B ordinary shares is entitled to ten votes per share on all matters submitted to them for a vote. Our Class A ordinary shares and Class B ordinary shares vote together as a single class on all matters submitted to a vote of our shareholders, except as may otherwise be required by law. Our Class B ordinary shares are convertible at any time by the holder thereof into Class A ordinary shares on a one-for-one basis. * Less than 1% of our total outstanding ordinary shares and aggregate voting power. 116 ** Each of Mr. Wang Huang, Yunfen Lu, Xiaojun Zhang, Leon Cheng Deng, Mike Yan Yeung, Meihui Fan and Hui Wang’s business address is Huami Global Innovation Center, Building B2, Zhong’an Chuanggu Technology Park, No. 900 Wangjiang West Road Road, Hefei, 230088, People’s Republic of China. Pengtao Yu’s business address is 10050 North Wolfe Road, Cupertino, California 95104. Mr. De Liu’s business address is Keliyuan Building, No.72 Anningzhuang East Road, Haidian District, Beijing, 100085, People’s Republic of China. Mr. Jimmy Lai’s business address is 4521 Turnberry Ct, Plano, Texas, 75024, USA. Dr. Hongjiang Zhang’s business address is 627 Jurong West St 65, #14-380, Singapore 640627. Bing Xie’s business address is 10005 Meadowbrook Drive, Dallas, Texas, U.S. 75229.
117
To our knowledge, as of As of the date of this annual report, none of our ordinary shares are held by governmental entities of our place of incorporation, and no government entity in the place where our registered public accounting firm is located and organized has a controlling financial interest in our company. Enforceability of Civil Liabilities A majority of our operations are conducted outside of the United States, and a majority of our assets are located outside of the United States. A majority of our directors and executive officers are nationals or residents of jurisdictions other than the United States and most of their assets are located outside the United States. As a result, it may be difficult for a shareholder to effect service of process within the United States upon these individuals, or to bring an action against us or these individuals in the United States, or to enforce against us or them judgments obtained in United States courts, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. We have appointed Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711, as our agent upon whom process may be served in any action brought against us under the securities laws of the United States. 118 We have been informed by our Cayman Islands legal counsel that the United States and the Cayman Islands do not have a treaty providing for reciprocal recognition and enforcement of judgments of U.S. courts in civil and commercial matters and that a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the U.S. federal securities laws, would not be automatically enforceable in the Cayman Islands. We have also been advised by our Cayman Islands legal counsel that a judgment obtained in any federal or state court in the United States will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (i) is given by a foreign court of competent jurisdiction, (ii) imposes on the judgment debtor a liability to pay a liquidated sum for which the judgment has been given, (iii) is final, (iv) is not in respect of taxes, a fine or a penalty, and (v) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. There is uncertainty as to whether the courts of the Cayman Islands would recognize or enforce judgments of United States courts obtained against us or our directors or officers predicated upon the civil liability provisions of the securities laws of the United States or any state in the United States. Such uncertainty relates to whether a judgment obtained from the United States courts under the civil liability provisions of the securities laws will be determined by the courts of the Cayman Islands as penal or punitive in nature. If such a determination is made, the courts of the Cayman Islands will not recognize or enforce the judgment against a Cayman Islands company or its directors and officers. Because the courts of the Cayman Islands have yet to rule on whether such judgments are penal or punitive in nature, it is uncertain whether they would be enforceable in the Cayman Islands. Our PRC legal counsel has advised us that there is uncertainty as to whether the courts of China would:
Our PRC legal counsel has further advised us that the recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other form of reciprocity with the United States or the Cayman Islands that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, courts in the PRC will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC law or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States or in the Cayman Islands. Under the PRC Civil Procedures Law, foreign shareholders may originate actions based on PRC law against a company in China for disputes if they can establish sufficient nexus to the PRC for a PRC court to have jurisdiction, and meet other procedural requirements, including, among others, the plaintiff must have a direct interest in the case, and there must be a concrete claim, a factual basis and a cause for the suit. It will be, however, difficult for U.S. shareholders to originate actions against us in the PRC in accordance with PRC laws because we are incorporated under the laws of the Cayman Islands and it will be difficult for U.S. shareholders, by virtue only of holding the ADSs or our ordinary shares, to establish a connection to the PRC for a PRC court to have jurisdiction as required under the PRC Civil Procedures Law. ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
Contractual Arrangements with our Variable Interest Entity and its Shareholders See “Item 4. Information on the Company—C. Organizational Structure.” Shareholders Agreement We entered into our shareholders agreement on April 29, 2015 with our shareholders, which consist of holders of ordinary shares and preferred shares. The shareholders agreement provides for certain special rights, including right of first refusal, co-sale rights, preemptive rights and contains provisions governing the board of directors and other corporate governance matters. Those special rights, as well as the corporate governance provisions, automatically terminated upon the completion of our initial public offering. We have also granted certain registration rights to our shareholders. Set forth below is a description of the registration rights granted under the shareholders agreement.
Demand Registration Rights. At any time after the earlier of (i) April 29, 2020 or (ii) one year following the taking effect of a registration statement for a qualified initial public offering, holders of at least 50% of the registrable securities (including preferred shares and ordinary shares issued on conversion of preferred shares) then outstanding have the right to demand that we file a registration statement covering at least 20% (or any lesser percentage if the anticipated gross proceeds to us from such proposed offering would exceed US$5 million) of the registrable securities. We have the right to defer filing of a registration statement for a period of not more than 90 days after the receipt of the request of the initiating holders if we furnish to the holders requesting registration a certificate signed by our president or chief executive officer stating that in the good faith judgment of our board of directors, it would be materially detrimental to us and our shareholders for such registration statement to be filed at such time. However, we cannot exercise the deferral right more than once in any twelve-month period. We are obligated to effect no more than two demand registrations, other than demand registration to be effected pursuant to registration statement on Form F-3, for which an unlimited number of demand registrations shall be permitted. Piggyback Registration Rights. If we propose to file a registration statement for a public offering of our securities, we must offer our shareholders an opportunity to include in the registration all or any part of the registrable securities held by such holders. If the managing underwriters of any underwritten offering determine in good faith that marketing factors require a limitation of the number of shares to be underwritten, and the number of shares that may be included in the registration and the underwriting shall be allocated first to us, second to each of the holders requesting for the inclusion of their registrable securities on a pro rata basis, and third to holders of other securities of us. Form F-3 Registration Expenses of Registration. We will bear all registration expenses, other than underwriting discounts and selling commissions, and fees for special counsel of the holders participating in such registration, incurred in connection with any demand, piggyback or Form F-3 registration. Termination of Registration Rights. Our shareholders’ registration rights will terminate (i) on the fifth anniversary of our initial public offering, and (ii) with respect to any shareholder, when the registrable securities proposed to be sold by such shareholder may then be sold without registration in any 90-day period pursuant to Rule 144 under the Securities Act. Employment Agreements and Indemnification Agreements See “Item 6. Directors, Senior Management and Employees — A. Directors and Senior Management — Employment Agreements and Indemnification Agreements.” 120 Share Incentive Plan See “Item 6. Directors, Senior Management and Employees—B. Our Relationship with Xiaomi As of Strategic Cooperation Agreement Under our strategic cooperation agreement with a subsidiary of Xiaomi, (i) we are Xiaomi’s most preferred partner for Xiaomi-branded smart bands, smart watches (excluding children watches and quartz watches) and smart scales products, and (ii) if any other smart band, smart watch or smart scale is sold on any sales platform or channel operated by Xiaomi (including its official website, Mi.com, offline retail stores and online mobile apps), Xiaomi is required to provide better or equally prominent displays for our products. This extended strategic cooperation agreement will expire in October
Business Cooperation Agreement We have entered into a business cooperation agreement with a subsidiary of Xiaomi for the sale of Xiaomi Wearable Products, including Mi Band series and Mi Smart Scale series. The business cooperation agreement is set to expire on the date that is the later of the third anniversary of the business cooperation agreement and the date on which the parties complete the third Xiaomi Wearable Products, and automatically extends for successive two-year periods unless otherwise terminated with 60 days’ written notice prior to the expiration of the then current term. Pursuant to this agreement we and Xiaomi agree that (i) Xiaomi is the exclusive distributor for Xiaomi Wearable Products, (ii) Xiaomi will purchase Xiaomi Wearable Products at a price that covers for all of our costs and expenses (including costs of raw materials, manufacturer markup, costs for specialized tooling and equipment purchased by our contract manufacturers and logistics expenses) in connection with the manufacturing and shipment of Xiaomi Wearable Products, (iii) Xiaomi and we will share all profits, normally on a 50:50 basis, derived from sales of Xiaomi Wearable Products, and (iv) we and Xiaomi shall jointly set the retail price of Xiaomi Wearable Products. With respect to intellectual properties, we and Xiaomi will have joint ownership over On user data, we and Xiaomi agree that both parties have access to and can collect and utilize user data of Xiaomi Wearable Products. In addition, unless our users instruct us or Xiaomi to disclose or transfer our data in a particular way, we need to obtain consent from Xiaomi if we want to disclose or license third parties to use user data of Xiaomi Wearable Products, and after user data of Xiaomi Wearable Products reaches certain volume threshold, Xiaomi will also need to obtain consent from us before it discloses or licenses other parties to the same user data. 121 Transactions with Xiaomi In the year ended December 31, In the year ended December 31, 2020, we recorded RMB4,449.8 million in revenues from Xiaomi and its affiliates primarily for the sales of Xiaomi Wearable Products and self-branded products and others. As of December 31, In the year ended December 31,
Other Transactions with Related Parties We have invested in a number of companies as a strategy to expand our business partner network, and we extended loans to our investee companies from time to time to support their operations. Hefei Huaheng Electronic Technology Co., Ltd. In 2020, we sold 26.7% equity interest in Shenzhen Yunding Information Technology Co., Ltd. for In 2020, we made a prepayment of RMB12.0 million to purchase a building of Hefei Yizhi Electronic Technology Co., Ltd., a company controlled by Mr. Wang Huang. In 2021, we purchased raw materials from
Not applicable. ITEM 8. FINANCIAL INFORMATION
We have appended consolidated financial statements filed as part of this annual report. Legal Proceedings We are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, is likely to result in substantial cost and diversion of our resources, including our management’s time and attention. 122 Dividend Policy On March 17, 2022, our board of directors approved the declaration and payment of special cash dividends in an amount of US$0.025 per ordinary share (US$0.1 per American depositary share), representing an aggregate dividend payment to all shareholders of our company of approximately RMB40 million (US$6.28 million), to be paid out of our cash balance. In April 2022, we paid such cash dividend to our shareholders of record at the close of business on March 28, 2022. Other than the payment of dividends in April 2022, we currently do not plan to declare or pay any dividends in the near future on our shares or ADSs. We currently intend to retain our available funds and any future earnings to operate and expand our business. Our board of directors has discretion on whether to distribute dividends, subject to certain requirements of Cayman Islands law. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of business. Even if we decide to pay dividends, the form, frequency and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions and other factors that the board of directors may deem relevant.
We have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual report. ITEM 9. THE OFFER AND LISTING
Our ADSs, each representing four Class A ordinary shares of ours, have been listed on the NYSE since February 8, 2018. Our ADSs trade under the symbol “HMI.” B. Plan of Distribution
Not applicable.
Our ADSs, each representing four Class A ordinary shares of ours, have been listed on the NYSE since February 8,
Not applicable.
Not applicable. F. Expenses of the Issue Not applicable. ITEM 10. ADDITIONAL INFORMATION
Not applicable.
The following are summaries of material provisions of our Memorandum and Articles and of the Companies Objects of Our Company. Under our Memorandum and Articles, the objects of our company are unrestricted and we have the full power and authority to carry out any object not prohibited by the law of the Cayman Islands. Ordinary Shares. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of our Class A ordinary shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Our ordinary shares are issued in registered form and are issued when registered in our register of shareholders. We may not issue shares to bearer. Our shareholders who are nonresidents of the Cayman Islands may freely hold and vote their shares. Conversion. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof. Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances. Upon any sale transfer, assignment or disposition of any Class B ordinary shares by a holder thereof, or upon a change of ultimate beneficial ownership of any Class B ordinary shares to any person or entity, such Class B ordinary shares will be automatically and immediately converted into an equal number of Class A ordinary shares. Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors. In addition, our shareholders may by ordinary resolution declare a dividend, but no dividend may exceed the amount recommended by our directors. Our Memorandum and Articles provide that dividends may be declared and paid out of our profits, realized or unrealized, or from any reserve set aside from profits which our board of directors determine is no longer needed. Dividends may also be declared and paid out of share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies Voting Rights. On a show of hands, each shareholder is entitled to one vote, or on a poll, each shareholder is entitled to one vote for each Class A ordinary share and ten votes for each Class B ordinary share, voting together as a single class, on all matters that require a shareholder’s vote. Voting at any shareholders’ meeting is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any shareholder which is present in person or by proxy at the meeting. An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast at a meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to the outstanding ordinary shares at a meeting. A special resolution will be required for important matters such as a change of name or making changes to our Memorandum and Articles. Holders of the ordinary shares may, among other things, divide or combine their shares by ordinary resolution.
General Meetings of Shareholders. As a Cayman Islands exempted company, we are not obliged by the Companies Shareholders’ general meetings may be convened by the chairman of our board of directors or a majority of our board of directors. Advance notice of at least ten (10) calendar days is required for the convening of our annual general shareholders’ meeting (if any) and any other general meeting of our shareholders. A quorum required for any general meeting of shareholders consists of at least one shareholder present or by proxy, representing not less than one-third of all votes attaching to all of our shares in issue and entitled to vote. The Companies Transfer of Ordinary Shares. Subject to the restrictions set out below and the provisions above in respect of the transfer of Class B ordinary shares, any of our shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in the usual or common form or any other form approved by our board of directors. Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
If our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal. The registration of transfers may, after compliance with any notice required of the New York Stock Exchange, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our board may determine. Liquidation. On the winding up of our company, if the assets available for distribution amongst our shareholders shall be more than sufficient to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion to the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which there are monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders in proportion to the par value of the shares held by them. 125 Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid on their shares in a notice served to such shareholders at least 14 days prior to the specified time and place of payment. The shares that have been called upon and remain unpaid are subject to forfeiture.
Redemption, Repurchase and Surrender of Variations of Rights of Shares. If at any time, our share capital is divided into different classes or series of shares, the rights attached to any class or series of shares (unless otherwise provided by the terms of issue of the shares of that class or series), whether or not our company is being wound-up, may be varied with the consent in writing of the holders of two-thirds of the issued shares of that class or series or with the sanction of a special resolution passed by two-thirds of the votes cast at a separate meeting of the holders of the shares of the class or series. The rights conferred upon the holders of the shares of any class issued shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares. Issuance of Additional Shares. Our Memorandum and Articles Our Memorandum and Articles also authorize our board of directors to establish from time to time one or more series of preference shares and to determine, with respect to any series of preference shares, the terms and rights of that series, including:
Our board of directors may issue preference shares without action by our shareholders to the extent authorized but unissued. Issuance of these shares may dilute the voting power of holders of ordinary shares. Inspection of Books and Records. Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain copies of our list of shareholders or our corporate Anti-Takeover Provisions. Some provisions of our Memorandum and Articles may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that:
126 However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our Memorandum and Articles for a proper purpose and for what they believe in good faith to be in the best interests of our company. Exempted Company. We are an exempted company with limited liability under the Companies
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which a court may be prepared to pierce or lift the corporate veil). Differences in Corporate Law The Companies Act is derived, to a large extent, from the older Companies Acts of England but does not follow recent English statutory enactments and accordingly there are significant differences between the Companies Act and the current Companies Act of England. In addition, the Companies Act differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of certain significant differences between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated in the United States and their shareholders. Mergers and Similar Arrangements. The Companies Act permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (i) “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company, and (ii) a “consolidation” means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of the shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association. The plan must be filed with the Registrar of Companies of the Cayman Islands together with a declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and that notification of the merger or consolidation will be published in the Cayman Islands Gazette. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures. 127 A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders of that Cayman subsidiary if a copy of the plan of merger is given to every member of that Cayman subsidiary to be merged unless that member agrees otherwise. For this purpose a company is a “parent” of a subsidiary if it holds issued shares that together represent at least ninety percent (90%) of the votes at a general meeting of the subsidiary. The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands. Save in certain limited circumstances, a shareholder of a Cayman constituent company who dissents from the merger or consolidation is entitled to payment of the fair value of his shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) upon dissenting to the merger or consolidation, provide the dissenting shareholder complies strictly with the procedures set out in the Companies Act. The exercise of dissenter rights will preclude the exercise by the dissenting shareholder of any other rights to which he or she might otherwise be entitled by virtue of holding shares, save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful. Separate from the statutory provisions relating to mergers and consolidations, the Companies Act also contains statutory provisions that facilitate the reconstruction and amalgamation of companies by way of schemes of arrangement, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
The Companies Act also contains a statutory power of compulsory acquisition which may facilitate the “squeeze out” of dissentient minority shareholder upon a tender offer. When a tender offer is made and accepted by holders of 90% of the shares affected within four months, the offeror may, within a two-month period commencing on the expiration of such four-month period, require the holders of the remaining shares to transfer such shares to the offeror on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion. If an arrangement and reconstruction by way of scheme of arrangement is thus approved and sanctioned, or if a tender offer is made and accepted, in accordance with the foregoing statutory procedures, a dissenting shareholder would have no rights comparable to appraisal rights, save that objectors to a takeover offer may apply to the Grand Court of the Cayman Islands for various orders that the Grand Court of the Cayman Islands has a broad discretion to make, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares. Shareholders’ Suits. In principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company, and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, the Cayman Islands court can be expected to follow and apply the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) so that a non-controlling shareholder may be permitted to commence a class action against or derivative actions in the name of the company to challenge actions where:
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Indemnification of Directors and Executive Officers and Limitation of Liability. Cayman Islands law does not limit the extent to which a company’s memorandum and articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime. Our Memorandum and Articles of Association provide that that we shall indemnify our officers and directors against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such directors or officer, other than by reason of such person’s own dishonesty, willful default or fraud, in or about the conduct of our company’s business or affairs (including as a result of any mistake of judgment) or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by such director or officer in defending (whether successfully or otherwise) any civil proceedings concerning our company or its affairs in any court whether in the Cayman Islands or elsewhere. This standard of conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements with our directors and executive officers that provide such persons with additional indemnification beyond that provided in our Memorandum and Articles of Association. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us under the foregoing provisions, we have been informed that in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. C. Material Contracts |
We have not entered into any material contracts other than in the ordinary course of business and other than those described in “Item 4. Information on the Company,” “Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions,” in this “Item 10. Additional Information—C. Material Contracts” or elsewhere in this annual report on Form 20-F.
| D. Exchange Controls |
See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating toRegulation on Foreign Exchange.”
| E. Taxation |
The following summary of the material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in our ADSs or ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are subject to change. This summary does not deal with all possible tax consequences relating to an investment in our ADSs or ordinary shares, such as the tax consequences under U.S. state and local tax laws or under the tax laws of jurisdictions other than the Cayman Islands, the People’s Republic of China and the United States.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or, after execution, brought within the jurisdiction of the Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
Payments of dividends and capital in respect of our ordinary shares and ADSs will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend or capital to any holder of our ordinary shares or ADSs, nor will gains derived from the disposal of our ordinary shares or ADSs be subject to Cayman Islands income or corporation tax.
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No stamp duty is payable in respect of the issue of the shares or on an instrument of transfer in respect of a share.
People’s Republic of China Taxation
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with a “de facto management body” within the PRC is considered a resident enterprise and will be subject to the enterprise income tax at the rate of 25% on its global income. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control over and overall management of the business, productions, personnel, accounts and properties of an enterprise. In April 2009, the State Administration of Taxation issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.
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We believe that HuamiZepp Health Corporation is not a PRC resident enterprise for PRC tax purposes. HuamiZepp Health Corporation is not controlled by a PRC enterprise or PRC enterprise group and we do not believe that HuamiZepp Health Corporation meets all of the conditions above. HuamiZepp Health Corporation is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent with us.
If the PRC tax authorities determine that HuamiZepp Health Corporation is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders (including our ADS holders) would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. It is also unclear whether non-PRC shareholders of HuamiZepp Health Corporation would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that HuamiZepp Health Corporation is treated as a PRC resident enterprise. Pursuant to the EIT Law and its implementation rules, if a non-residentnonresident enterprise has not set up an organization or establishment in China, or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on Income, the tax rate in respect to dividends paid by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements, or SAT Circular 81, if the relevant PRC tax authorities determine, in their discretion, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may adjust the preferential tax treatment.
Accordingly, our subsidiary Huami HKHong Kong Zepp Holding Limited may be able to enjoy the 5% tax rate for the dividends it receives from its PRC incorporated subsidiaries if they satisfy the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations and obtain the approvals as required. However, according to SAT Circular 81, if the relevant tax authorities determine our transactions or arrangements are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable tax rate on dividends in the future.
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Provided that our Cayman Islands holding company, HuamiZepp Health Corporation, is not deemed to be a PRC resident enterprise, holders of our ADSs and ordinary shares who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares or ADSs. SAT Public Notice 7 further clarifies that, if a non-resident enterprise derives income by acquiring and selling shares in an offshore listed enterprise in the public market, such income will not be subject to PRC tax. However, there is uncertainty as to the application of SAT Public Notice 37 and SAT Public Notice 7, we and our non-PRC resident investors may be at risk of being required to file a return and being taxed under SAT Public Notice 37 and SAT Public Notice 7 and we may be required to expend valuable resources to comply with SAT Public Notice 37 and SAT Public Notice 7 or to establish that we should not be taxed under SAT Public Notice 37 and SAT Public Notice 7. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.”
United States Federal Income Tax Considerations
The following discussion is a summary of U.S. federal income tax considerations generally applicable to the ownership and disposition of our ADSs or Class A ordinary shares by a U.S. Holder (as defined below) that acquires our ADSs and holds our ADSs as “capital assets” (generally, property held for investment) under the U.S. Internal Revenue Code of 1986, as amended, or the Code. This discussion is based upon existing U.S. federal tax law, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought fromThere can be no assurance that the Internal Revenue Service, the IRS, with respect to any U.S. federal income tax consequences described below, and there can be no assurance thator the IRS, or a court will not take a contrary position. This discussion, moreover, does not address the U.S. federal estate, gift, Medicare, and alternative minimum tax considerations, or any state, local and non-U.S. tax considerations, relating to the ownership or disposition of our ADSs or Class A ordinary shares. The following summary does not address all aspects of U.S. federal income taxation that may be important to particular investors in light of their individual circumstances or to persons in special tax situations such as:
| ● | banks and other financial institutions; |
| ● | insurance companies; |
| ● | pension plans; |
| ● | cooperatives; |
| ● | regulated investment companies; |
| ● | real estate investment trusts; |
| ● | broker-dealers; |
| ● | traders in securities that elect to use a mark-to-market method of accounting; |
| ● | certain former U.S. citizens or long-term residents; |
| ● | tax-exempt entities (including private foundations); |
| ● | persons liable for alternative minimum tax; |
| ● | holders who acquire their ADSs or Class A ordinary shares pursuant to any employee share option or otherwise as compensation; |
| ● | investors that will hold their ADSs or Class A ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes; |
| ● | investors that have a functional currency other than the U.S. dollar; |
| ● | persons that actually or constructively own 10% or more of our stock by vote or value; or |
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insurance companies;
pension plans;
cooperatives;
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|
|
real estate investment trusts;
broker-dealers;
traders in securities that elect to use a mark-to-market method of accounting;
certain former U.S. citizens or long-term residents;
tax-exempt entities (including private foundations);
persons liable for alternative minimum tax;
holders who acquire their ADSs or Class A ordinary shares pursuant to any employee share option or otherwise as compensation;
investors that will hold their ADSs or Class A ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes;
investors required to accelerate the recognition of any item of gross income with respect to our ADSs or ordinary shares as a result of such income being recognized on an applicable financial statement;
investors that have a functional currency other than the U.S. dollar;
persons that actually or constructively own 10% or more of our stock by vote or value; or
partnerships or other entities taxable as partnerships for U.S. federal income tax purposes, or persons holding common stock through such entities.
All of whom may be subject to tax rules that differ significantly from those discussed below.
Each U.S. Holder is urged to consult its tax advisor regarding the application of U.S. federal taxation to its particular circumstances, and the state, local, non-U.S. and other tax considerations of the ownership and disposition of our ADSs or Class A ordinary shares.
General
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of our ADSs or Class A ordinary shares that is, for U.S. federal income tax purposes:
| ● | a trust (A) the administration of which is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a U.S. person under the Code. |
| ● | an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or |
| ● | a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created in, or organized under the law of the United States or any state thereof or the District of Columbia; |
| ● | an individual who is a citizen or resident of the United States; |
a trust (A) the administration of which is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a U.S. person under the Code.
an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created in, or organized under the law of the United States or any state thereof or the District of Columbia;
an individual who is a citizen or resident of the United States;
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of our ADSs or Class A ordinary shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership. Partnerships holding our ADSs or Class A ordinary shares and their partners are urged to consult their tax advisors regarding an investment in our ADSs or Class A ordinary shares.
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For U.S. federal income tax purposes, it is generally expected that a U.S. Holder of ADSs will be treated as the beneficial owner of the underlying shares represented by the ADSs. The remainder of this discussion assumes that a U.S. Holder of our ADSs will be treated in this manner. Accordingly, deposits or withdrawals of Class A ordinary shares for ADSs will generally not be subject to U.S. federal income tax.
Passive Foreign Investment Company Considerations
A non-U.S. corporation, such as our company, will be classified as a PFIC, for U.S. federal income tax purposes for any taxable year, if either (i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets (determined(generally determined on the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of passive income. For this purpose, cash and assets readily convertible into cash are categorized as a passive asset and the company’s goodwill and other unbooked intangibles are taken into account. Passive income generally includes, among other things, dividends, interest, rents, royalties, and gains from the disposition of passive assets. We will be treated as owning a proportionate share of the assets and earning a proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by value) of the stock.
Although the law in this regard is not entirely clear, we treat our consolidated VIEs as being owned by us for U.S. federal income tax purposes because we control their management decisions and are entitled to substantially all of the economic benefits associated with these entities. As a result, we consolidate their results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are not the owner of the consolidated VIEs for U.S. federal income tax purposes, we may be treated as a PFIC for the current taxable year and any subsequent taxable year.
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Assuming that we are the owner of the VIEs for U.S. federal income tax purposes, and based upon our income and assets, and the market value of our ADSs, we do not believe that we were a PFIC for the taxable year ended December 31, 20182021 and do not anticipate becoming a PFIC in the current taxable year or in the foreseeable future. While we do not anticipate being or becoming a PFIC in the current or foreseeable taxable years,future, no assurance can be given in this regard because the determination of whether we are or will be or become a PFIC is a factual determination made annually that will depend, in part, upon the composition of our income and assets. Fluctuations in the market price of our ADSs may cause us to be classified as a PFIC for the current or future taxable years because the value of our assets for purposes of the asset test, including the value of our goodwill and unbooked intangibles, may be determined by reference to the market price of our ADSs from time to time (which may be volatile). In particular, recent declines in the market price of our ADSs significantly increased our risk of becoming a PFIC. The market price of our ADSs may continue to fluctuate considerably and, consequently, we cannot assure you of our PFIC status for any taxable year.
If our market capitalization subsequently declines, we may be or become classified as a PFIC for the current taxable year or future taxable years. Furthermore, the composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets. Under circumstances where our revenue from activities that produce passive income significantly increase relative to our revenue from activities that produce non-passive income, or where we determine not to deploy significant amounts of cash for active purposes, our risk of becoming classified as a PFIC may substantially increase.
If we are classified as a PFIC for any year during which a U.S. Holder holds our ADSs or Class A ordinary shares, the PFIC rules discussed below under “—Passive Foreign Investment Company Rules” generally will apply to such U.S. Holder for such taxable year, and unless the U.S. Holder makes certain elections, will apply in future years even if we cease to be a PFIC.
The discussion below under “—Dividends” and “—Sale or Other Disposition” is written on the basis that we will not be or become classified as a PFIC for U.S. federal income tax purposes. The U.S. federal income tax rules that apply generally if we are treated as a PFIC are discussed below under “—Passive Foreign Investment Company Rules.”
Dividends
Subject to the discussion below under “—Passive Foreign Investment Company Rules,” any cash distributions (including the amount of any PRC tax withheld) paid on our ADSs or Class A ordinary shares out of our current or accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally be includible in the gross income of a U.S. Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of Class A ordinary shares, or by the depositary, in the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, any distribution we pay will generally be treated as a “dividend” for U.S. federal income tax purposes. Dividends received on our ADSs or Class A ordinary shares will not be eligible for the dividends received deduction allowed to corporations. A non-corporate U.S. Holder will be subject to tax at the lower capital gain tax rate applicable to “qualified dividend income,” provided that certain conditions are satisfied, including that (1) our ADSs are readily tradeable on an established securities market in the United States, or, in the event that we are deemed to be a PRC resident enterprise under the PRC tax law, we are eligible for the benefit of the United States-PRC income tax treaty, (2) we are neither a PFIC nor treated as such with respect to a U.S. Holder (as discussed below) for the taxable year in which the dividend was paid and the preceding taxable year, and (3) certain holding period requirements are met. We expect ourOur ADSs (but not our Class A ordinary shares) will beare listed on the New York Stock Exchange and is considered readily tradeable on an established securities market in the United States. There can be no assurance, however, that our ADSs will be considered readily tradeable on an established securities market in later years.
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In the event that we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law, we may be eligible for the benefits of the United States-PRC income tax treaty. If we are eligible for such benefits, dividends we pay on our Class A ordinary shares, regardless of whether such shares are represented by the ADSs, would be eligible for the reduced rates of taxation described in the preceding paragraph.
Dividends will generally be treated as income from foreign sources for U.S. foreign tax credit purposes and will generally constitute passive category income. Depending on the U.S. Holder’s individual facts and circumstances, a U.S. Holder may be eligible, subject to a number of complex limitations, to claim a foreign tax credit in respect of any foreign withholding taxes imposed on dividends received on our ADSs or Class A ordinary shares. A U.S. Holder who does not elect to claim a foreign tax credit for foreign tax withheld may instead claim a deduction, for U.S. federal income tax purposes, in respect of such withholding, but only for a year in which such holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex and their outcome depends in large part on the U.S. Holder’s individual facts and circumstances. Accordingly, U.S. Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
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Sale or Other Disposition
Subject to the discussion below under “—Passive Foreign Investment Company Rules,” a U.S. Holder will generally recognize capital gain or loss upon the sale or other disposition of ADSs or Class A ordinary shares in an amount equal to the difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such ADSs or Class A ordinary shares. Any capital gain or loss will be long-term if the ADSs or Class A ordinary shares have been held for more than one year and will generally be U.S.-source gain or loss for U.S. foreign tax credit purposes. In the event that gain from the disposition of the ADSs or Class A ordinary shares is subject to tax in the PRC, such gain may be treated as PRC source gain under the United States-PRC income tax treaty. Pursuant to recently issued Treasury Regulations, however, if a U.S. Holder is not eligible for the benefits of the Treaty or does not elect to apply the Treaty, then such holder may not be able to claim a foreign tax credit arising from any PRC tax imposed on the disposition of the ADSs or Class A ordinary shares. The deductibility of a capital loss may be subject to limitations. U.S. Holders are urged to consult their tax advisors regarding the tax consequences if a foreign tax is imposed on a disposition of our ADSs or Class A ordinary shares, including the availability of the foreign tax credit under their particular circumstances.
Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable year during which a U.S. Holder holds our ADSs or Class A ordinary shares, and unless the U.S. Holder makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special tax rules on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution paid during a taxable year to a U.S. Holder that is greater than 125 percent of the average annual distributions paid in the three preceding taxable years or, if shorter, the U.S. Holder’s holding period for the ADSs or Class A ordinary shares), and (ii) any gain realized on the sale or other disposition of ADSs or Class A ordinary shares. Under the PFIC rules:
| ● | the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or Class A ordinary shares; |
| ● | the amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year in which we are classified as a PFIC (each, a “pre-PFIC year”), will be taxable as ordinary income; |
| ● | the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect for individuals or corporations, as appropriate, for that year; and |
| ● | the interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-PFIC year. |
the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares;
the amount allocated to the current taxable year and any taxable years in the U.S. Holder’s holding period prior to the first taxable year in which we are classified as a PFIC (each, a “pre-PFIC year”), will be taxable as ordinary income;
the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest tax rate in effect for individuals or corporations, as appropriate, for that year; and
the interest charge generally applicable to underpayments of tax will be imposed on the tax attributable to each prior taxable year, other than a pre-PFIC year.
If we are a PFIC for any taxable year during which a U.S. Holder holds our ADSs or Class A ordinary shares and any of our subsidiary, our VIEs or any of the subsidiaries of our VIEs is also a PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares of the lower-tier PFIC for purposes of the application of these rules. U.S. Holders are urged to consult their tax advisors regarding the application of the PFIC rules to any of our subsidiary, our VIEs or any of the subsidiaries of our VIEs.
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As an alternative to the foregoing rules, a U.S. Holder of “marketable stock” in a PFIC may make a mark-to-market election with respect to such stock, provided that such stock is regularly traded.traded on a national securities exchange that is registered with the SEC. For those purposes, our ADSs, but not our Class A ordinary shares, are treated as marketable stock upon their listinglisted on the New York Stock Exchange.Exchange, which is an established securities exchange in the United States. We anticipate that our ADSs should qualify as being regularly traded, but no assurances may be given in this regard. If a U.S. Holder makes this election, the holder will generally (i) include as ordinary income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market value of such ADSs held at the end of the taxable year, but such deduction will only be allowed to the extent of the amount previously included in income as a result of the mark-to-market election. The U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or loss resulting from the mark-to-market election. If a U.S. Holder makes a mark-to-market election in respect of a corporation classified as a PFIC and such corporation ceases to be classified as a PFIC, the holder will not be required to take into account the gain or loss described above during any period that such corporation is not classified as a PFIC. If a U.S. Holder makes a mark-to-market election, any gain such U.S. Holder recognizes upon the sale or other disposition of our ADSs in a year when we are a PFIC will be treated as ordinary income and any loss will be treated as ordinary loss, but such loss will only be treated as ordinary loss to the extent of the net amount previously included in income as a result of the mark-to-market election.
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Because a mark-to-market election cannot technically be made for any lower-tier PFICs that we may own, a U.S. Holder may continue to be subject to the PFIC rules with respect to such U.S. Holder’s indirect interest in any investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.
We do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections which, if available, would result in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described above.
If a U.S. Holder owns our ADSs or Class A ordinary shares during any taxable year that we are a PFIC, the holder must generally file an annual IRS Form 8621. You should consult your tax advisors regarding the U.S. federal income tax consequences of owning and disposing of our ADSs or Class A ordinary shares if we are or become a PFIC.
Information Reporting
Certain U.S. Holders may be required to report information to the IRS with respect to the beneficial ownership of our ADSs or ordinary shares. These rules also impose penalties if a U.S. Holder is required to submit such information to the IRS and fails to do so.
In addition, U.S. Holders may be subject to information reporting to the IRS with respect to dividends on and proceeds from the sale or other disposition of our ADSs or ordinary shares. Each U.S. Holder is advised to consult with its tax advisor regarding the application of the U.S. information reporting rules to their particular circumstances.
| F. Dividends and Paying Agents |
Not applicable.
| G. Statement by Experts |
Not applicable.
| H. Documents on Display |
We are subject to the periodic reporting and other informational requirements of the Exchange Act. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than four months after the close of each fiscal year. Copies of reports and other information, when so filed, may be inspected without charge and may be obtained at prescribed rates at the public reference facilities maintained by the SEC at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. The public may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act.
We will furnish Deutsche Bank Trust Company Americas, the depositary of our ADSs, with our annual reports, which will include a review of operations and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any notice of a shareholders’ meeting received by the depositary from us.
| 135 I. Subsidiary Information |
Not applicable.
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ITEM 11.QUALITATIVEQUALITATIVE DISCLOSURES ABOUT MARKET RISK
Inflation
To date, inflation in China has not materially impacted our results of operations. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index were increases of 1.8% for December 2017 and 1.9% for December 2018. Although we have not been materially affected by inflation in the past, we can provide no assurance that we will not be affected by higher rates of inflation in China in the future.
Market Risks
Foreign Exchange Risk
Substantially allThe majority of our revenues and expenses are denominated in RMB. The value of the Renminbi against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and by China’sAlthough we do not believe that we currently have any significant direct foreign exchange policies, among other things. In July 2005, the PRC government changed its decades-old policy of peggingrisk, we have entered into several hedging arrangements and recorded a gain in RMB2.8 million (US$0.4 million) to hedge exposure to such risk. Although our exposure to foreign exchange risks should be limited in general, the value of the Renminbi to the U.S. dollar, and the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation subsided andyour investment in our ADSs will be affected by the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010,and Renminbi because the value of our business is effectively denominated in RMB, while our ADSs will be traded in U.S. dollars.
The conversion of Renminbi into foreign currencies, including U.S. dollars and Euros, is based on rates set by the People’s Bank of China. The Renminbi has fluctuated against the U.S. dollar, at times significantly and unpredictably. While appreciating approximately by 7% against the U.S. dollar in 2017, the Renminbi in 2018 depreciated approximately by 5% against the U.S. dollar. Since October 1, 2016, the RMB has joined the International Monetary Fund (IMF)’s basket of currencies that make up the Special Drawing Right (SDR), along with the U.S. dollar, the Euro, the Japanese yen and the British pound. With the development of the foreign exchange market and progress towards interest rate liberalization and Renminbi internationalization, the PRC government may in the future announce further changes to the exchange rate system and there is no guarantee that the RMB will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the Renminbi and the U.S. dollar in the future.
To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the RMB amount we receive from the conversion. Conversely, if we decide to convert Renminbi into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amounts available to us.
Any significant depreciation of the Renminbi may materially and adversely affect our revenues, earnings and financial position as reported in U.S. dollars. To the extent that we need to convert U.S. dollars we received from our initial public offering into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB amounts into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or ADSs or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount available to us.
Interest Rate Risk
Our exposure to interest rate risk primarily relates to the interest income generated by excess cash, which is mostly held in interest-bearing bank deposits. Interest-earning instruments carry a degree of interest rate risk. We have not been exposed to material risks due to changes in interest rates, and we have not used any derivative financial instruments to manage our interest risk exposure. However, our future interest income may fall short of expectations due to changes in market interest rates.
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ITEM 12. DESCRIPTION OF SECURITIESSECURITIES OTHER THAN EQUITY SECURITIES
A.Debt Securities |
|
Not applicable.
| B. Warrants and Rights |
Not applicable.
| C. Other Securities |
Not applicable.
| 136 D. American Depositary Shares |
Charges Our ADS Holders May Have to Pay
The depositary of our ADS facility, Deutsche Bank Trust Company Americas, shall charge the following fees for the services performed under the terms of the deposit agreement, provided, however, that no fees shall be payable upon distribution of cash dividends so long as the charging of such fee is prohibited by the exchange, if any, upon which the ADSs are listed:
| ● | to any person to whom ADSs are issued or to any person to whom a distribution is made in respect of ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits or other distributions (except where converted to cash), a fee not in excess of US$5.00 per 100 ADSs (or fraction thereof) so issued under the terms of the deposit agreement to be determined by the depositary; |
| ● | to any person surrendering ADSs for withdrawal of deposited securities or whose ADSs are cancelled or reduced for any other reason including, inter alia, cash distributions made pursuant to a cancellation or withdrawal, a fee not in excess of US$5.00 per 100 ADSs reduced, cancelled or surrendered (as the case may be); |
| ● | to any holder of ADSs, a fee not in excess of US$5.00 per 100 ADSs held for the distribution of cash dividends; |
| ● | to any holder of ADSs, a fee not in excess of US$5.00 per 100 ADSs held for the distribution of cash entitlements (other than cash dividends) and/or cash proceeds, including proceeds from the sale of rights, securities and other entitlements; |
| ● | to any holder of ADSs, a fee not in excess of US$5.00 per 100 ADSs (or portion thereof) issued upon the exercise of rights; and |
| ● | for the operation and maintenance costs in administering the ADSs an annual fee of US$5.00 per 100 ADSs, such fee to be assessed against holders of record as of the date or dates set by the depositary as it sees fit and collected at the sole discretion of the depositary by billing such holders for such fee or by deducting such fee from one or more cash dividends or other cash distributions. |
to any person to whom ADSs are issued or to any person to whom a distribution is made in respect of ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits or other distributions (except where converted to cash), a fee not in excess of US$5.00 per 100 ADSs (or fraction thereof) so issued under the terms of the deposit agreement to be determined by the depositary;
to any person surrendering ADSs for withdrawal of deposited securities or whose ADSs are cancelled or reduced for any other reason including, inter alia, cash distributions made pursuant to a cancellation or withdrawal, a fee not in excess of US$5.00 per 100 ADSs reduced, cancelled or surrendered (as the case may be);
to any holder of ADSs, a fee not in excess of US$5.00 per 100 ADSs held for the distribution of cash dividends;
to any holder of ADSs, a fee not in excess of US$5.00 per 100 ADSs held for the distribution of cash entitlements (other than cash dividends) and/or cash proceeds, including proceeds from the sale of rights, securities and other entitlements;
to any holder of ADSs, a fee not in excess of US$5.00 per 100 ADSs (or portion thereof) issued upon the exercise of rights; and
for the operation and maintenance costs in administering the ADSs an annual fee of US$5.00 per 100 ADSs, such fee to be assessed against holders of record as of the date or dates set by the depositary as it sees fit and collected at the sole discretion of the depositary by billing such holders for such fee or by deducting such fee from one or more cash dividends or other cash distributions.
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In addition, holders, beneficial owners, any person depositing Shares for deposit and any person surrendering ADSs for cancellation and withdrawal of deposited securities will be required to pay the following charges:
| ● | taxes (including applicable interest and penalties) and other governmental charges; |
| ● | such registration fees as may from time to time be in effect for the registration of our ordinary shares or other deposited securities with the foreign registrar and applicable to transfers of ordinary shares or other deposited securities to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively; |
| ● | such cable, telex, facsimile and electronic transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expense of the depositor depositing or person withdrawing ordinary shares or holders and beneficial owners of ADSs; |
| ● | the expenses and charges incurred by the depositary and/or a division or affiliate(s) of the depositary in the conversion of foreign currency; |
| ● | such fees and expenses as are incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to ordinary shares, deposited securities, ADSs and ADRs; |
| ● | the fees and expenses incurred by the depositary in connection with the delivery of deposited securities, including any fees of a central depository for securities in the local market, where applicable; and |
| ● | any additional fees, charges, costs or expenses that may be incurred by the depositary or a division or affiliate(s) of the depositary from time to time. |
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such registration fees as may from time to time be in effect for the registration of our ordinary shares or other deposited securities with the foreign registrar and applicable to transfers of ordinary shares or other deposited securities to or from the name of the custodian, the depositary or any nominees upon the making of deposits and withdrawals, respectively;
such cable, telex, facsimile and electronic transmission and delivery expenses as are expressly provided in the deposit agreement to be at the expenseTable of the depositor depositing or person withdrawing ordinary shares or holders and beneficial owners of ADSs;Contents
the expenses and charges incurred by the depositary and/or a division or affiliate(s) of the depositary in the conversion of foreign currency;
such fees and expenses as are incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to ordinary shares, deposited securities, ADSs and ADRs;
the fees and expenses incurred by the depositary in connection with the delivery of deposited securities, including any fees of a central depository for securities in the local market, where applicable;
any additional fees, charges, costs or expenses that may be incurred by the depositary or a division or affiliate(s) of the depositary from time to time.
Any other fees and charges of, and expenses incurred by, the depositary or the custodian under the deposit agreement will be paid by us unless otherwise agreed in writing between the depositary and us from time to time. All fees and charges may, at any time and from time to time, be changed by agreement between the depositary and us but subject, in the case of fees and charges payable by holders or beneficial owners, only in the manner contemplated by the deposit agreement.
Fees and Other Payments Made by the Depositary to Us
Our depositary anticipates to reimburse us for certain expenses we incur that are related to establishment and maintenance of the ADR program upon such terms and conditions as we and the depositary may agree from time to time. The depositary may make available to us a set amount or a portion of the depositary fees charged in respect of the ADR program or otherwise upon such terms and conditions as we and the depositary may agree from time to time. For the year ended December 31, 2018,2021, we did not receive suchreceived reimbursement of US$0.1 million from the depositary.
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PART II.
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
Material Modifications to the Rights of Security Holders
See “Item 10. Additional Information—B. Memorandum and Articles of Association—Ordinary Shares” for a description of the rights of securities holders, which remain unchanged.
Use of Proceeds
The following “UseBy the end of Proceeds” information relates to the registration statement on Form F-1, as amended (File No. 333-222528 ) (the “F-1 Registration Statement”) in relation to our initial public offering of 10,000,000 ADSs representing 40,000,000 Class A ordinary shares, at an initial offering price of US$11.00 per ADS. Our initial public offering closed in February 2018. Credit Suisse Securities (USA) LLC, Citigroup Global Markets Inc. and China Renaissance Securities (Hong Kong) Limited were the representatives of the underwriters for our initial public offering. Counting in the ADSs sold upon the exercise of the over-allotment option by our underwriters,2019, we and certain selling shareholders offered and sold 10,400,000 and 1,100,000 ADSs, respectively, and received total purchase price of US$106.4 million and US$11.3 million, respectively.
The F-1 Registration Statement was declared effective by the SEC on February 7, 2018. The total expenses incurred for our company’s account in connection with our initial public offering was approximately US$10.5 million, which included US$8.0 million in underwriting discounts and commissions for the initial public offering and approximately US$2.5 million in other costs and expenses for our initial public offering. Counting in the ADSs sold upon the exercise of the over-allotment option by our underwriters, we received net proceeds of approximately US$103.9 million from our initial public offering, after deducting underwriting commissions and discounts and the offering expenses payable by us. None of the transaction expenses included payments to directors or officers of our company or their associates, persons owning more than 10% or more of our equity securities or our affiliates. None of the net proceeds we received from the initial public offering were paid, directly or indirectly, to any of our directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates.
In 2018, we usedhad applied all the net proceeds from our initial public offering as follows:
approximately US$15.9 million for research and developmentthe registered follow-on offering of products, services and technologies;
approximately US$7.6 million for selling and marketing;
approximately US$14.4 million for general corporate purposes and working capital; and
approximately US$31.6 million for strategic investments and acquisitions.
We still intend to use the remainder of the proceeds from our initial public offering, as disclosedADSs in our registration statement on Form F-1, for (i) research and development of products, services and technologies, (ii) selling and marketing, and (iii) general corporate purposes and working capital and potential strategic investments and acquisitions.April 2019.
ITEM 15. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our chief executive officer and chief financial officer, has performed an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this annual report. Based upon that evaluation, our management has concluded that, as of December 31, 2021, our disclosure controls and procedures were ineffective as of December 31, 2018 and as of the dateeffective in ensuring that the evaluation ofinformation required to be disclosed by us in the effectiveness of our disclosure controlsreports that we file and proceduresfurnish under the Exchange Act was completed, because ofrecorded, processed, summarized and reported, within the material weaknesstime periods specified in our internal control over financial reporting described below. Our disclosure controlsthe SEC’s rules and procedures were not effective to satisfy the objectives for which they are intended.
Notwithstanding management's assessment that our internal control over financial reporting was ineffective as of December 31, 2018 due to the material weakness described below, we believeforms, and that the consolidatedinformation required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial statements included in this annual report correctly present our financial position, results of operations and cash flows for the fiscal years covered thereby in all material respects.officer, to allow timely decisions regarding required disclosure.
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Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP and includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of our company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. GAAP, and that receipts and expenditures of our company are being made only in accordance with authorizations of our management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of the unauthorized acquisition, use or disposition of our company’s assets that could have a material effect on the consolidated financial statements. Because of its inherent limitations, internal control over financial reporting may not detect or prevent misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management conducted an assessmentAs required by Section 404 of the Sarbanes-Oxley Act of 2002 and related rules as promulgated by the Securities and Exchange Commission, our management including our Chief Executive Officer and Chief Financial Officer assessed the effectiveness of our company’s internal control over financial reporting as of December 31, 2018 based on2021 using the frameworkcriteria set forth in Internalthe report “Internal Control—Integrated Framework (2013) issued” published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, ourevaluation, management concluded that our internal control over financial reporting was ineffectiveeffective as of December 31, 2018 due to one material weakness we identified in our internal control over financial reporting. The material weakness identified related to lack of adequate supervisory review over the appropriate accounting treatment of complex transactions (including some of our equity transactions consummated prior to the initial public offering of our ADSs that were treated as a deemed dividend) to ensure that such transactions were in compliance with U.S. GAAP. This identified material weakness impacted our interim reporting during 2018 and could affect our ability to accurately and timely report our financial results in accordance with U.S. GAAP and detect or prevent material misstatements of our annual or interim financial statements on a timely basis prospectively.
We have implemented and plan to (i) establish effective oversight and clarifying reporting requirements for non-recurring and complex transactions to ensure consolidated financial statements and related disclosures are accurate, complete and in compliance with U.S. GAAP and SEC reporting requirements, and (ii) enhance our internal audit function as well as engaging an external consulting firm to assist us in assessing our compliance readiness under Rule 13a-15 of the Exchange Act and improve overall internal control. However, we cannot assure you that we will be able to continue implementing these measures in the future, or that we will not identify additional material weaknesses in the future.
We will continue to implement measures to remediate our internal control deficiencies. We may incur significant costs in the implementation of such measures. However, the implementation of these measures may not fully address the deficiencies in our internal control over financial reporting. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—If we fail to maintain an effective system of internal control over financial reporting, we may be unable to accurately report our financial results or prevent fraud, and investor confidence in our company and the market price of our ADSs may be adversely affected.”2021.
Attestation Report of the Registered Public Accounting Firm
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting as we qualify as an “emerging growth company” under section 3(a) of the Securities Exchange Act of 1934, as amended, and are therefore exempt from the attestation requirement.
Changes in Internal Control Over Financial Reporting
Other than as described above, thereThere were no changes in our internal controls over financial reporting that occurred during the period covered by this annual report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
Our board of directors has determined that Jimmy Lai, a member of our audit committee and independent director (under the standards set forth in Section 303A of the Corporate Governance Rules of the NYSE and Rule 10A-3 under the Securities Exchange Act of 1934), is an audit committee financial expert.
ITEM 16B. CODE OF ETHICS
In January 2018, our board of directors adopted a code of business conduct and ethics that applies to our directors, officers and employees. We have posted a copy of our code of business conduct and ethics on our website at http://www.huami.com/investor.www.zepp.com/investor.
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ITEM 16C. PRINCIPAL ACCOU
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by Deloitte Touche Tohmatsu Certified Public Accountants LLP, our principal external auditors, for the periods indicated. We did not pay any other fees to our auditors during the periods indicated below.
| | | | |
| | For the Year Ended December 31, | ||
|
| 2020 |
| 2021 |
| | (in thousands of RMB) | ||
Audit fees(1) | | 7,923 | | 9,304 |
Tax fees(2) |
| 450 |
| 550 |
|
| For the Year Ended December 31, |
| |||||
|
| 2017 |
|
| 2018 |
| ||
|
| (in thousands of RMB) |
| |||||
Audit fees(1) |
|
| 4,392 |
|
|
| 5,662 |
|
Notes:
(1) | “Audit fees” means the aggregate fees billed for professional services rendered by our principal auditors for the audit of our annual financial statements and the review of our comparative interim financial |
| (2) | “Tax fees” represents the aggregated fees |
The policy of our audit committee is to pre-approve all audit and other service provided by Deloitte Touche Tohmatsu Certified Public Accountants LLP as described above, other than those for de minimis services which are approved by the Audit Committee prior to the completion of the audit.
ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
In November 2021, our board of directors authorized a share repurchase program under which we may repurchase up to US$20 million of our shares in the form of American depositary shares and/or the ordinary shares of our company over the next 12 months in the open market. The share repurchases may be made from time to time in the open market and through privately negotiated transactions, in block trades or through other legally permissible means, depending on market conditions and in accordance with applicable rules and regulations.
140
The table below is a summary ofsummarizes the shares repurchased by usrepurchases we made in 2018. All shares were repurchased pursuant to the share purchase agreements we and our two employees entered into on November 15, 2018, pursuant to which we repurchased 160,000 Class A ordinary shares and 328,000 Class A ordinary shares acquired by them upon vesting of restricted shares or exercise of options, as applicable.periods indicated.
|
|
| ||
|
|
| ||
|
|
|
| | | | | | | | |
|
| |
| |
| Total |
| |
| | | | | | Number of | | Approximate |
| | | | | | Ordinary | | Dollar Value of |
| | | | | | Shares | | Ordinary Shares |
| | | | | | Purchased | | that May Yet Be |
| | Total Number | | Average Price | | as Part of | | Purchased Under |
| | of Ordinary | | Paid Per | | Share | | Share Repurchase |
| | Shares | | Ordinary Share | | Repurchase | | Program (US$, in |
Month | | Purchased | | (US$) | | Program | | millions) |
January 2021 | | — | | — | | — | | — |
February 2021 |
| — |
| — |
| — |
| — |
March 2021 |
| — |
| — |
| — |
| — |
April 2021 |
| — |
| — |
| — |
| — |
May 2021 |
| — |
| — |
| — |
| — |
June 2021 |
| — |
| — |
| — |
| — |
July 2021 |
| — |
| — |
| — |
| — |
August 2021 |
| — |
| — |
| — |
| — |
September 2021 |
| — |
| — |
| — |
| — |
October 2021 |
| — |
| — |
| — |
| — |
November 2021 |
| 27,876 |
| 1.93 |
| 27,876 |
| 19.9 |
December 2021 |
| 2,628,288 |
| 1.28 |
| 2,656,164 |
| 16.6 |
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
As a Cayman Islands company listed on the New York Stock Exchange, we are subject to the NYSE corporate governance listing standards. However, NYSE rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance practices in the Cayman Islands, which is our home country, may differ significantly from the NYSE corporate governance listing standards. Pursuant to Sections 303A.01, 303A.04 303A.05 and 303A.07303A.05 of the New York Stock Exchange Listed Company Manual, a company listed on the New York Stock Exchange must have a majority of independent directors, a nominating and corporate governance committee composed entirely of independent directors and a compensation committee composed entirely of independent directors and an audit committee with a minimum of three members.directors. We currently follow our home country practice in lieu of these requirements. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our ADSs—We areAs a foreign private issuer withincompany incorporated in the meaning of the rules under the Exchange Act, and as suchCayman Islands, we are exemptpermitted to adopt certain home country practices in relation to corporate governance matters that differ significantly from certain provisions applicablethe NYSE corporate governance listing standards; these practices may afford less protection to United States domestic public companies.shareholders than they would enjoy if we complied fully with the NYSE corporate governance listing standards.”
ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
101
ITEM 16.I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
PART III.
We have elected to provide financial statements pursuant to Item 18.
141
The consolidated financial statements of HuamiZepp Health Corporation are included at the end of this annual report.
Exhibit |
| Description of Document |
1.1 | ||
2.1 | Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3) | |
2.2 | ||
2.3 | ||
2.4 | ||
2.5 | ||
4.1 | ||
4.2 | ||
4.3 | ||
4.4 | ||
4.5 | ||
4.6 |
102
|
| |
4.7 | ||
4.8 | ||
4.9 | ||
4.10 |
142
4.12 | ||
4.13 | ||
4.14 | ||
4.15 | ||
4.16 | ||
4.17 | ||
4.18(1) | | |
| | |
8.1* | List of Principal Subsidiaries and Consolidated Variable Interest Entities of the Registrant | |
11.1 | ||
12.1* | ||
| CEO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
12.2* | ||
| CFO Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
13.1** | ||
| CEO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
13.2** |
103
|
| |
CFO Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | ||
15.1* | ||
| Consent of Deloitte Touche Tohmatsu Certified Public Accountants LLP | |
15.2* | ||
| ||
101.INS* | Inline XBRL Instance Document — the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
|
| |
| Inline XBRL Taxonomy Extension Scheme Document | |
101.CAL* | ||
| Inline XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF* | ||
| Inline XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB* | ||
| Inline XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE* | ||
| Inline XBRL Taxonomy Extension Presentation Linkbase Document |
104* | | Cover Page Interactive Data File (embedded within the Inline XBRL document) |
* Filed with this Annual Report on Form 20-F.
** Furnished with this Annual Report on Form 20-F.
| (1) | Portions of this exhibit have been omitted in reliance of the revised Item 601 of Regulation S-K. The registrant hereby undertakes to furnish copies of any of the omitted portions upon request by the Securities and Exchange Commission. |
143 |
|
104
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.
| |||||
| Zepp Health Corporation | ||||
|
|
| |||
| By: | /s/ Wang Huang | |||
| Name: | Wang Huang | |||
| Title: | Chairman of the Board of Directors and Chief Executive Officer | |||
|
|
| |||
Date: April | 28, 2022 |
|
| ||
144
Huami Corporation
Consolidated Financial Statements and
Report of Independent Registered Public Accounting Firm
For the years ended December 31, 2016, 2017 and 2018
ZEPP HEALTH CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS |
| PAGE(S) |
| |
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM (PCAOB ID: 1113) | | F-2 |
| ||
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2020 AND 2021 | | F-3 |
| |
|
|
| |
|
| |
| |
|
| F-6 | |
| ||
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2019, 2020 AND 2021 | | F-7 |
| |
|
| ||
| F-8 | |
| ||
| F-9 | |
| |
|
| ||
|
F-1
REPORT OF INDEPENDENT REGIS
To the shareholders and the Board of Directors and Shareholdersof HuamiZepp Health Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of HuamiZepp Health Corporation (the "Company")and its subsidiaries its consolidated variable interest entities (“VIEs”) and the VIEs’ subsidiaries (collectively the “Group”(the “Company”) as of December 31, 20182021 and 2017,2020, the related consolidated statements of operations, comprehensive income, changes in (deficit) equity, and cash flows for each of the three years in the period ended December 31, 2018,2021, and the related notes and the financial statement schedule listed in schedule I (collectively referred to as the "financial statements"“financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the GroupCompany as of December 31, 20182021 and 2017,2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 2021, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company has changed its method of accounting for revenues from contracts with customers in 2018 due to the adoption of Accounting Standards Codification ("ASC") 606.
Basis for Opinion
These financial statements are the responsibility of the Company'sCompany’s management. Our responsibility is to express an opinion on the Company's Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement,, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits,, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Convenience translation
Our audit also comprehended the translation of Renminbi amounts into United States dollar amounts and, in our opinion, such translation has been made in conformity with the basis stated in Note 2. Such United States dollar amounts are presented solely for the convenience of readers in the United States of America.
/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP
Beijing, the People'sPeople’s Republic of China
April 12, 201928, 2022
We have served as the Company'sCompany’s auditor since 2016.
F-2
F-3
HUAMIZEPP HEALTH CORPORATION
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
Exceptexcept for number of shares and per share data, or otherwise noted)
| | | | | | |
| | As of December 31 | ||||
|
| 2020 |
| 2021 |
| 2021 |
| | RMB | | RMB | | US$ |
| | | | | | (Note2) |
Assets |
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
Cash and cash equivalents |
| 2,273,349 | | 1,468,499 | | 230,440 |
Restricted cash |
| 2,401 | | 41,040 | | 6,440 |
Term deposit |
| 5,000 | | 5,000 | | 785 |
Accounts receivable (net of allowance of NaN and RMB814 as of December 31, 2020 and 2021, respectively) |
| 298,038 | | 537,084 | | 84,280 |
Amounts due from related parties (net of allowance of NaN and NaN as of December 31, 2020 and 2021, respectively) |
| 860,213 | | 295,614 | | 46,388 |
Inventories, net |
| 1,217,537 | | 1,249,327 | | 196,047 |
Short-term investments |
| 18,430 | | 19,351 | | 3,037 |
Prepaid expenses and other current assets |
| 152,898 | | 315,038 | | 49,436 |
Total current assets |
| 4,827,866 | | 3,930,953 | | 616,853 |
Property, plant and equipment, net |
| 124,619 | | 133,873 | | 21,008 |
Intangible assets, net |
| 145,213 | | 135,582 | | 21,276 |
Long-term investments |
| 443,986 | | 1,552,591 | | 243,635 |
Deferred tax assets |
| 120,190 | | 143,419 | | 22,506 |
Operating lease right-of-use assets | | 151,165 | | 108,435 | | 17,016 |
Goodwill |
| 62,515 | | 61,055 | | 9,581 |
Other non-current assets |
| 28,165 | | 19,593 | | 3,075 |
Total assets |
| 5,903,719 | | 6,085,501 | | 954,950 |
Liabilities |
| |
| |
|
|
Current liabilities: |
|
|
|
|
|
|
Accounts payable (including accounts payable of the consolidated VIEs without recourse to the Group of RMB1,945,731 and RMB1,314,091 as of December 31, 2020 and 2021, respectively) |
| 1,951,335 | | 1,317,306 | | 206,714 |
Advance from customers (including advance from customers of the consolidated VIEs without recourse to the Group of RMB41,312 and RMB2,262 as of December 31, 2020 and 2021, respectively) |
| 42,502 | | 4,230 | | 664 |
Amount due to related parties (including amount due to related parties of the consolidated VIEs without recourse to the Group of RMB892 and RMB48,561 as of December 31, 2020 and 2021, respectively) | | 11,185 | | 50,123 | | 7,865 |
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Group of RMB175,747 and RMB165,181 as of December 31, 2020 and 2021, respectively) |
| 252,275 | | 316,083 | | 49,600 |
Income tax payables (including income tax payables of the consolidated VIEs without recourse to the Group of RMB27,706 and RMB411 as of December 31, 2020 and 2021, respectively) |
| 27,706 | | 2,595 | | 407 |
Notes payable of the consolidated VIEs without recourse to the Group |
| — | | 103,795 | | 16,288 |
Short-term bank borrowings (including short-term bank borrowings of the consolidated VIEs without recourse to the Group of RMB504,671 and RMB303,000 as of December 31, 2020 and 2021, respectively) |
| 504,671 | | 358,000 | | 56,178 |
Total current liabilities |
| 2,789,674 | | 2,152,132 | | 337,716 |
Deferred tax liabilities (including deferred tax liabilities of the consolidated VIEs without recourse to the Group of RMB17,171 and RMB23,006 as of December 31, 2020 and 2021, respectively) |
| 22,374 | | 26,909 | | 4,223 |
Other non-current liabilities (including other non-current liabilities of the consolidated VIEs without recourse to the Group of RMB183,920 and RMB172,735 as of December 31, 2020 and 2021, respectively) |
| 185,168 | | 175,053 | | 27,470 |
Long-term borrowings (including long-term borrowings of the consolidated VIEs without recourse to the Group of RMB60,000 and RMB254,500 as of December 31, 2020 and 2021, respectively) | | 60,000 | | 726,851 | | 114,059 |
Non-current operating lease liabilities (including Noncurrent operating lease liabilities of the consolidated VIEs without recourse to the Group of RMB48,650 and RMB29,435 as of December 31, 2020 and 2021, respectively) | | 116,245 | | 71,117 | | 11,160 |
Total liabilities |
| 3,173,461 | | 3,152,062 | | 494,628 |
|
| As of December 31 |
| |||||||||
| 2017 |
|
| 2018 |
|
| 2018 |
| ||||
|
| RMB |
|
| RMB |
|
| US$ |
| |||
|
|
|
|
|
|
|
|
|
| (Note2) |
| |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 366,336 |
|
|
| 1,441,802 |
|
|
| 209,701 |
|
Restricted cash |
|
| 3,185 |
|
|
| 10,010 |
|
|
| 1,456 |
|
Term deposit |
|
| — |
|
|
| 96,969 |
|
|
| 14,104 |
|
Accounts receivable (net of allowance of nil and nil as of December 31, 2017 and 2018, respectively) |
|
| 32,867 |
|
|
| 58,925 |
|
|
| 8,570 |
|
Amounts due from related parties (net of allowance of nil and nil as of December 31, 2017 and 2018, respectively) |
|
| 578,454 |
|
|
| 656,399 |
|
|
| 95,469 |
|
Inventories |
|
| 249,735 |
|
|
| 484,622 |
|
|
| 70,485 |
|
Short-term investments |
|
| 13,721 |
|
|
| 50,482 |
|
|
| 7,342 |
|
Prepaid expenses and other current assets |
|
| 51,062 |
|
|
| 58,247 |
|
|
| 8,473 |
|
Total current assets |
|
| 1,295,360 |
|
|
| 2,857,456 |
|
|
| 415,600 |
|
Property, plant and equipment, net |
|
| 28,755 |
|
|
| 40,042 |
|
|
| 5,824 |
|
Intangible assets, net |
|
| 5,339 |
|
|
| 63,722 |
|
|
| 9,268 |
|
Goodwill |
|
| 5,930 |
|
|
| 5,930 |
|
|
| 862 |
|
Long-term investments |
|
| 85,238 |
|
|
| 208,949 |
|
|
| 30,390 |
|
Deferred tax assets |
|
| 41,895 |
|
|
| 75,032 |
|
|
| 10,913 |
|
Other non-current assets |
|
| 3,000 |
|
|
| 7,350 |
|
|
| 1,070 |
|
Total assets |
|
| 1,465,517 |
|
|
| 3,258,481 |
|
|
| 473,927 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable (including accounts payable of the consolidated VIEs without recourse to the Group of RMB671,942 and RMB1,059,676 as of December 31, 2017 and 2018, respectively) |
|
| 707,782 |
|
|
| 1,064,106 |
|
|
| 154,768 |
|
Advance from customers (including advance from customers of the consolidated VIEs without recourse to the Group of RMB10,683 and RMB5,930 as of December 31, 2017 and 2018, respectively) |
|
| 10,683 |
|
|
| 5,943 |
|
|
| 864 |
|
Amount due to related parties of the consolidated VIEs without recourse to the Group |
|
| 8,143 |
|
|
| 10,695 |
|
|
| 1,556 |
|
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Group of RMB62,042 and RMB159,736 as of December 31, 2017 and 2018, respectively) |
|
| 93,798 |
|
|
| 213,975 |
|
|
| 31,121 |
|
Income tax payables of the consolidated VIEs without recourse to the Group |
|
| 21,600 |
|
|
| 54,037 |
|
|
| 7,859 |
|
Notes payable of the consolidated VIEs without recourse to the Group |
|
| 5,243 |
|
|
| 18,936 |
|
|
| 2,754 |
|
Bank borrowings of the consolidated VIEs without recourse to the Group |
|
| 30,000 |
|
|
| 20,000 |
|
|
| 2,909 |
|
Total current liabilities |
|
| 877,249 |
|
|
| 1,387,692 |
|
|
| 201,831 |
|
Deferred tax liabilities of the consolidated VIEs without recourse to the Group |
|
| 2,470 |
|
|
| 4,962 |
|
|
| 722 |
|
Amount due to a related party, non-current of the consolidated VIEs without recourse to the Group |
|
| 3,076 |
|
|
| — |
|
|
| — |
|
Other non-current liabilities of the consolidated VIEs without recourse to the Group |
|
| 4,940 |
|
|
| 56,249 |
|
|
| 8,181 |
|
Total liabilities |
|
| 887,735 |
|
|
| 1,448,903 |
|
|
| 210,734 |
|
F-3
F-4
HUAMIZEPP HEALTH CORPORATION
CONSOLIDATED BALANCE SHEETS – CONTINUED
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
Exceptexcept for number of shares and per share data, or otherwise noted)
|
| As of December 31 |
| |||||||||
|
| 2017 |
|
| 2018 |
|
| 2018 |
| |||
|
| RMB |
|
| RMB |
|
| US$ |
| |||
|
|
|
|
|
|
|
|
|
| (Note2) |
| |
Mezzanine equity |
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible redeemable participating preferred shares (“Series A Preferred Shares”) (US$0.0001 par value; 71,641,792 shares and nil authorized, issued and outstanding as of December 31,2017 and 2018, respectively; liquidation value of RMB24,870 and nil as of December 31, 2017 and 2018, respectively) |
|
| 26,770 |
|
|
| — |
|
|
| — |
|
Series B-1 convertible redeemable participating preferred shares (“Series B-1 Preferred Shares”) (US$0.0001 par value; 2,000,000 shares and nil authorized, issued and outstanding as of December 31, 2017 and 2018, respectively; liquidation value of RMB33,188 and nil as of December 31, 2017 and 2018, respectively) |
|
| 26,906 |
|
|
| — |
|
|
| — |
|
Series B-2 convertible redeemable participating preferred shares (“Series B-2 Preferred Shares”) (US$0.0001 par value; 20,895,523 shares and nil authorized, issued and outstanding as of December 31, 2017 and 2018, respectively; liquidation value of RMB364,145 and nil as of December 31, 2017 and 2018, respectively) |
|
| 295,942 |
|
|
| — |
|
|
| — |
|
Total mezzanine equity |
|
| 349,618 |
|
|
| — |
|
|
| — |
|
Commitments and contingencies (Note 24) |
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares (US$0.0001 par value; 405,462,685 and nil shares authorized as of December 31, 2017 and 2018, respectively; 91,304,327 and nil shares issued and outstanding as of December 31, 2017 and 2018, respectively) |
|
| 56 |
|
|
| — |
|
|
| — |
|
Class A Ordinary shares (US$0.0001 par value; nil and 9,800,000,000 shares authorized as of December 31, 2017 and 2018; nil and 57,303,093 shares issued and outstanding as of December 31, 2017 and 2018, respectively) |
|
| — |
|
|
| 36 |
|
|
| 5 |
|
Class B Ordinary shares(US$0.0001 par value; nil and 200,000,000 shares authorized as of December 31, 2017 and 2018; nil and 184,376,679 shares issued and outstanding as of December 31, 2017 and 2018, respectively) |
|
| — |
|
|
| 115 |
|
|
| 17 |
|
Additional paid-in capital |
|
| 72,427 |
|
|
| 1,373,577 |
|
|
| 199,779 |
|
Accumulated retained earnings |
|
| 131,192 |
|
|
| 340,046 |
|
|
| 49,457 |
|
Accumulated other comprehensive income |
|
| 22,100 |
|
|
| 97,141 |
|
|
| 14,129 |
|
Total Huami Corporation shareholders’ equity |
|
| 225,775 |
|
|
| 1,810,915 |
|
|
| 263,387 |
|
Noncontrolling interest |
|
| 2,389 |
|
|
| (1,337 | ) |
|
| (194 | ) |
Total equity |
|
| 228,164 |
|
|
| 1,809,578 |
|
|
| 263,193 |
|
Total liabilities, mezzanine equity and equity |
|
| 1,465,517 |
|
|
| 3,258,481 |
|
|
| 473,927 |
|
| | | | | | |
| | As of December 31 | ||||
|
| 2020 |
| 2021 |
| 2021 |
| | RMB | | RMB | | US$ |
Equity |
|
|
|
|
|
|
Class A Ordinary shares (US$ 0.0001 par value; 9,800,000,000 and 9,800,000,000 shares authorized as of December 31, 2020 and 2021; 128,736,916 and 133,992,912 shares outstanding as of December 31, 2020 and 2021, respectively) |
| 81 | | 85 | | 13 |
Class B Ordinary shares (US$ 0.0001 par value; 200,000,000 and 200,000,000 shares authorized as of December 31, 2020 and 2021; 121,408,247 and 117,208,247 shares outstanding as of December 31, 2020 and 2021, respectively) |
| 76 | | 74 | | 12 |
Additional paid-in capital |
| 1,552,109 | | 1,641,544 | | 257,594 |
Treasury shares | | — | | (21,798) | | (3,421) |
Accumulated retained earnings |
| 1,133,368 | | 1,271,171 | | 199,474 |
Accumulated other comprehensive income |
| 44,624 | | 29,271 | | 4,596 |
Total Zepp Health Corporation shareholders’ equity |
| 2,730,258 | | 2,920,347 | | 458,268 |
Noncontrolling interest |
| — | | 13,092 | | 2,054 |
Total equity |
| 2,730,258 | | 2,933,439 | | 460,322 |
Total liabilities and equity |
| 5,903,719 | | 6,085,501 | | 954,950 |
The accompanying notes are an integral part of these consolidated financial statements.
F-5
F-4
HUAMIZEPP HEALTH CORPORATION
CONSOLIDATED STATEMENTSSTATEMENTS OF OPERATIONS
(amountsAmounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
|
| For the years ended December 31, |
| |||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| 2018 |
| ||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Note2) |
| |
Revenues (including RMB1,449,927, RMB1,778,640 and RMB 2,816,995 with related parties for the years ended December 31, 2016, 2017 and 2018, respectively) |
|
| 1,556,476 |
|
|
| 2,048,896 |
|
|
| 3,645,335 |
|
|
| 530,192 |
|
Cost of revenues (including RMB1,198,295, RMB1,355,493 and RMB2,141,123 with related parties for the years ended December 31, 2016, 2017 and 2018, respectively) |
|
| 1,280,324 |
|
|
| 1,554,194 |
|
|
| 2,705,885 |
|
|
| 393,555 |
|
Gross profit |
|
| 276,152 |
|
|
| 494,702 |
|
|
| 939,450 |
|
|
| 136,637 |
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
| 27,821 |
|
|
| 44,026 |
|
|
| 96,538 |
|
|
| 14,041 |
|
General and administrative |
|
| 102,644 |
|
|
| 114,880 |
|
|
| 213,973 |
|
|
| 31,121 |
|
Research and development |
|
| 132,304 |
|
|
| 153,827 |
|
|
| 263,220 |
|
|
| 38,284 |
|
Total operating expenses |
|
| 262,769 |
|
|
| 312,733 |
|
|
| 573,731 |
|
|
| 83,446 |
|
Operating income |
|
| 13,383 |
|
|
| 181,969 |
|
|
| 365,719 |
|
|
| 53,191 |
|
Other income and expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
| 754 |
|
|
| 3,003 |
|
|
| 11,595 |
|
|
| 1,686 |
| |
Realized gain from investments |
|
| — |
|
|
| 2,373 |
|
|
| 261 |
|
|
| 38 |
|
Gain from fair value change of long-term investments |
|
| — |
|
|
| — |
|
|
| 7,860 |
|
|
| 1,143 |
|
Impairment loss from long-term investments |
|
| — |
|
|
| — |
|
|
| (7,590 | ) |
|
| (1,104 | ) |
Other income, net |
|
| 14,726 |
|
|
| 4,555 |
|
|
| 8,768 |
|
|
| 1,275 |
|
Income before income tax and (loss)/income from equity method investments |
|
| 28,863 |
|
|
| 191,900 |
|
|
| 386,613 |
|
|
| 56,229 |
|
Provision for income taxes |
|
| (3,088 | ) |
|
| (27,611 | ) |
|
| (52,036 | ) |
|
| (7,568 | ) |
Income before (loss)/income from equity method investments |
|
| 25,775 |
|
|
| 164,289 |
|
|
| 334,577 |
|
|
| 48,661 |
|
(Loss)/income from equity method investments |
|
| (1,829 | ) |
|
| 2,806 |
|
|
| 1,743 |
|
|
| 254 |
|
Net income |
|
| 23,946 |
|
|
| 167,095 |
|
|
| 336,320 |
|
|
| 48,915 |
|
Less: Net loss attributable to noncontrolling interest |
|
| — |
|
|
| (587 | ) |
|
| (3,726 | ) |
|
| (542 | ) |
Net income attributable to Huami Corporation |
|
| 23,946 |
|
|
| 167,682 |
|
|
| 340,046 |
|
|
| 49,457 |
|
Less: Accretion of Series A Preferred Shares |
|
| 3,209 |
|
|
| 3,762 |
|
|
| 177 |
|
|
| 26 |
|
Less: Accretion of Series B-1 Preferred Shares |
|
| 2,738 |
|
|
| 3,127 |
|
|
| 368 |
|
|
| 54 |
|
Less: Accretion of Series B-2 Preferred Shares |
|
| 30,121 |
|
|
| 34,382 |
|
|
| 4,049 |
|
|
| 589 |
|
Less: Deemed dividend to preferred shareholders |
|
| — |
|
|
| — |
|
|
| 209,752 |
|
|
| 30,507 |
|
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares |
|
| — |
|
|
| 80,291 |
|
|
| 12,210 |
|
|
| 1,776 |
|
Net (loss)/income attributable to ordinary shareholders of Huami Corporation |
|
| (12,122 | ) |
|
| 46,120 |
|
|
| 113,490 |
|
|
| 16,505 |
|
Net (loss)/income per share attributable to ordinary shareholders of Huami Corporation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic (loss)/income per ordinary share |
|
| (0.22 | ) |
|
| 0.68 |
|
|
| 0.54 |
|
|
| 0.08 |
|
Diluted (loss)/income per ordinary share |
|
| (0.22 | ) |
|
| 0.65 |
|
|
| 0.51 |
|
|
| 0.07 |
|
Weighted average number of shares used in computing net (loss)/ income per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary share - basic |
|
| 55,612,626 |
|
|
| 67,777,592 |
|
|
| 211,873,704 |
|
|
| 211,873,704 |
|
Ordinary share - diluted |
|
| 55,612,626 |
|
|
| 76,291,901 |
|
|
| 225,034,650 |
|
|
| 225,034,650 |
|
| | | | | | | | |
| | For the years ended December 31, | ||||||
|
| 2019 |
| 2020 |
| 2021 |
| 2021 |
| | RMB | | RMB | | RMB | | US$ |
| | | | | | | | (Note2) |
Revenues (including RMB4,281,005, RMB4,449,757 and RMB3,350,032 with related parties for the years ended December 31, 2019, 2020 and 2021, respectively) |
| 5,812,255 | | 6,433,363 | | 6,250,109 | | 980,778 |
Cost of revenues (including RMB3,342,084, RMB3,713,536 and RMB2,759,980 resulting from related parties sales for the years ended December 31, 2019, 2020 and 2021, respectively) |
| 4,344,512 | | 5,100,698 | | 4,944,467 | | 775,895 |
Gross profit |
| 1,467,743 | | 1,332,665 | | 1,305,642 | | 204,883 |
Operating expenses |
|
|
| |
| |
| |
Selling and marketing |
| 181,975 | | 358,655 | | 438,273 | | 68,775 |
General and administrative |
| 248,462 | | 261,805 | | 258,346 | | 40,540 |
Research and development |
| 430,822 | | 538,009 | | 515,081 | | 80,827 |
Total operating expenses |
| 861,259 | | 1,158,469 | | 1,211,700 | | 190,142 |
Operating income |
| 606,484 | | 174,196 | | 93,942 | | 14,741 |
Other income and expenses |
| | | | | | | |
Interest income |
| 33,478 | | 46,118 | | 16,686 | | 2,618 |
Interest expenses | | — | | (22,623) | | (44,884) | | (7,043) |
Realized gain from investments |
| 1,822 | | — | | 13,507 | | 2,120 |
Gain from deconsolidation of a subsidiary | | — | | 56,522 | | — | | — |
Gain from fair value change of long-term investments |
| — | | 12,325 | | — | | — |
Impairment loss from long-term investments |
| (2,600) | | — | | — | | — |
Other income/(expenses), net |
| 13,186 | | (929) | | 27,418 | | 4,302 |
Income before income tax and income from equity method investments |
| 652,370 | | 265,609 | | 106,669 | | 16,738 |
Provision for income taxes |
| (77,887) | | (31,154) | | (10,745) | | (1,686) |
Income before income from equity method investments |
| 574,483 | | 234,455 | | 95,924 | | 15,052 |
(Loss)/ Income from equity method investments |
| (1,112) | | (4,749) | | 41,028 | | 6,438 |
Net income |
| 573,371 | | 229,706 | | 136,952 | | 21,490 |
Less: Net (loss)/income attributable to noncontrolling interest |
| (1,825) | | 953 | | (851) | | (134) |
Net income attributable to Zepp Health Corporation |
| 575,196 | | 228,753 | | 137,803 | | 21,624 |
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares |
| 2,450 | | — | | — | | — |
Net income attributable to ordinary shareholders of Zepp Health Corporation |
| 572,746 | | 228,753 | | 137,803 | | 21,624 |
Net income per share attributable to ordinary shareholders of Zepp Health Corporation |
|
|
| |
| |
| |
Basic income per ordinary share |
| 2.35 | | 0.92 | | 0.55 | | 0.09 |
Diluted income per ordinary share |
| 2.24 | | 0.88 | | 0.52 | | 0.08 |
Weighted average number of shares used in computing net income per share |
|
|
| |
| |
| |
Ordinary share - basic |
| 243,648,186 | | 248,470,684 | | 252,167,610 | | 252,167,610 |
Ordinary share - diluted |
| 255,959,172 | | 260,351,994 | | 264,368,629 | | 264,368,629 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
F-5
HUAMIZEPP HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
Exceptexcept for number of shares and per share data, or otherwise noted)
| For the years ended December 31, |
| ||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| 2018 |
| ||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Note2) |
| |
Net income |
|
| 23,946 |
|
|
| 167,095 |
|
|
| 336,320 |
|
|
| 48,915 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
| 5,262 |
|
|
| (3,175 | ) |
|
| 60,357 |
|
|
| 8,779 |
|
Unrealized gain on available-for-sale investments and others, (net of tax effect of nil, RMB1,554 and RMB2,250 for years ended December 31, 2016, 2017 and 2018, respectively) |
|
| 303 |
|
|
| 9,484 |
|
|
| 14,684 |
|
|
| 2,136 |
|
Comprehensive income |
|
| 29,511 |
|
|
| 173,404 |
|
|
| 411,361 |
|
|
| 59,830 |
|
Less: Net loss attributable to noncontrolling interest |
|
| — |
|
|
| (587 | ) |
|
| (3,726 | ) |
|
| (542 | ) |
Comprehensive income attributable to Huami Corporation |
|
| 29,511 |
|
|
| 173,991 |
|
|
| 415,087 |
|
|
| 60,372 |
|
| | | | | | | | |
| | For the years ended December 31, | ||||||
|
| 2019 |
| 2020 |
| 2021 |
| 2021 |
| | RMB | | RMB | | RMB | | US$ |
| | | | | | | | (Note2) |
Net income |
| 573,371 | | 229,706 | | 136,952 | | 21,490 |
Other comprehensive income/(loss), net of tax |
|
|
| |
| |
| |
Foreign currency translation adjustment |
| 11,274 | | (45,117) | | (17,938) | | (2,815) |
Unrealized gain/(loss) on available-for-sale investments and others, (net of tax effect of RMB620, RMB4,017 and NaN for the years ended December 31, 2019, 2020 and 2021, respectively) |
| 2,666 | | (21,340) | | 2,585 | | 406 |
Comprehensive income |
| 587,311 | | 163,249 | | 121,599 | | 19,081 |
Less: Net (loss)/ income attributable to noncontrolling interest |
| (1,825) | | 953 | | (851) | | (134) |
Comprehensive income attributable to Zepp Health Corporation |
| 589,136 | | 162,296 | | 122,450 | | 19,215 |
The accompanying notes are an integral part of these consolidated financial statements.
F-6
F-7
HUAMIZEPP HEALTH CORPORATION
CONSOLIDATED STATEMENTS OF (DEFICIT) EQUITY
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
|
| Ordinary Shares |
|
|
|
|
|
| Accumulated |
|
| (Accumulated |
|
| Total Huami Corporation |
|
|
|
|
|
| Total |
| |||||||||
|
| Shareholders’ Shares |
|
| Amount |
|
| Additional Paid-in Capital |
|
| Other Comprehensive Income |
|
| Deficit)/ Retained Earnings |
|
| Shareholders’ (Deficit)/ Equity |
|
| Noncontrolling Interest |
|
| Shareholders' (Deficit)/ Equity |
| ||||||||
|
|
|
|
|
| RMB |
|
| RMB |
|
| RMB |
|
| RMB |
|
| RMB |
|
| RMB |
|
| RMB |
| |||||||
Balance as of January 1, 2016 |
|
| 91,134,327 |
|
|
| 56 |
|
|
| 29,131 |
|
|
| 10,226 |
|
|
| (60,436 | ) |
|
| (21,023 | ) |
|
| — |
|
|
| (21,023 | ) |
Accretion of Series A preferred shares |
|
| — |
|
|
| — |
|
|
| (3,209 | ) |
|
| — |
|
|
| — |
|
|
| (3,209 | ) |
|
| — |
|
|
| (3,209 | ) |
Accretion of Series B preferred shares |
|
| — |
|
|
| — |
|
|
| (32,859 | ) |
|
| — |
|
|
| — |
|
|
| (32,859 | ) |
|
| — |
|
|
| (32,859 | ) |
Exercise of option |
|
| 35,000 |
|
|
| — |
|
|
| 24 |
|
|
| — |
|
|
| — |
|
|
| 24 |
|
|
| — |
|
|
| 24 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 23,946 |
|
|
| 23,946 |
|
|
| — |
|
|
| 23,946 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 5,262 |
|
|
| — |
|
|
| 5,262 |
|
|
| — |
|
|
| 5,262 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 57,735 |
|
|
| — |
|
|
| — |
|
|
| 57,735 |
|
|
| — |
|
|
| 57,735 |
|
Unrealized gain on available-for-sale investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 303 |
|
|
| — |
|
|
| 303 |
|
|
| — |
|
|
| 303 |
|
Balance as of December 31, 2016 |
|
| 91,169,327 |
|
|
| 56 |
|
|
| 50,822 |
|
|
| 15,791 |
|
|
| (36,490 | ) |
|
| 30,179 |
|
|
| — |
|
|
| 30,179 |
|
Accretion of Series A preferred shares |
|
| — |
|
|
| — |
|
|
| (3,762 | ) |
|
| — |
|
|
| — |
|
|
| (3,762 | ) |
|
| — |
|
|
| (3,762 | ) |
Accretion of Series B preferred shares |
|
| — |
|
|
| — |
|
|
| (37,509 | ) |
|
| — |
|
|
| — |
|
|
| (37,509 | ) |
|
| — |
|
|
| (37,509 | ) |
Exercise of option |
|
| 135,000 |
|
|
| — |
|
|
| 89 |
|
|
| — |
|
|
| — |
|
|
| 89 |
|
|
| — |
|
|
| 89 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 167,682 |
|
|
| 167,682 |
|
|
| (587 | ) |
|
| 167,095 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,175 | ) |
|
| — |
|
|
| (3,175 | ) |
|
| — |
|
|
| (3,175 | ) |
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 62,787 |
|
|
| — |
|
|
| — |
|
|
| 62,787 |
|
|
| — |
|
|
| 62,787 |
|
Noncontrolling interest arise from acquisition |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,976 |
|
|
| 2,976 |
|
Unrealized gain on available-for-sale investments |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 9,484 |
|
|
| — |
|
|
| 9,484 |
|
|
| — |
|
|
| 9,484 |
|
Balance as of December 31, 2017 |
|
| 91,304,327 |
|
|
| 56 |
|
|
| 72,427 |
|
|
| 22,100 |
|
|
| 131,192 |
|
|
| 225,775 |
|
|
| 2,389 |
|
|
| 228,164 |
|
Accretion of Series A preferred shares |
|
| — |
|
|
| — |
|
|
| (177 | ) |
|
| — |
|
|
| — |
|
|
| (177 | ) |
|
| — |
|
|
| (177 | ) |
Accretion of Series B preferred shares |
|
| — |
|
|
| — |
|
|
| (4,417 | ) |
|
| — |
|
|
| — |
|
|
| (4,417 | ) |
|
| — |
|
|
| (4,417 | ) |
Issuance of ordinary shares upon initial public offering, net of offering costs of US$10,512 |
|
| 41,600,000 |
|
|
| 26 |
|
|
| 657,035 |
|
|
| — |
|
|
| — |
|
|
| 657,061 |
|
|
| — |
|
|
| 657,061 |
|
Conversion of participating convertible redeemable preferred shares to ordinary shares upon initial public offering |
|
| 94,537,315 |
|
|
| 60 |
|
|
| 354,152 |
|
|
| — |
|
|
| — |
|
|
| 354,212 |
|
|
| — |
|
|
| 354,212 |
|
Exercise of option and restricted shares |
|
| 2,661,305 |
|
|
| 2 |
|
|
| 3,484 |
|
|
| — |
|
|
| — |
|
|
| 3,486 |
|
|
| — |
|
|
| 3,486 |
|
Net income |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 340,046 |
|
|
| 340,046 |
|
|
| (3,726 | ) |
|
| 336,320 |
|
Foreign currency translation adjustment |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 60,357 |
|
|
| — |
|
|
| 60,357 |
|
|
| — |
|
|
| 60,357 |
|
Share-based compensation |
|
| — |
|
|
| — |
|
|
| 134,709 |
|
|
| — |
|
|
| — |
|
|
| 134,709 |
|
|
| — |
|
|
| 134,709 |
|
Repurchase of ordinary shares |
|
| (488,000 | ) |
|
| — |
|
|
| (8,157 | ) |
|
| — |
|
|
| — |
|
|
| (8,157 | ) |
|
| — |
|
|
| (8,157 | ) |
Unrealized gain on available-for-sale investments, net of tax effect of RMB2,250 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 14,684 |
|
|
| — |
|
|
| 14,684 |
|
|
| — |
|
|
| 14,684 |
|
Cumulative effect adjustment related to opening retained earnings for adoption of ASC 606 |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 33,329 |
|
|
| 33,329 |
|
|
| — |
|
|
| 33,329 |
|
Deemed dividend related to issuance of ordinary shares to preferred shareholders |
|
| 12,064,825 |
|
|
| 7 |
|
|
| 164,521 |
|
|
| — |
|
|
| (164,521 | ) |
|
| 7 |
|
|
| — |
|
|
| 7 |
|
Balance as of December 31, 2018 |
|
| 241,679,772 |
|
|
| 151 |
|
|
| 1,373,577 |
|
|
| 97,141 |
|
|
| 340,046 |
|
|
| 1,810,915 |
|
|
| (1,337 | ) |
|
| 1,809,578 |
|
| | | | | | | | | | | | | | | | | | | | |
|
| |
| | | | | |
| |
| |
| |
| Total |
| |
| |
| | | | | | | | | | | | Accumulated | | | | Zepp Health | | | | |
|
| Ordinary Shares |
| Treasury Shares |
| Additional |
| Other | | Accumulated | | Corporation | | | | Total | ||||
| | | | | | | | | | Paid-in | | Comprehensive | | Retained | | Shareholders’ | | Noncontrolling | | Shareholders' |
| | Shares | | Amount | | Shares | | Amount | | Capital | | Income | | Earnings | | Equity | | Equity | | Equity |
| | | | RMB | | | | RMB | | RMB | | RMB | | RMB | | RMB | | RMB | | RMB |
Balance as of December 31, 2018 |
| 241,679,772 |
| 151 | | — | | — |
| 1,373,577 | | 97,141 | | 340,046 |
| 1,810,915 | | (1,337) | | 1,809,578 |
Exercise of option |
| 2,665,615 |
| 2 | | — | | — |
| 931 | | — | | — |
| 933 | | — | | 933 |
Net income |
| — |
| — | | — | | — |
| — | | — | | 575,196 |
| 575,196 | | (1,825) | | 573,371 |
Foreign currency translation adjustment |
| — |
| — | | — | | — |
| — | | 11,274 | | — |
| 11,274 | | — | | 11,274 |
Issuance of ordinary shares upon secondary offering, net of offering costs of US$ 434 | | 3,174,600 | | 2 | | — | | — | | 49,174 | | — | | ��� | | 49,176 | | — | | 49,176 |
Deemed dividend to shareholders | | — | | — | | — | | — | | — | | — | | (4,538) | | (4,538) | | — | | (4,538) |
Share-based compensation | | — | | — | | — | | — | | 55,128 | | — | | — | | 55,128 | | — | | 55,128 |
Unrealized gain on available-for-sale investments, net of tax effect of RMB620 | | — | | — | | — | | — | | — | | 2,666 | | — | | 2,666 | | — | | 2,666 |
Statutory reserve | | — | | — | | — | | — | | 92 | | — | | (92) | | — | | — | | — |
Balance as of December 31, 2019 |
| 247,519,987 |
| 155 | | — | | — |
| 1,478,902 | | 111,081 | | 910,612 |
| 2,500,750 | | (3,162) | | 2,497,588 |
Exercise of option |
| 2,625,176 |
| 2 | | — | | — |
| (2) | | — | | — |
| — | | — | | — |
Net income |
| — |
| — | | — | | — |
| — | | — | | 228,753 |
| 228,753 | | 953 | | 229,706 |
Foreign currency translation adjustment |
| — |
| — | | — | | — |
| — | | (45,117) | | — |
| (45,117) | | — | | (45,117) |
Share-based compensation | | — | | — | | — | | — | | 67,212 | | — | | — | | 67,212 | | — | | 67,212 |
Unrealized loss on available-for-sale investments, net of tax effect of RMB4,017 | | — | | — | | — | | — | | — | | (21,340) | | — | | (21,340) | | — | | (21,340) |
Statutory reserve | | — | | — | | — | | — | | 5,997 | | — | | (5,997) | | — | | — | | — |
Deconsolidation of a subsidiary | | — | | — | | — | | — | | — | | — | | — | | — | | 2,209 | | 2,209 |
Balance as of December 31, 2020 |
| 250,145,163 | | 157 | | — | | — |
| 1,552,109 | | 44,624 | | 1,133,368 |
| 2,730,258 | | — | | 2,730,258 |
Exercise of option |
| 3,712,160 | | 2 | | — | | — |
| 5,463 | | — | | — |
| 5,465 | | — | | 5,465 |
Repurchase of ordinary shares | | — | | — | | (2,656,164) | | (21,798) | | — | | — | | — | | (21,798) | | — | | (21,798) |
Net income |
| — | | — | | — | | — |
| — | | — | | 137,803 |
| 137,803 | | (851) | | 136,952 |
Foreign currency translation adjustment |
| — | | — | | — | | — |
| — | | (17,938) | | — |
| (17,938) | | — | | (17,938) |
Share-based compensation |
| — |
| — | | — | | — |
| 83,972 |
| — |
| — |
| 83,972 |
| — |
| 83,972 |
Unrealized gain on available-for-sale investments, net of tax effect of NaN | | — | | — | | — | | — | | — | | 2,585 | | — | | 2,585 | | — | | 2,585 |
Capital contribution from non-controlling interest | | — | | — | | — | | — | | — | | — | | — | | — | | 13,943 | | 13,943 |
Balance as of December 31, 2021 |
| 253,857,323 | | 159 | | (2,656,164) | | (21,798) |
| 1,641,544 | | 29,271 |
| 1,271,171 | | 2,920,347 |
| 13,092 | | 2,933,439 |
The accompanying notes are an integral part of these consolidated financial statements.
F-8F-7
HUAMIZEPP HEALTH CORPORATION
CONSOLIDATED STATEMENTSSTATEMENTS OF CASH FLOWS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
|
| For the years ended December 31, |
| |||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| 2018 |
| ||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Note2) |
| |
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 23,946 |
|
|
| 167,095 |
|
|
| 336,320 |
|
|
| 48,915 |
|
Adjustment to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation of property, plant and equipment |
|
| 2,399 |
|
|
| 3,542 |
|
|
| 5,773 |
|
|
| 840 |
|
Amortization of intangible assets |
|
| — |
|
|
| 175 |
|
|
| 443 |
|
|
| 65 |
|
Write-off of short-term loans |
|
| — |
|
|
| — |
|
|
| 5,500 |
|
|
| 800 |
|
Impairment loss from long-term investments |
|
| — |
|
|
| — |
|
|
| 7,590 |
|
|
| 1,104 |
|
Inventory write-down |
|
| 1,037 |
|
|
| 2,449 |
|
|
| — |
|
|
| — |
|
Share-based compensation |
|
| 57,735 |
|
|
| 62,787 |
|
|
| 134,709 |
|
|
| 19,592 |
|
Loss / (gain) from equity method investment |
|
| 1,829 |
|
|
| (2,806 | ) |
|
| (1,743 | ) |
|
| (254 | ) |
Realized gain from investments |
|
| — |
|
|
| (2,373 | ) |
|
| (261 | ) |
|
| (38 | ) |
Loss on disposal of property, plant and equipment |
|
| — |
|
|
| 192 |
|
|
| 26 |
|
|
| 4 |
|
Gain from fair value change of long-term investments |
|
| — |
|
|
| — |
|
|
| (7,860 | ) |
|
| (1,143 | ) |
Deferred income taxes |
|
| (18,468 | ) |
|
| (18,962 | ) |
|
| (32,895 | ) |
|
| (4,784 | ) |
Others |
|
| — |
|
|
| — |
|
|
| 295 |
|
|
| 43 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 2,218 |
|
|
| (13,158 | ) |
|
| (26,058 | ) |
|
| (3,790 | ) |
Inventories |
|
| (103,464 | ) |
|
| (57,609 | ) |
|
| (234,887 | ) |
|
| (34,163 | ) |
Prepaid expenses and other current assets |
|
| 6,691 |
|
|
| (32,985 | ) |
|
| (5,748 | ) |
|
| (836 | ) |
Amount due from related parties |
|
| (287,661 | ) |
|
| (109,756 | ) |
|
| (45,116 | ) |
|
| (6,562 | ) |
Other non-current assets |
|
| — |
|
|
| — |
|
|
| (3,150 | ) |
|
| (458 | ) |
Amount due to related parties |
|
| — |
|
|
| (281 | ) |
|
| 5,757 |
|
|
| 837 |
|
Accounts payable |
|
| 271,999 |
|
|
| 181,628 |
|
|
| 356,324 |
|
|
| 51,825 |
|
Notes payable |
|
| 2,662 |
|
|
| 2,581 |
|
|
| 13,693 |
|
|
| 1,992 |
|
Advance from customers |
|
| 5,885 |
|
|
| 4,333 |
|
|
| (4,740 | ) |
|
| (689 | ) |
Income tax payable |
|
| 21,697 |
|
|
| 972 |
|
|
| 32,437 |
|
|
| 4,718 |
|
Accrued expense and other current liabilities |
|
| 28,761 |
|
|
| 45,572 |
|
|
| 119,887 |
|
|
| 17,436 |
|
Other non-current liability |
|
| — |
|
|
| 4,940 |
|
|
| 51,309 |
|
|
| 7,463 |
|
Net Cash provided by Operating Activities |
|
| 17,266 |
|
|
| 238,336 |
|
|
| 707,605 |
|
|
| 102,917 |
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment |
|
| (10,274 | ) |
|
| (21,454 | ) |
|
| (17,136 | ) |
|
| (2,492 | ) |
Prepayment for other non-current assets |
|
| — |
|
|
| (3,000 | ) |
|
| — |
|
|
| — |
|
Purchase of intangible assets |
|
| (1,223 | ) |
|
| (88 | ) |
|
| (52,017 | ) |
|
| (7,566 | ) |
Cash received from the disposal of property, plant and equipment |
|
| — |
|
|
| 164 |
|
|
| 65 |
|
|
| 10 |
|
Purchase of term deposits |
|
| — |
|
|
| — |
|
|
| (385,028 | ) |
|
| (56,000 | ) |
Proceeds from maturity of term deposits |
|
| — |
|
|
| — |
|
|
| 288,771 |
|
|
| 42,000 |
|
Purchase of business, net of cash acquired of RMB3,475 |
|
| — |
|
|
| 2,323 |
|
|
| — |
|
|
| — |
|
Loans provided to related parties |
|
| (16,071 | ) |
|
| — |
|
|
| (5,000 | ) |
|
| (727 | ) |
Loans provided to third-parties |
|
| — |
|
|
| (12,857 | ) |
|
| (8,920 | ) |
|
| (1,297 | ) |
Proceeds received from loans provided to third-parties |
|
| — |
|
|
| 1,000 |
|
|
| 5,578 |
|
|
| 811 |
|
Purchase of short-term investments |
|
| (8,937 | ) |
|
| (6,506 | ) |
|
| (41,300 | ) |
|
| (6,007 | ) |
Purchase of long-term investments |
|
| (62,882 | ) |
|
| (23,610 | ) |
|
| (109,854 | ) |
|
| (15,978 | ) |
Disposal of short-term investments |
|
| — |
|
|
| 2,062 |
|
|
| — |
|
|
| — |
|
Disposal of long-term investments |
|
| — |
|
|
| 23,085 |
|
|
| — |
|
|
| — |
|
Net Cash Used in Investing Activities |
|
| (99,387 | ) |
|
| (38,881 | ) |
|
| (324,841 | ) |
|
| (47,246 | ) |
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans repaid to related party |
|
| — |
|
|
| — |
|
|
| (3,221 | ) |
|
| (468 | ) |
Exercise of share options and restricted shares |
|
| 24 |
|
|
| 89 |
|
|
| 3,486 |
|
|
| 506 |
|
Bank borrowings |
|
| 10,000 |
|
|
| 30,000 |
|
|
| 20,000 |
|
|
| 2,908 |
|
Repayment of bank borrowing |
|
| — |
|
|
| (10,000 | ) |
|
| (30,000 | ) |
|
| (4,363 | ) |
Net proceeds from initial public offering |
|
| — |
|
|
| — |
|
|
| 657,062 |
|
|
| 95,566 |
|
Repurchase of ordinary shares |
|
| — |
|
|
| — |
|
|
| (8,157 | ) |
|
| (1,186 | ) |
Net Cash Provided by Financing Activities |
|
| 10,024 |
|
|
| 20,089 |
|
|
| 639,170 |
|
|
| 92,963 |
|
Net (decrease) increase in cash and cash equivalents and restricted cash |
|
| (72,097 | ) |
|
| 219,544 |
|
|
| 1,021,934 |
|
|
| 148,634 |
|
Effect of exchange rate changes |
|
| 5,262 |
|
|
| (3,175 | ) |
|
| 60,357 |
|
|
| 8,779 |
|
Cash and cash equivalents and restricted cash at beginning of year |
|
| 219,987 |
|
|
| 153,152 |
|
|
| 369,521 |
|
|
| 53,744 |
|
Cash and cash equivalents and restricted cash at end of the year |
|
| 153,152 |
|
|
| 369,521 |
|
|
| 1,451,812 |
|
|
| 211,157 |
|
Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax paid |
|
| 9,599 |
|
|
| 35,892 |
|
|
| 52,063 |
|
|
| 7,572 |
|
Interest paid |
|
| — |
|
|
| 1,997 |
|
|
| 1,310 |
|
|
| 191 |
|
Non-cash investing and financing activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payable for long-term investment |
|
| 15,000 |
|
|
| — |
|
|
| 275 |
|
|
| 40 |
|
Conversion from loan to long-term investment |
|
| — |
|
|
| 8,000 |
|
|
| — |
|
|
| — |
|
Non-monetary exchange of convertible bond to intangible assets |
|
| — |
|
|
| — |
|
|
| 7,104 |
|
|
| 1,033 |
|
Payable for property, plant and equipment |
|
| — |
|
|
| 264 |
|
|
| 15 |
|
|
| 2 |
|
Conversion of preferred shares to ordinary shares |
|
| — |
|
|
| — |
|
|
| 354,212 |
|
|
| 51,518 |
|
Deemed dividend related to issuance of ordinary shares to preferred shareholders |
|
| — |
|
|
| — |
|
|
| 209,752 |
|
|
| 30,507 |
|
| | | | | | | | |
| | For the years ended December 31, | ||||||
|
| 2019 |
| 2020 |
| 2021 |
| 2021 |
| | RMB | | RMB | | RMB | | US$ |
| | | | | | | | (Note2) |
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
Net income |
| 573,371 | | 229,706 | | 136,952 | | 21,490 |
Adjustment to reconcile net income to net cash provided by operating activities: |
| | | | | | | |
Non-cash lease expenses |
| 27,683 | | 48,191 | | 41,536 | | 6,518 |
Depreciation and amortization |
| 17,215 | | 27,129 | | 51,884 | | 8,142 |
Provision for excess and obsolete inventories |
| 23,799 | | 64,223 | | 51,336 | | 8,056 |
Share-based compensation |
| 55,128 | | 65,154 | | 83,122 | | 13,044 |
Share of results of equity method investment |
| 1,112 | | 4,749 | | (41,028) | | (6,438) |
Gain on disposal of property, plant and equipment |
| 767 | | 7,406 | | (304) | | (48) |
Gain from fair value change of long-term investments | | — | | (12,325) | | — | | — |
Deferred income taxes |
| (27,800) | | (10,442) | | (18,694) | | (2,933) |
Gain from deconsolidation of a subsidiary | | — | | (56,522) | | — | | — |
Write-off of short-term loans | | 5,640 | | — | | — | | — |
Allowance for doubtful accounts | | — | | — | | 814 | | 128 |
Impairment loss from short-term investments | | — | | — | | 320 | | 50 |
Impairment loss from long-term investments | | 2,600 | | — | | — | | — |
Realized gain from investments | | (1,822) | | — | | (13,507) | | (2,120) |
Changes in operating assets and liabilities |
| |
| |
| |
| |
Accounts receivable |
| (130,015) | | (131,215) | | (239,860) | | (37,639) |
Inventories |
| (432,983) | | (410,691) | | (83,126) | | (13,044) |
Prepaid expenses and other current assets |
| (32,444) | | (79,957) | | (158,829) | | (24,924) |
Amount due from related parties |
| (770,976) | | 583,457 | | 544,599 | | 85,460 |
Other non-current assets |
| (2,678) | | (33,049) | | 8,572 | | 1,345 |
Amount due to related parties |
| 4,074 | | (3,584) | | 38,938 | | 6,110 |
Accounts payable |
| 935,845 | | (9,761) | | (673,224) | | (105,644) |
Notes payable |
| (16,752) | | (2,184) | | 103,795 | | 16,288 |
Advance from customers |
| 38,850 | | (2,189) | | (38,272) | | (6,006) |
Income tax payable |
| 13,817 | | (40,148) | | (25,111) | | (3,940) |
Accrued expenses and other current liabilities |
| 86,221 | | (149,385) | | 7,767 | | 1,219 |
Other non-current liability |
| 57,347 | | 68,739 | | (10,115) | | (1,587) |
Net Cash provided by/(used in) Operating Activities |
| 427,999 | | 157,302 | | (232,435) | | (36,473) |
Cash Flows from Investing Activities |
| |
| |
| |
| |
Purchase of property, plant and equipment |
| (34,276) | | (83,554) | | (46,055) | | (7,227) |
Disposal of property, plant and equipment |
| — | | — | | 2,520 | | 395 |
Purchase of intangible assets |
| (11,845) | | (1,220) | | (7,027) | | (1,103) |
Purchase of term deposits |
| — | | (212,065) | | (5,000) | | (785) |
Proceeds from maturity of term deposits |
| 96,969 | | 207,065 | | 5,000 | | 785 |
Loans provided to third-parties |
| — | | (480) | | — | | — |
Proceeds received from loan repayment |
| 6,772 | | — | | — | | — |
Purchase of long-term investments |
| (180,927) | | (82,221) | | (1,072,783) | | (168,343) |
Disposal of long-term investments |
| 10,461 | | — | | 20,000 | | 3,138 |
Dividend received from an equity method investment | | — | | — | | 113 | | 18 |
Acquisition of businesses and assets, net of cash acquired of RMB 7,497 | | — | | (26,713) | | — | | — |
Deconsolidation of a subsidiary | | — | | (7,701) | | 20,000 | | 3,138 |
Capital contribution from non-controlling interest | | — | | — | | 13,943 | | 2,188 |
Other investing activities | | 143 | | 9 | | — | | — |
Net Cash Used in Investing Activities |
| (112,703) | | (206,880) | | (1,069,289) | | (167,796) |
Cash Flows from Financing Activities |
| | | | | | | |
Exercise of share options |
| 933 | | — | | 5,465 | | 858 |
Bank borrowings |
| — | | 1,207,793 | | 1,473,567 | | 231,235 |
Repayment of bank borrowings |
| (20,000) | | (643,122) | | (953,387) | | (149,607) |
Repurchase of ordinary shares | | — | | — | | (13,763) | | (2,160) |
Reverse factoring | | — | | — | | 39,195 | | 6,151 |
Net proceeds from the secondary offering |
| 49,214 | | — | | — | | — |
Deemed dividend to shareholders | | (4,538) | | — | | — | | — |
Net Cash Provided by Financing Activities |
| 25,609 | | 564,671 | | 551,077 | | 86,477 |
Net increase in cash and cash equivalents and restricted cash |
| 340,905 | | 515,093 | | (750,647) | | (117,793) |
Effect of exchange rate changes |
| 11,274 | | (43,334) | | (15,564) | | (2,442) |
Cash and cash equivalents and restricted cash at beginning of the year |
| 1,451,812 | | 1,803,991 | | 2,275,750 | | 357,115 |
Cash and cash equivalents and restricted cash at end of the year |
| 1,803,991 | | 2,275,750 | | 1,509,539 | | 236,880 |
Supplemental disclosure of cash flow information |
| | | | | | | |
Income tax paid |
| 91,732 | | 82,406 | | 74,377 | | 11,671 |
Interest paid |
| 286 | | 14,858 | | 47,132 | | 7,396 |
Non-cash investing and financing activity |
| | | | | | | |
Payable for long-term investment |
| — | | — | | — | | — |
Payable for Intangible asset |
| 16 | | 1,641 | | 1,031 | | 162 |
Receivable from the disposal of a subsidiary | | — | | 22,500 | | 2,500 | | 392 |
Conversion from convertible bond to equity interest investment | | 15,800 | | 8,393 | | — | | — |
Disposal of previous equity interest in exchange for acquisition | | — | | 87,716 | | — | | — |
Forgiveness of loan related to acquisition | | — | | 13,711 | | — | | — |
Non-monetary exchange of convertible bond to intangible assets | | 8,019 | | — | | — | | — |
Non-monetary transaction of exchanging loan for Intangible assets | | 9,957 | | — | | — | | — |
Payable for property, plant and equipment | | 351 | | 173 | | 306 | | 48 |
Payable for repurchasing of ordinary shares | | — | | — | | 8,044 | | 1,262 |
The accompanying notes are an integral part of these consolidated financial statements.
F-9F-8
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATEDCONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
1. ORGANAZATION AND PRINCIPAL ACTIVITIES
HuamiZepp Health Corporation (the “Company”) was incorporated in the Cayman Islands in December 2014. The Company, its wholly owned subsidiaries and its variable interest entities (“VIEs”), Anhui Huami Information Technology Co., Ltd. (“Anhui Huami”), Huami (Beijing) Information Technology Co., Ltd. (“Beijing Huami”), and Anhui Huami's subsidiaries and Beijing Huami’s subsidiaries, are collectively referred to as the “Group”.
The Group primarily engages in the business of developing, manufacturing and selling smart, wearable technological devices in the People’s Republic of China (“PRC”). During the yearyears ended December 31, 2016, 20172019, 2020 and 2018,2021, the Group derived over 65%72.2%, 69.0% and 53.5% of its revenue from sales of exclusively designed and manufactured smart wearable devices to one1 customer who is controlled by one of its shareholders.
As of December 31, 2018,2021, details of the Company’s major subsidiaries, VIEs and VIEsmajor VIE’s subsidiary were as follows:
| | | | | | | ||
| |
| | Date of
| | Percentage
| ||
| Place of incorporation | Incorporation/acquisition | Of ownership | |||||
Major subsidiaries of the Company: |
|
|
|
|
|
| ||
|
| Hong Kong (“HK”) | | December 23, 2014 |
| 100% | ||
|
| United States of America (“U.S.”) | | January 15, 2015 |
| 100% | ||
Beijing ShunYuan KaiHua Technology Co., Ltd. (“ |
| PRC | | February 25, 2015 |
| 100% | ||
Huami (Shenzhen) Information Technology Co., Ltd. | | PRC | | December 7, 2015 | 100% | |||
Anhui Huami |
| PRC | | December |
| 100% | ||
|
|
|
| |||||
|
| U.S. | | June 16, 2016 |
| 100% | ||
|
|
| |
|
| 100% | ||
| |
| |
| | 100% | ||
Variable interest entities of the Company: |
|
| | | | | ||
Anhui Huami |
| PRC | | December 27, 2013 |
| Consolidated VIE | ||
Beijing Huami |
| PRC | | July 11, 2014 |
| Consolidated VIE | ||
|
| | | | | | ||
Anhui Huami Healthcare Co., Ltd. (“ |
| PRC | | December 5, 2016 |
| VIE’s subsidiary | ||
|
|
|
| |||||
|
|
|
| |||||
The VIE arrangements
The Company conducts substantially all of its smart, wearable and technological devices business in the PRC through contractual arrangements with its VIEs, Anhui Huami and its subsidiariesBeijing Huami and Beijing Huami.the VIEs’ subsidiaries. Since the operations of Anhui Huamithe VIEs and itsthe VIEs’ subsidiaries and Beijing Huami are closely interrelated and almost indistinguishable from one another, the risks and rewards associated with their operations are substantially the same. In addition, the Company consolidates Anhui Huamithe VIEs and itsthe VIEs’ subsidiaries and Beijing Huami as disclosed. Therefore, the Company aggregates disclosures related to Anhui Huamithe VIEs and itsthe VIEs’ subsidiaries and Beijing Huami as variable interest entities and referred to them as “the VIEs” in the Company’s consolidated financial statements. The VIEs hold the requisite licenses and permits necessary to conduct the Company’s business. In addition, the VIEs hold the assets necessary to operate the Company’s business and generate substantially all of the Company’s revenues.
F-10
F-9
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
1. ORGANAZATION AND PRINCIPAL ACTIVITIES- continued CONTINUED
VIE Arrangements between the VIEs and the Company’s PRC subsidiary
The Company, through Shun Yuan, a wholly-owned subsidiary of the Company in the PRC (the “WFOE”) has entered into the following contractual arrangements with Anhui Huami, Beijing Huami and their shareholders that enable the Company to (1) have power to direct the activities that most significantly affects the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, the Company is considered the primary beneficiary of the VIEs and has consolidated the VIEs’ financial results of operations, assets and liabilities in the Company’s consolidated financial statements. In making the conclusion that the Company is the primary beneficiary of the VIEs, the Company believes the Company’s rights under the terms of the purchase option agreement provide it with a substantive kick-out right. More specifically, the Company believes the terms of the purchase option agreement are valid, binding and enforceable under PRC laws and regulations currently in effect. The Company also believes that the consideration which is the minimum amount permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for the Company to currently exercise its rights under the purchase option agreement.
A simple majority vote of the Company’s board of directors is required to pass a resolution to exercise the Company’s rights under the purchase option agreement, for which Mr. Wang Huang’s, the chief executive officer ("CEO"(“CEO”) of the Company (“Mr. Huang”), consent is not required. The Company’s rights under the purchase option agreement give the Company the power to control the shareholders of Anhui Huami and Beijing Huami. In addition, the Company’s rights under the power of attorney also reinforce the Company’s abilities to direct the activities that most significantly impact the VIEs’ economic performance. The Company also believes that this ability to exercise control ensures that the VIEs will continue to execute consulting and service agreements and also ensures that consulting and service agreements will be executed and renewed indefinitely unless a written agreement is signed by all parties to terminate it or a mandatory termination is requested by the local government. The Company has the rights to receive substantially all of the economic benefits from the VIEs.
Exclusive consulting and service agreement
On April 29, 2015, Shun Yuan entered into an exclusive consulting and service agreement with Anhui Huami and Beijing Huami to enable Shun Yuan to receive substantially all of the economic benefits of the VIEs and such agreement was amended on November 3, 2017. Under the exclusive consulting and service agreement, Shun Yuan has the exclusive right to provide or designate any entity affiliated with it to provide VIEs the technical and business support services, including information technology support, hardware management and updates, software development, maintenance and updates and other operating services. The exclusive consulting and service agreement could be indefinitely effective unless a written agreement is signed by all parties to terminate it or a mandatory termination is requested by the local government. The exclusive consulting and service agreement was effective on April 29, 2015.
On March 20, 2020, due to the change of the nominee shareholders in the VIEs, the exclusive consultation and service agreement of Anhui Huami and Beijing Huami was amended and restated with terms substantially similar as before.
Equity pledge agreement
Pursuant to the equity pledge agreements dated April 29, 2015 and amended on November 3, 2017 among Anhui Huami, BeijngBeijing Huami, all their shareholders and Shun Yuan, all shareholders of Anhui Huami and Beijing Huami agreed to pledge their equity interests in Anhui Huami or Beijing Huami to Shun Yuan to secure the performance of the VIEs’ obligations under the existing purchase option agreement, power of attorney, exclusive consulting and service agreement and also the equity pledge agreement.
F-10
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED
Equity pledge agreement - continued
On March 20, 2020, due to the change of the nominee shareholders in the VIEs, the Group updated the registration of its equity pledge for Anhui Huami and Beijing Huami. The equity pledge agreement for Anhui Huami and Beijing Huami was amended and restated with the same terms as before.
Exclusive purchase option agreement
Pursuant to the exclusive purchase option agreements entered into on April 29, 2015 and amended on November 3, 2017 among Shun Yuan, Anhui Huami, Beijing Huami and their shareholders, the shareholders of Anhui Huami and Beijing Huami are obligated to sell producttheir equity interest or any assets to Shun Yuan. Shun Yuan has the exclusive and irrevocable right to purchase, or cause the shareholders of Anhui Huami and Beijing Huami to sell to the party designated by Shun Yuan, in Shun Yuan’s sole discretion, all of the shareholders’ equity interests or any assets in Anhui Huami and Beijing Huami when and to the extent that applicable PRC law permits the Company to own such equity interests and assets in Anhui Huami and Beijing Huami. The price to be paid by Shun Yuan or any party designated by Shun Yuan will be the minimum amount of consideration permitted by applicable PRC law at the time when such transaction occurs. All of the shareholders promised and agreed that they will refund the consideration once received to Shun Yuan or any party designated by Shun Yuan within 10 working days. Also, the shareholders of Anhui Huami and Beijing Huami should try their best to help Anhui Huami and Beijing Huami develop well and are prohibited from transferring, pledging, intentionally terminating significant contracts or otherwise disposing of any significant assets in Anhui Huami and Beijing Huami without the Shun Yuan’s prior written consent.
F-11
TableOn March 20, 2020, due to the change of Contents
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amountsthe nominee shareholders in thousandsthe VIEs, the exclusive purchase option agreement of Renminbi (“RMB”)Anhui Huami and U.S. dollars (“US$”)
except for number of sharesBeijing Huami was amended and per share data, or otherwise noted)restated with the same terms as before.
1. ORGANAZATION AND PRINCIPAL ACTIVITIES - continued
Power of Attorney
On April 29, 2015 and amended on November 3, 2017, all of the shareholders of Anhui Huami and Beijing Huami have executed a power of attorney with Shun Yuan, Anhui Huami and Beijing Huami, whereby all of the shareholders irrevocably appoint and constitute the person designated by Shun Yuan as their attorney-in-fact to exercise on their behalf any and all rights that the shareholders have in respect of their equity interests in Anhui Huami and Beijing Huami. The power of attorney will be indefinitely effective unless all parties decide to terminate it by written agreement.
On March 20, 2020, due to the change of the nominee shareholders in the VIEs, the power of attorney agreement of Anhui Huami and Beijing Huami was amended and restated with the same terms as before.
F-11
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED
Risks in relation to VIE structure
The Company believes that the contractual arrangements with its VIEs and their respective shareholders are in compliance with PRC laws and regulations and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce the contractual arrangements. If the legal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:
| ● | revoke the business and operating licenses of the Company’s PRC subsidiaries and VIEs; |
| ● | discontinue or restrict the operations of any related-party transactions between the Company’s PRC subsidiaries and VIEs; |
| ● | limit the Group’s business expansion in China by way of entering into contractual arrangements; |
| ● | impose fines or other requirements with which the Company’s PRC subsidiaries and VIEs may not be able to comply; |
| ● | impose additional conditions or requirements with which the Group may not be able to comply; |
| ● | take other regulatory or enforcement actions against the Group that could be harmful to the Group’s business or |
| ● | require the Company or the Company’s PRC subsidiaries or VIEs to restructure the relevant ownership structure or operations. |
revoke the business and operating licenses of the Company’s PRC subsidiaries and VIEs;
discontinue or restrict the operations of any related-party transactions between the Company’s PRC subsidiaries and VIEs;
limit the Group’s business expansion in China by way of entering into contractual arrangements;
impose fines or other requirements with which the Company’s PRC subsidiaries and VIEs may not be able to comply;
impose additional conditions or requirements with which the Group may not be able to comply;
take other regulatory or enforcement actions against the Group that could be harmful to the Group’s business or
require the Company or the Company’s PRC subsidiaries or VIEs to restructure the relevant ownership structure or operations.
The Company’s ability to conduct its business may be negatively affected if the PRC government were to carry out any of the aforementioned actions. As a result, the Company may not be able to consolidate its VIEs in its consolidated financial statements as it may lose the ability to exert effective control over the VIEs and their respective shareholders and it may lose the ability to receive economic benefits from the VIEs. The Company, however, does not believe such actions would result in the liquidation or dissolution of the Company, its PRC subsidiaries or VIEs.
The VIE agreements were amended on November 3, 2017 and March 20, 2020 with no significant differences.
Mr. Huang is the largest shareholder of Anhui Huami and Beijing Huami, and Mr. Huang is also the largest beneficiary owner of the Company. The interests of Mr. Huang as the largest beneficiary owner of the VIEs may differ from the interests of the Company as a whole, since Mr. Huang is only one of the beneficiary shareholders of the Company, holding 29.5%27.7% of the total common shares as of December 31, 2018.2021. The Company cannot assert that when conflicts of interest arise, Mr. Huang will act in the best interests of the Company or that conflicts of interests will be resolved in the Company’s favor. Currently, the Company does not have existing arrangements to address potential conflicts of interest Mr. Huang may encounter in his capacity as a beneficial owner and director of the VIEs, on the one hand, and as a beneficial owner and director of the Company, on the other hand. The Company believes Mr. Huang will not act contrary to any of the contractual arrangements and the exclusive option agreement provides the Company with a mechanism to remove Mr. Huang as a beneficiary shareholder of the VIEs should he act to the detriment of the Company. The Company relies on Mr. Huang, as a director and executive officer of the Company, to fulfill his fiduciary duties and abide by laws of the PRC and Cayman Islands and act in the best interest of the Company. If the Company cannot resolve any conflicts of interest or disputes between the Company and Mr. Huang, the Company would have to rely on legal proceedings, which could result in disruption of its business, and there is substantial uncertainty as to the outcome of any such legal proceedings.
F-12
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
1.ORGANAZATION AND PRINCIPAL ACTIVITIES
-Risks in relation to VIE structure –- continued
In addition, most of the current shareholders of Anhui Huami and Beijing Huami are also beneficial owners of the Company and therefore have no current interest in seeking to act contrary to the contractual arrangements. However, to further protect the investors’ interest from any risk that the shareholders of Anhui Huami and Beijing Huami may act contrary to the contractual arrangements, the Company, through Shun Yuan, entered into an irrevocable power of attorney with all of the shareholders of Anhui Huami and Beijing Huami on April 29, 2015 and November 3, 2017. Through the power of attorney, all shareholders of Anhui Huami and Beijing Huami have entrusted the person designated by Shun Yuan as its proxy to exercise their rights as the shareholders of Anhui Huami and Beijing Huami with respect to an aggregate of 100% of the equity interests in Anhui Huami and Beijing Huami.
The following financial statement amountsposition and balancesfinancial performance of the VIEs and VIEs’ subsidiaries were included in the accompanying consolidated financial statements after the elimination of intercompany balances and transactions within the Group:
| | | | |
| | As of December 31, | ||
|
| 2020 |
| 2021 |
| | RMB | | RMB |
Total current assets |
| 3,675,394 |
| 2,989,474 |
Total non-current assets |
| 593,603 |
| 701,134 |
Total assets |
| 4,268,997 |
| 3,690,608 |
Total current liabilities |
| 2,696,059 | | 1,937,301 |
Total non-current liabilities |
| 309,741 | | 479,676 |
Total liabilities |
| 3,005,800 | | 2,416,977 |
As of December 31, 2020 and 2021, the total assets of the Group's consolidated VIEs and VIEs' subsidiaries mainly consisted of cash and cash equivalents, restricted cash, short-term investments, accounts receivable, inventories, prepaid expenses and other current assets, long-term investments , property, plant and equipment, intangible assets, deferred tax assets, operating lease right-of-use assets and other non-current assets.
| | | | | | |
| | For the years ended December 31, | ||||
|
| 2019 |
| 2020 |
| 2021 |
| | RMB | | RMB | | RMB |
Revenues |
| 5,801,405 | | 6,297,534 | | 5,219,560 |
Net income/(loss) |
| 987,672 | | 751,803 | | (61,184) |
The following are cash flows of the Company's VIEs and VIEs’ subsidiaries for the years ended December 31, 2019, 2020 and 2021:
| | | | | | |
| | For the years ended December 31, | ||||
|
| 2019 |
| 2020 |
| 2021 |
| | RMB | | RMB | | RMB |
Net cash provided by operating activities |
| 478,806 | | 165,512 | | 78,845 |
Net cash used in investing activities |
| (126,887) | | (728,797) | | (362,683) |
Net cash (used in)/provided by financing activities |
| (20,000) | | 564,671 | | 32,024 |
For the years ended December 31, 2019, 2020 and 2021, for all of the Company’s VIEs and VIEs’ subsidiaries, excluding inter-company transactions:
|
| As of December 31, |
| |||||
|
| 2017 |
|
| 2018 |
| ||
|
| RMB |
|
| RMB |
| ||
Total current assets |
|
| 1,178,273 |
|
|
| 2,202,009 |
|
Total non-current assets |
|
| 129,588 |
|
|
| 191,522 |
|
Total assets |
|
| 1,307,861 |
|
|
| 2,393,531 |
|
Total current liabilities |
|
| 809,653 |
|
|
| 1,329,010 |
|
Total non-current liabilities |
|
| 10,486 |
|
|
| 61,211 |
|
Total liabilities |
|
| 820,139 |
|
|
| 1,390,221 |
|
|
| For the years ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Revenues |
|
| 1,552,340 |
|
|
| 2,042,640 |
|
|
| 3,638,560 |
|
Net income |
|
| 269,162 |
|
|
| 327,101 |
|
|
| 643,239 |
|
|
| For the years ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Net cash provided by operating activities |
|
| 15,316 |
|
|
| 248,642 |
|
|
| 712,210 |
|
Net cash used in investing activities |
|
| (81,954 | ) |
|
| (19,643 | ) |
|
| (72,862 | ) |
Net cash provided by financing activities |
|
| 17,500 |
|
|
| 20,000 |
|
|
| (13,221 | ) |
The intercompany payable between Anhui Huami and ShunyuanShun Yuan were RMB44,420RMB153,190 and RMB68,713RMB260,928 as of December 31, 20172020 and 2018,2021, respectively. Those were eliminated by the Company upon consolidation.
F-13
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation and principle of consolidation
The consolidated financial statements of the Group have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The consolidated financial statements of the Group include the financial statements of the Company, its wholly-owned subsidiaries, its VIEs and the VIEs’ subsidiaries. The Company believes that the disclosures are adequate to make the information presented not misleading.
F-13
Table of ContentsReclassifications
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data,During the year ended December 31, 2021, certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current year’s presentation. These reclassifications had no impact on net income, shareholders’ equity, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continuedcash flows as previously reported
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Group’s consolidated financial statements include allowance for doubtful accounts, inventory valuation, the useful lives of long-lived assets, impairment of long-lived assets, impairment of goodwill,incremental borrowing rate for leases, product warranties, fair value measurement of ordinary shares and preferred shares, fair value measurement of long-term available-for-sale investments and long-term investments of non-marketable equity securities with fair value change through profit or loss, share-based compensation, the valuation allowance for deferred tax assets and income tax. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.
Fair value
Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.
Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:
Level 1
Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.
Level 2
Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.
F-14
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Level 3
Level 3 applies to assets or liabilities for which there are unobservable inputs to the valuation methodology that are significant to the measurement of the fair value of the assets or liabilities.
Measured fair value on a recurring basis
The Group measured its financial assets and liabilities primarily including available-for-sale securitiesinvestments at fair value on a recurring basis and equity securities with readily determinable fair value as of December 31, 20172020 and 2018.2021.
Measured fair value on a nonrecurring basis
The Group measured acquired intangible assets using the income approach-discounted cash flow method when events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. The fair values were determined using models with significant unobservable inputs (Level 3 inputs). The Group did not recognize any impairment loss related to acquired intangible assets arising from acquisitions during the years ended December 31, 2019, 2020 and 2021.
The Group measured the fair value of the intangible assets acquired through non-monetary exchange at fair value. The fair values waswere determined using models with significant unobservable inputs (Level 3 inputs). The Group used the income approach by applying the discounted cash flow method (“DCF”). The DCF involves applying an appropriate discount rate to discount future cash flows to present value. The future cash flows represent management’s best estimation as of the measurement date. The projected cash flow estimation includes, among others, analysis of projected revenue growth, gross margins and terminal value and these assumptions are consistent with the Group’s business plan. In determining an appropriate discount rate, the Group has considered the weighted average cost of capital (“WACC”) by considering relative risk of the industry and the characteristics of the Company. A discount rate of 22% as of the valuation date19% was used for the fair value measurement of intangible assets.
The Group measured acquired intangible assets using the income approach-discounted cash flow method when events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. The Group did not recognize any impairment loss related to acquired intangible assets arising from acquisitions during the years ended December 31, 2016, 2017 and 2018.
F-14
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Measured fair value on a nonrecurring basis – continued2019.
The Group measured goodwill at fair value on a nonrecurring basis when it is evaluated annually or whenever events or changes in circumstances indicate that the carrying amount of a reporting unit exceeds its fair value as a result of the impairment assessments. The fair value of goodwillthe reporting unit is determined using discounted cash flows, and an impairment loss will be recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.flows. The Group did not0t recognize any impairment loss related to goodwill during the yearyears ended December 31, 2016, 20172019, 2020 and 2018.2021.
For equity investments without readily determinable fair values for which the Company elected to use the measurement alternative, starting in 2018, the equity investment is measured at fair value on a nonrecurring basis when there is an orderly transaction for identical or similar investments of the same issuer.
Fair value of financial instruments
The Group’sGroup's financial instruments consist primarily of cash and cash equivalents, restricted cash, term deposit, accounts receivable, restricted cash, amount due from related parties, available-for-sale securities investments, accounts payable, notes payable, short-term bank borrowing andborrowings, amount due to related parties.parties and long-term bank borrowings. The Company carries its available-for-sales investments at fair value. The carrying amounts of cash and cash equivalents, restricted cash, term deposit, accounts receivable, restricted cash, amount due from related parties, accounts payable, notes payable and short-term bank borrowings approximate their fair values due to the short-term maturities of these instruments. The carrying amounts of long-term borrowings approximates its fair value as the interest rates are based on the prevailing interest rates in the market.
F-15
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Cash and cash equivalents
Cash and cash equivalents consist of cash on-hand, demand deposits with financial institutions, term deposits with an original maturity of three months or less and highly liquid investments, which are unrestricted from withdrawal or use, or which have original maturities of three months or less when purchased.
Restricted cash
Restricted cash represents deposits made to the bank for bank acceptance notes (or notes payable) issued by the Group. When the Group issues the bank acceptance notes, the banks requiresrequire the Group to make a deposit for 40%30% or 60%40% of the face value of the bank acceptance notes issued as collateral. Restricted cash also consists of cash pledged for bank loan facility. The deposits for unsettled bank acceptance notes and cash pledged for bank loan facility are recorded as restricted cash in the consolidated balance sheet as of December 31, 20172020 and 2018.2021.
Term deposit
Term deposits consist of deposits placed with financial institutions with original maturities of greater than three months and less than one year.
Accounts receivable
Accounts receivable represents those receivables derived in the ordinary course of business, net of allowance for doubtful accounts.
Allowance for doubtful accounts
The Group maintains an allowance for doubtful accounts for estimated losses on uncollected accounts receivable. Management considers the following factors when determining the collectability of specific accounts: creditworthiness of customers, aging of the receivables, past transaction history with customers and their current condition, changes in customer payment terms, specific facts and circumstances, and the overall economic climate in the industries the Group serves. The Group evaluates its accounts receivable for expected credit losses on a regular basis. The Group maintains an estimated allowance for credit loss to reduce its accounts receivable to the amount that it believes will be collected. The Group uses the creditworthiness of customers, aging of the receivables, past transaction history with customers and their current condition, changes in customer payment terms, specific facts and circumstances, and the overall economic climate in the industries the Group serves to monitor the Group's receivables within the scope of expected credit losses model and use these as a basis to develop the Group's expected loss estimates. As of December 31, 20172020 and 2018,2021, the Company recorded nilNaN and RMB814 allowance for doubtful account.
F-15
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Inventories, net
Inventories of the Group consist of raw materials, finished goods and work in process. Inventories are stated at the lower of cost or net realizable value on a weighted average basis. Inventory costs include expenses that are directly or indirectly incurred in the purchase, including shipping and handling costs charged to the Group by suppliers, and production of manufactured product for sale. Expensessale, such as include the cost of materials and supplies used in production, direct labor costs and allocated overhead costs such as depreciation, insurance, employee benefits, and indirect labor. Cost is determined using the weighted average method. The Group assesses the valuation of inventory and periodically writes down and writes off the value for estimated excess and obsolete inventory based upon the product life cycle. During the years ended December 31, 2016, 2017
F-16
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and 2018, inventory write-down amounted to RMB1,037, RMB2,449U.S. dollars (“US$”)
except for number of shares and nil, respectively.per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Short-term investments
Short-term investments are mainly consistconsisting of investment in convertible bonds with a maturity of less than one year. These investments are accounted for as available-for-sale investments and measured at fair value. The Group recorded RMB(848), RMB1,243, and RMB1,240 unrealized (losses)/gains in accumulated other comprehensive income on such investments during the years ended December 31, 2019, 2020 and 2021, respectively.
Prepaid expenses and other current assets
Prepaid expenses and other current assets primarily consist of advance to suppliers, prepaid expenses, other receivables, rental deposits and value-added tax receivables.recoverable.
Property, plant and equipment, net
Property, plant and equipment are carried at cost less accumulated depreciation. Depreciation is calculated on a straight-line basis over the following estimated useful lives:
| | |
Software and electronic equipment |
| 3-5 years |
Building |
| 20 years |
Leasehold improvements |
| Shorter of the lease term or estimated useful lives |
Acquired intangible assets other than goodwill consist of the domain name for the Company’sCompany's website www.huami.com,www.zepp.com, an insurance brokerage license, trademark and patents.
The domain name, isinsurance brokerage license and certain trademark are recognized as an intangible asset with indefinite life and evaluated for impairment at least annually or if events or changes in circumstances indicate that the asset might be impaired. Such impairment test compares the fair values of the asset with its carrying value amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair value. The estimates of values of the intangible asset not subject to amortization are determined using discounted cash flow valuation approach. Significant assumptions are inherent in this process, including estimates of discount rates.rates and cash flow.
TheSome trademark and patents are recognized as intangible assets with finite lives and are amortized on a straight-line basis over their expected useful economic lives. Amortization is calculated on a straight-line basis over the estimated useful life of 105 to10 years.
F-17
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
Leases
The Group leases administrative office spaces in different cities in the PRC, and in the United States and Canada under operating leases. The Group determines whether an arrangement constitutes a lease and records lease liabilities and right-of-use assets on its consolidated balance sheets at the lease commencement. The Group measures its lease liabilities based on the present value of the total lease payments not yet paid discounted based on its incremental borrowing rate, which is the estimated rate the Group would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. The Group estimates its incremental borrowing rate based on an analysis of publicly traded debt securities of companies with credit and financial profiles similar to its own. The Group measures right-of-use assets based on the corresponding lease liability adjusted for payments made to the lessor at or before the commencement date, and the initial direct costs it incurs under the lease. The Group begins recognizing operating lease expenses when the lessor makes the underlying asset available to the Group. The Group's leases have remaining lease terms of up to four years, some of which include options to extend the leases for an additional period which has to be agreed with the lessors based on mutual negotiation. After considering the factors that create an economic incentive, the Group did not include renewal option periods in the lease term for which it is not reasonably certain to exercise. For all real estate leases, any non-lease components, including common area maintenance, have been separated from lease components and excluded from the associated right-of-use asset and lease liability calculations.
For short-term leases with lease term less than one year, the Group records operating lease expenses in its consolidated statements of operations on a straight-line basis over the lease term and record variable lease payments as incurred.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in business combination. Goodwill is not amortized but is tested for impairment annually or more frequently if events on changes in circumstance indicate that it might be impaired.
Goodwill is tested for impairment at the reporting unit level on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. These events or circumstances could include a significant change in the stock prices, business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit.
F-16
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Application of the goodwill impairment test requires judgment, including the identification of reporting units, assignment of assets and liabilities to reporting units, assignment of goodwill to reporting units, and determination of the fair value of each reporting unit. The estimation of fair value of each reporting unit using a discounted cash flow methodology also requires significant judgments, including estimation of future cash flows, which is dependent on internal forecasts, estimation of the long-term rate of growth for the Group’sGroup's business, estimation of the useful life over which cash flows will occur, and determination of the Group’sGroup's weighted average cost of capital.capital and consideration of the impact of COVID-19. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.
ThePrior to January 1, 2020 the Group performsperformed a two-step goodwill impairment test. The first step comparescompared the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceedsexceeded its carrying amount, goodwill iswas not considered impaired and the second step willwas not be required. If the carrying amount of a reporting unit exceedsexceeded its fair value, the second step comparescompared the implied fair value of the affected reporting unit’sunit's goodwill to the carrying value of that goodwill. The implied fair value of goodwill is determined in a manner similar to accounting for a business combination with the allocation of the assessed fair value determined in the first step to the assets and liabilities of the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to the assets and liabilities is the implied fair value of goodwill. This allocation process is only performed for purposes of evaluating goodwill impairment and does not result in an entry to adjust the value of any assets or liabilities. An impairment loss iswas recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.
During
F-18
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
The Group adopted ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the yearTest for Goodwill Impairment (“ASU 2017-04”) on January 1, 2020, and used the one-step method for the goodwill impairment assessment for the years ended December 31, 20172020 and 2018,2021. The guidance removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment is now the amount by which a reporting unit's carrying value exceeds its fair value, not the difference between the implied fair value and carrying amount of goodwill which was the step 2 test before.
During the years ended December 31, 2019, 2020 and 2021, the Group recognized nilNaN impairment loss on goodwill.
Long-term investments
The Group’s long-term investments consist of equity securities with readily determinable fair value, equity securities without readily determinable fair value, equity method investments and available-for-sale securities investments.
(a) | Equity securities with readily determinable fair value |
Equity securities with readily determinable fair values are measured at fair value and any changes in fair value are recognized in the consolidated statements of operations.
| (b) | Equity securities without readily determinable fair value |
On January 1, 2018,The Group accounts for equity investments that do not have a readily determinable fair value under the Group adoptedmeasurement alternative prescribed within Accounting Standards Update ("ASU"(“ASU”) No. 2016-01, Financial Instruments-Overall: Recognition and Measurement of Financial Assets and Financial Liabilities, and 2018-03 Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Priorthe extent such investments are not subject to 2018, for investee companies over whichconsolidation or the Group does not have significant influence or a controlling interest, equity securities without determinable fair value were accounted for usingmethod. Under the cost method of accounting, measuredmeasurement alternative, these financial instruments are carried at cost, less other-than-temporary impairment. Starting in 2018, these securities are measured and recorded using a measurement alternative that measures the securities at cost minusany impairment, if any, plus or minus changes resulting from qualifying observable price changes.changes in orderly transactions for an identical or similar investment of the same issuer.
The Group reviews its equity securities without readily determinable fair value for impairment at each reporting period by considering factors including, but not limited to, current economic and market conditions and the impact of COVID-19, the operating performance of the companies including current earning trends and other company specific information. During the years ended December 31, 2016, 2017 and 2018, the Group did not record any impairment losses on its equity securities without readily determinable fair values.
| Equity |
For an investee company over which the Group has the ability to exercise significant influence, but does not have a controlling interest, the Group accounts for the investment under the equity method. Significant influence is generally considered to exist when the Group has an ownership interest in the voting stock of the investee between 20% and 50%. Other factors, such as representation on the investee’s board of directors, voting rights and the impact of commercial arrangements are also considered in determining whether the equity method of accounting is appropriate.
Under the equity method of accounting, the investee company’s accounts are not reflected within the Group’s consolidated balance sheets and statements of operations; however, the Group’s share of the earnings or losses of the investee company is reflected in the caption “(loss)/income“income/(loss) from equity method investments” in the consolidated statements of operations.
F-17F-19
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued – CONTINUED
Long-term investments – - continued
An impairment charge is recorded if the carrying amount of the investment exceeds its fair value and this condition is determined to be other-than-temporary. The Group estimated the fair value of the investee company based on comparable quoted price for similar investment in active market, if applicable, or discounted cash flow approach which requires significant judgments, including the estimation of future cash flows, which is dependent on internal forecasts, the estimation of long-term growth rate of a company’scompany's business, the estimation of the useful life over which cash flows will occur, and the determination of the weighted average cost of capital.capital and the consideration of COVID-19 impact. The Group recorded nil, nilRMB218, NaN and RMB4,133NaN impairment losses on its equity method investments during the years ended December 31, 2016, 20172019, 2020 and 2018.2021.
| Available-for-sale |
For investments which are determined to be debt securities, the Group accounts for them as long-term available-for-sale investments when they are not classified as either trading or held-to-maturity investments.
Available-for-sale investment is carried at its fair value and the unrealized gains or losses from the changes in fair values are included in accumulated other comprehensive income.
The Group reviews its available for sale investments for other than temporary impairment based on the specific identification method. The Group considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds the investment’s fair value, the Group considers, among other factors, general market conditions, government economic plans, the duration and the extent to which the fair value of the investment is less than the cost, the Group’s intent and ability to hold the investment, and the financial condition and near term prospects of the investees. The Group recorded nil, nilRMB3,514, RMB(22,583), and RMB3,457 impairment lossesRMB1,345 unrealized gains/(losses) in accumulated other comprehensive income on its available- for-saleavailable-for-sale investments during the years ended December 31, 2016, 20172019, 2020 and 2018,2021, respectively.
The Group evaluates each individual investment periodically for impairment. For investments where the Group does not intend to sell, the Company evaluates whether a decline in fair value is due to deterioration in credit risk. Credit-related impairment losses, not to exceed the amount that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses on the consolidated balance sheet with corresponding adjustment in the consolidated statements of operations and comprehensive income. Subsequent increases in fair value due to credit improvement are recognized through reversal of the credit loss and corresponding reduction in the allowance for credit loss. Any decline in fair value that is non-credit related is recorded in accumulated other comprehensive income as a component of shareholder's equity. As of December 31, 2020 and 2021, there were no investments held by the Group that had been in continuous unrealized loss position.
Notes payable
The Group endorses bank acceptance notes (“Notes”) to suppliers in the PRC in the normal course of business. The Group may endorse these Notes with its suppliers to clear its accounts payable. When the Notes are endorsed by the Group, the Group is jointly liable with other endorsers in the Notes. Notes that have been presented to banks or endorsed with suppliers are derecognized from the consolidated balance sheets when the Notes are settled with banks or when the obligations as endorser are discharged.
Revenue recognition
On January 1, 2018, the Group adopted Accounting Standards Update (ASU) 2014-09, Revenue Contracts with Customers (Topic 606), "Topic 606" applying the modified retrospective method to all contracts that were not completed as of January 1, 2018. Results for reporting periods beginning after January 1, 2018 are presented under Topic 606, while prior period amounts are not adjusted and continue to be reported under the accounting standards in effect for the prior period. Please see the newly adopted accounting pronouncement for detail regarding the impact on the Group's financial statements that arise from the adoption.
Nature of Goods and Services
The Group generates substantially all of its revenues from sales of smart wearable devices. The Group also generates a small amount of its revenues from its subscription-based services. For the yearyears ended December 31, 2018,2019, 2020 and 2021, the Group generated 66.9%72.2%, 69.0% and 53.5% of revenue from one1 customer for sales of exclusively designed and manufactured smart wearable devices, and 33.1%generated 27.8%, 31.0% and 46.5% of revenue from sales of the Group'sGroup’s self-branded products and others. Revenue is recognized when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration the Group expects to be entitled to in exchange for the goods or services. The Group recognizes revenue, net of estimated sales returns and value-added taxes ("VAT"(“VAT”).
F-20
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Revenue recognition - continued
The Group has determined that its contracts with its customers include multiple performance obligations that the Group accounts for separately as those are distinct from other items in the contract. The first performance obligation is the smart wearable device and embedded firmware that is essential to the functionality of the device, which the customer can benefit from it on its own or with other resources that are readily available to the customer. The second performance obligation is the software services included with the products, which are provided free of charge and enable users to sync, view, and access real-time data on the Group’s mobile apps. The third performance obligation is the embedded right included with the purchase of the device to receive, on a when-and-if-available basis, future unspecified firmware upgrades and features relating to the product’s essential firmware.
F-18
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Revenue recognition – continued.
The Group allocates the transaction price to all performance obligations based on their relative standalone selling prices. The standalone selling prices are determined based on the expected cost plus margin as the Group determined that no observable price is available for any of its performance obligation. The Group considered multiple factors in the process of determining its cost plus margin including consumer behavioursbehaviors and the Group’s internal pricing model. The cost plus margin estimated selling price for the smart and wearable devices comprised the majority of the transaction. The cost plus margin estimated selling price for the software services and software upgrades was estimated from RMB1.77RMB1.72 to RMB5.68RMB10.62 per unit, RMB1.83 to RMB8.40 per unit and RMB1.97 to RMB2.15 per unit for the yearyears ended December 31, 2018.2019, 2020 and 2021, respectively. The Group recognizes revenue for the amounts allocated to the connected smart and wearable devices when the customer obtains control of the Group'sGroup’s product, which occurs at a point of time, typically upon delivery to the reseller and acceptance by the reseller, who has been identified as the customer of the Group. Amounts allocated to the software services and unspecified upgrade rights are deferred and recognized over time as the customer simultaneously receives and consumes the benefit over an estimated nine-month period.
Sales of self-branded products and others
For the yearyears ended December 31, 2018,2019, 2020 and 2021, the Group generated 33.1%27.8%, 31.0% and 46.5% of revenues from sales of the Group'sGroup’s self-branded products and others to retailers, distributors and end users. The Group’s revenue recognition for its self-branded products was consistent with that described in the preceding paragraphs.
Cooperation agreement with one customer
For the yearyears ended December 31, 2018,2019, 2020 and 2021, the Group generated 66.9%72.2%, 69.0% and 53.5% of revenues from one1 customer for sales of exclusively designed and manufactured smart wearable devices. That customer is also the sole distributor for such smart wearable devices and is controlled by one of ourthe shareholders (see Note 22)21). Under the cooperation agreement with this customer, the Group produces and assembles final product for shipments of wearable devices to that customer, who are then responsible for commercial distribution and sale of the product. The arrangement includes two2 payment instalments. The first payment instalment is priced to recover the costs incurred by the Group in developing and shipping the devices to the customer and is due from the customer to the Group once the products have been delivered and accepted by the customer. The Group allocates the initial payment instalment between the hardware device, the software services, and the software upgrades based on their standalone selling price and recognizes revenue based on its recognition policy further described in the preceding paragraph. The Group is also entitled to receive a potential second instalment payment calculated as 50 percent of the future net profits from commercial sales made by the customer. The Group has determined that the second instalment consideration constitutes variable consideration and includes the amount in the transaction price to the extent it is not constrained and it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period (see below for further details). The second instalment is also allocated between the hardware device, the software services, and the software upgrades based on the relative standalone price and is recognized based on the Group'sGroup’s recognition policy further described in the preceding paragraph. The Group’s revenue recognition policy of its products under its cooperation agreement is substantially consistent with that for its sales of self-branded products except that the instalment payments arrangement under the cooperation agreement is not available to the self-branded products.
F-21
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Revenue recognition - continued
Variable Consideration
Revenues from product sales are recorded at the net sales price (transaction price), which includes estimate of variable consideration which result from the Group'sGroup’s cooperation agreement with one1 customer (see above for more details). The amount of variable consideration is included in the transaction price to the extent it is not constrained and that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not occur in a future period. Actual amounts of consideration ultimately received may differ from the Group'sGroup’s estimates. If actual results in the future vary from the Group'sGroup’s estimates, the Group will adjust these estimates, which would affect revenue and earnings in the period such variances are known.
Sales Incentive
Starting in 2018, theThe Group periodically provides sales incentives to its customers for self-branded products, including reduced sales prices and volume-based discounts. Volume discounts are negotiated on a contract-by-contract basis with customers and the discount will increase depending upon the volume purchased over the period. The sales incentives are discounts to be applied to future sales to the customer which cannot be exchanged for cash. To the extent that the volume discount or sales incentive represents a material right or options to acquire additional goods or services at a discount in the future period, the material right is recognized as a separate performance obligation at the outset of the arrangement based on the most likely amount of incentive to be provided to the customer. Amounts allocated to a material right are recognized as revenue when those future goods are sold to the customers.
F-19
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Practical Expedients and Exemptions
The Group generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling and marketing expenses. In addition, the Group does not disclose the value of unsatisfied performance obligations as all of its contracts have an original expected length of one year or less.
Periods prior to January 1, 2018
The Group recognized revenue when a persuasive evidence of an arrangement exists, delivery has occurred and the services have been rendered, the sales price is fixed or determinable, and collection is reasonably assured. The Group recognized revenue, net of estimated sales returns and value-added taxes ("VAT").
The Group’s contracts with its customers included multiple element arrangements. The first deliverable was the smart wearable device and embedded firmware that was essential to the functionality of the device. The second deliverable was the software services included with the products, which were provided free of charge and enabled users to sync, view, and access real-time data on the Group’s mobile apps. The third deliverable was the embedded right included with the purchase of the device to receive, on a when-and-if-available basis, future unspecified firmware upgrades and features relating to the product’s essential firmware.
The Group allocated revenue to all deliverables based on their relative selling prices. The Group used a hierarchy to determine the selling price to be used for allocating revenue to the deliverables: (i) vendor-specific objective evidence (“VSOE”) of fair value, (ii) third-party evidence (“TPE”), and (iii) best estimate of the selling price (“BESP”). Because the Group did not have neither VSOE nor TPE for any of its deliverables, revenue was allocated to the deliverables on the Group’s BESP as if each deliverable was sold regularly on a stand-alone basis. The Group’s process for determining its BESP considered multiple factors including consumer behaviors and the Group’s internal pricing model. The BESP for the smart and wearable devices comprised the majority of the arrangement consideration. The BESP for the software services and software upgrades was estimated from RMB 0.43 to RMB 2.82 per unit and from RMB1.30 to RMB 5.69 per unit for the years ended December 31, 2016 and 2017, respectively. The Group recognized revenue for the amounts allocated to the connected smart and wearable devices at the time of delivery (except as noted below), provided the other conditions for revenue recognition have been met. Revenue for products sold through distributors or retailers was recognized on a sell-in basis. Amounts allocated to the software services and unspecified upgrade rights were deferred and recognized on a straight-line basis over their estimated usage period which approximately 9 months.
Sales of self-branded products and others
For the years ended December 31, 2016 and 2017, the Group generated 7.9% and 21.2% of revenues from sales of the Group's self-branded products and others to retailers, distributors and end users. The Group’s revenue recognition for its self-branded products was consistent with that described in the preceding paragraphs.
Cooperation agreement with one customer
For the years ended December 31, 2016 and 2017, the Group generated 92.1% and 78.8% of revenues from one customer for sales of exclusively designed and manufactured smart wearable devices. That customer was also the sole distribution channel for such smart wearable devices and is one of our shareholders (see Note 22). Under the cooperation agreement with this customer, the Group produces and assembles final product for shipments of wearable devices to that customer, who are then responsible for commercial distribution and sale of the product. The arrangement includes two payment instalments. The first payment instalment is priced to recover the costs incurred by the Group in developing and shipping the devices to the customer and is due from the customer to the Group once products have been delivered and accepted by the customer. The Group allocates the initial payment instalment between the hardware device, the software services, and the software upgrades based on their relative fair value and recognizes revenue based on its recognition policy further described in the preceding paragraph. The Group is also entitled to receive a potential second instalment payment calculated as 50 percent of the future net profits from commercial sales made by the customer. Given the revenue from the profit sharing arrangement is contingent on the commercial sale, the Group recognized revenue from the second instalment in the period following the commercial sale by the customer, which is when the fee was fixed and determinable. The fee related to the second instalment was usually earned by the Group between 30 to 45 days after initial shipment of the product to the customer. The second instalment was also allocated between the hardware device, the software services, and the software upgrades based on their relative fair value and is recognized based on the Group's recognition policy further described in the preceding paragraph. The Group’s revenue recognition policy of its products under its cooperation agreement was substantially consistent with that for its sales of self-branded products except that the instalment payments arrangement under the cooperation agreement is not available for the self-branded products.
F-20
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Value added taxes
"VAT"VAT on sales was previously calculated at 17% on revenue from products before May 1, 2018 and thereafter, in accordance with Cai Shui [2018] No.32, the VAT rate decreased to 16%. Since April 1, 2019, in accordance with Cai Shui [2019] No.39, the VAT rate further decreased to 13%. The Group reports revenue net of VAT. Subsidiaries that are VAT general tax payerstaxpayers are allowed to offset qualified input VAT paid against their output VAT liabilities.
Rights of return
The Group offers limited sales returns for self-branded products sold directly to its customers. The Group estimates the amount of its products sales that may be returned by its customers and records this estimate as a reduction of revenue in the period the related revenue is recognized. The Group currently estimates product return liabilities using its own historical sales information. For the years ended December 31, 20172019, 2020 and 2018,2021, sales returns have beenwere insignificant.
F-22
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Cost of revenues
Cost of revenues consists primarily of material costs, salaries and benefits for staff engaged in production activities and related expenses thatwhich are directly attributable to the production of products. The shipping and handling fees billed to the customers are presented as part of cost of revenues as well.
Product warranty
The Group offers a standard product warranty that the product will operate under normal use. For products sold to the one customer under the cooperation agreement the warranty period is 18 months which includes a six month warrantyand distributors of self-branded products. For products sold to end users, either through that customer and an additional 12 months warranty to end-users. Fordistributors of self-branded products, soldor directly by the Group to end users, the warranty period includeGroup offers a 12 months warranty to end users.12-month warranty. The Group has the obligation at its option, to either repair or replace the defective product.defect product for the customers if the product is still under warranty.
At the time revenue is recognized, an estimate of future warranty costs is recorded as a component of cost of revenues. The reserves established are regularly monitored based upon historical experience and any actual claims charged against the reserve. Warranty reserves are recorded as a cost of revenue.revenues.
Research and development expenses
Research and development expenses primarily consist of salaries and benefits for research and development personnel, materials, office rental expense,expenses, general expenses and depreciation expenses associated with research and development activities.
Advertising expenseexpenses
Advertising expenseexpenses are expensed as incurred and included in selling and marketing expenses. Total advertising expenses were RMB13,474, RMB7,586RMB72,269, RMB136,974 and RMB25,362RMB151,744 for the years ended December 31, 2016, 20172019, 2020 and 2018,2021, respectively.
Government subsidies
Government subsidies represent government grants received from local government authorities to encourage the Group’s technology and innovation. innovations and also other subsidies for production.
The Group records such government subsidies as other income or reduction of expenses or cost of revenues when it has fulfilled all of its obligation related to the subsidy.
During the years ended December 31, 2016, 20172019, 2020 and 2018,2021, the Group recognized RMB14,726, RMB6,719RMB14,723, RMB13,461 and RMB9,679RMB23,140 as subsidy income and recognized NaN, RMB10,408, and RMB103,660 as reduction of expenses or cost of revenues, respectively. As of December 31, 2018,2020 and 2021, subsidies of RMB8,888RMB26,158 and RMB3,129 were recorded as other current liabilities, RMB183,920 and RMB56,249RMB175,053 were recorded as other non-current liabilities as the Group has to meet certain performance conditions required by the government authorities.
F-23
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Income taxes
Current incomeIncome taxes are provided for in accordance with the laws of the relevant tax authorities. Deferred income taxestax assets and liabilities are recognized when temporary differences exist between the tax bases of assets and liabilities and their reported amounts in the consolidated financial statements. Net operating loss carry forwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized.
F-21
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Income taxes – continued.
The Group accounts for uncertain tax positions by reporting a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return. Tax benefits are recognized from uncertain tax positions when the Group believes that it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The Group recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense.expenses.
Share-based payment
Share-based payment transactions with employees, such as share options and restricted shares are measured based on the grant date fair value of the equity instrument. The Group has elected to recognize compensation expenses using the straight-line method for all employee equity awards granted with graded vesting provided that the amount of compensation cost recognized at any date is at least equal to the portion of the grant-date value of the options that are vested at that date, over the requisite service period of the award, which is generally the vesting period of the award. The Group elects to recognize forfeitures when they occur.
Comprehensive income
Comprehensive income consists of two components, net income and other comprehensive income, net of tax. Other comprehensive income refers to revenue, expenses, and gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income. The Group’s other comprehensive income consists of foreign currency translation adjustments from its subsidiaries not using the RMB as their functional currency and the fair value change of available-for-sale investments of the Group. Comprehensive income is reported in the consolidated statements of comprehensive income.
Foreign currencies
The functional currency of the Company outside of the PRC is the US$. The and the reporting currency of the Company is the RMB. The Company’s subsidiaries, consolidated VIEs and VIEs’ subsidiaries with operations in the PRC, Hong Kong, the United States and other jurisdictions generally use their respective local currencies as their functional currencies. The financial statements of the Company’s subsidiaries, other than the subsidiaries and consolidated VIEs with the functional currency of RMB, are translated into RMB using the exchange rate as of the balance sheet date for assets and liabilities and the average daily exchange rate for each month for income and expense items. Translation gains and losses are recorded in accumulated other comprehensive income or loss as a component of shareholders’ equity.
In the financial statements of the Company’s subsidiaries and consolidated VIEs and VIEs’ subsidiaries, transactions in currencies other than the functional currency are measured and recorded in the functional currency using the exchange rate in effect at the date of the transaction. At the balance sheet date, monetary assets and liabilities that are denominated in currencies other than the functional currency are translated into the functional currency using the exchange rate at the balance sheet date. All gains and losses arising from foreign currency transactions are recorded in the consolidated statements of operations during the year in which they occur. For the years ended December 31, 2016, 20172019, 2020 and 2018,2021, the transaction (losses)/gains /gains amounted to RMB(5,773)RMB(14,231), RMB779RMB27,451 and RMB(7,588)RMB18,156 and were recorded in general and administrative expenses.
F-24
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Foreign currencies - continued
RMB is not a freely convertible currency. The State Administration for Foreign Exchange, under the authority of the People’s Bank of China, controls the conversion of RMB into other currencies. The value of the RMB is subject to changes in central government policies and to international economic and political developments affecting supply and demand in the China Foreign Exchange Trading System market. The Group’s cash and cash equivalents denominated in US$ amounted to RMB98,537, RMB66,494RMB609,679 and RMB513,526RMB435,205 as of December 31, 2016, 20172020 and 2018,2021, respectively.
Convenience translation
Translations of balances in the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows from RMB into US$ as of and during the year ended December 31, 20182021 is solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.8755,RMB6.3726, representing the rate as certified by the statistical release of the Federal Reserve Board of United States on December 31, 2018.2021. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into U.S. dollar at that rate on December 31, 2018,2021, or at any other rate.
F-22
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
(Loss)/Net income per share
Basic (loss)/net income per ordinary share is computed by dividing net income (loss) attributable to ordinary shareholders by the weighted average number of ordinary shares outstanding during the period.
The Group’s convertible redeemable participating preferred shares are participating securities as they participate in undistributed earnings on an as-if converted basis. The Group determined that the nonvested restricted shares owned by the founders are participating securities as the holders of these nonvested restricted shares have nonforfeitable rights to receive dividends with all ordinary shares but these nonvested restricted shares do not have a contractual obligation to fund or otherwise absorb the Group’s loss. Accordingly, the Group uses the two-class method, whereby undistributed net income is allocated on a pro rata basis to the ordinary shares preferred shares and nonvested restricted shares held by the founders to the extent that each class may share income in the year; whereas the undistributed net loss for the year is allocated to ordinary shares only because the convertible redeemable participating preferred shares and nonvested restricted shares owned by the founders are not contractually obligated to share the loss.
Diluted (loss)/income per ordinary share reflect the potential dilution that would occur if securities were exercised or converted into ordinary shares. The Group had convertible redeemable participating preferred shares, share options, restricted shares and restricted stock units (“RSU”) which could potentially dilute basic (loss)/ income per ordinary share in the future. To calculate the number of shares for diluted (loss)/income per ordinary shares, the effect of the convertible redeemable participating preferrednonvested restricted shares owned by the founders is computed using the as-if-converted method; the effect of the share options, restricted shares and restricted stock unitsRSU is computed using the treasury stock method.
Concentration of credit risk
Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents, term deposits, accounts receivable and revenue.receivable. The Group places its cash and cash equivalents with financial institutions with high credit ratings and quality.
The Group conducts credit evaluations of third-party customers and related parties, and generally does not require collateral or other security from its third-party customers and related parties. The Group establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific third-party customers and related parties.
F-25
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Concentration of credit risk - continued
Accounts receivable concentration of credit risk is as below:
|
| As of December 31, | |||||||||||||
|
| 2017 |
|
| 2018 | ||||||||||
|
| RMB |
|
| RMB | ||||||||||
| | | | | | | | | | ||||||
| | As of December 31, | | ||||||||||||
|
| 2020 | | 2021 |
| ||||||||||
| | RMB | | RMB | | ||||||||||
Company A |
| 18,782(57.1%) |
|
| 10,600(18.0%) |
| * | % | 87,825 | | 16.4 | % | |||
Company B |
|
| — |
|
| 25,264(42.9%) |
| 59,987 | | 20.1 | % | 26,101 | | 4.9 | % |
Company C |
| 108,422 | | 36.4 | % | 269,460 | | 50.1 | % | ||||||
Total |
| 18,782(57.1%) |
|
| 35,864(60.9%) | | 168,409 | | 56.5 | % | 383,386 | | 71.4 | % | |
*Accounts receivable from Company A is less than 10% as of December 31, 2020.
Amount due from related parties concentration of credit risk is as below:
|
| As of December 31, | |||||||||||
|
| 2017 |
| 2018 | |||||||||
|
| RMB |
| RMB | |||||||||
Company C |
| 566,732(98.0%) |
| 631,204(96.2%) | |||||||||
| | | | | | | | | | ||||
| | As of December 31, | | ||||||||||
|
| 2020 | | 2021 |
| ||||||||
| | RMB | | RMB | | ||||||||
Company D |
| 830,871 | | 96.6 | % | 286,341 | | 96.9 | % | ||||
Total |
| 566,732(98.0%) |
| 631,204(96.2%) |
| 830,871 | | 96.6 | % | 286,341 | | 96.9 | % |
F-23
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
Concentration of credit risk – continued
Revenue generated from Company CD accounted for 93.1%73.5%, 86.6%69.1% and 76.8%53.5% of total revenue during the yearyears ended December 31, 2016, 20172019, 2020 and 2018,2021, respectively. Company CD is a subsidiary of a company controlled by one of the Group’s shareholders (see note 22)Note 21).
|
| For the years ended December 31, | |||||||||||||||||
|
| 2016 |
| 2017 |
| 2018 | |||||||||||||
|
| RMB |
| RMB |
| RMB | |||||||||||||
Company C |
| 1,448,960(93.1%) |
| 1,773,595(86.6%) |
| 2,798,824 (76.8%) | |||||||||||||
| | | | | | | | | | | | | | ||||||
| | For the years ended December 31, | | ||||||||||||||||
|
| 2019 |
| 2020 |
| 2021 | | ||||||||||||
| | RMB | | RMB | | RMB | | ||||||||||||
Company D |
| 4,271,135 |
| 73.5 | % | 4,447,957 |
| 69.1 | % | 3,340,857 |
| 53.5 | % | ||||||
Total |
| 1,448,960(93.1%) |
| 1,773,595(86.6%) |
| 2,798,824 (76.8%) |
| 4,271,135 | | 73.5 | % | 4,447,957 | | 69.1 | % | 3,340,857 | | 53.5 | % |
Supplier Concentration
The Group relies on third parties for the supply and manufacturing of its products, as well as third-party logistics providers. In instances where these parties fail to perform their obligations, the Group may be unable to find alternative suppliers or satisfactorily deliver its products to its customers on time, if at all.
For the yearyears ended December 31, 2018, 38.6%2019 and 2020, 13.5% and 15.1% of its raw materials and semi-manufactures were purchased through Company D,E, respectively, but numerous alternate sources of supply are readily available on comparable terms.
No purchases from a single suppliers account for more than 10% of total purchases during the year ended December 31, 2021.
Newly adopted accounting pronouncements
On January 1, 2018,In December 2019, the Group adoptedFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). Under(“ASU”) No. 2019-12, Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard revenue is recognized when a customer obtains controlpermitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The Group adopted the new standard beginning January 1, 2021 and the adoption of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The Group applied the five-step method outlined in Topic 606 to all revenue streams and elected to adopt the standard using the modified retrospective method. The additional disclosures required by the ASU have been included in Note 2 and Note 13.
The adoption of Topic 606 did not have a significantmaterial impact on revenue recognized on sales from the Group's self-branded products; however, it did have a significant impact on revenue recognized on sales under the Group's cooperation agreement with one customer. Under the accounting standards in effect in the prior period, the second instalment payment in the Group's cooperation agreement, calculated as 50 percent of the future net profits from commercial sales made by the customer, was considered contingent and recognized in the period following the commercial sale by the customer, which is when the fee became fixed or determinable. consolidated financial statements.
Under Topic 606, revenue related to the second instalment payment in the Group's cooperation agreement is considered variable consideration and the amount determined to be not probable of significant future reversal, which is the entire second instalment amount, is included in the transaction price utilizing the expected value method.F-26
As a result of the adoption, the Group recognized the following impact for the year ended and as of December 31, 2018:
|
| For the year ended December 31, |
| |||||||||
|
| Under ASC 605 |
|
| Impact |
|
| Under ASC 606 |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Revenue |
|
| 3,645,385 |
|
|
| (50 | ) |
|
| 3,645,335 |
|
Amount due from related parties |
|
| 623,120 |
|
|
| 33,279 |
|
|
| 656,399 |
|
Retained earnings at beginning |
|
| 131,192 |
|
|
| 33,329 |
|
|
| 164,521 |
|
F-24
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED
Newly adopted accounting pronouncements - continued
The adoption of the standard had no impact to net cash from or used in operating, investing, or financing activities in the Group’s consolidated statement of cash flows. Please refer to Note 13 for more information on disaggregate of revenue with customers.
In January 2016,2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) (“ASU 2020-01”), which clarifies the interactions of the accounting for certain equity securities under ASC 321, investments accounted for under the equity method of accounting in ASC 323, and the accounting for certain forward contracts and purchased options accounted for under ASC 815. ASU 2020-01 could change how an entity accounts for (i) an equity security under the measurement alternative and (ii) a new pronouncement ASU 2016-01 Financial Instruments-Overall: Recognition and Measurementforward contract or purchased option to purchase securities that, upon settlement of Financial Assets and Financial Liabilities. The ASU requires equity investments (except thosethe forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The ASU also requires an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments.
ASU 2016-01 was further amended in February 2018 by ASU 2018-03, "Technical Corrections and Improvements to Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities". This update was issued to clarify certain narrow aspects of guidance concerning the recognition of financial assets and liabilities established in ASU 2016-01. This includes an amendment to clarify that an entity measuring an equity security using the measurement alternative may change its measurement approach to a fair valuation method in accordance with Topic 820, Fair Value Measurement, through an irrevocable election that would apply to that securityASC 825. These amendments improve current U.S. GAAP by reducing diversity in practice and all identical or similar investmentsincreasing comparability of the same issued.
ASU 2016-01 and ASU 2018-03 are effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Adoption of the amendment must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for amendments related to equity instruments that do not have readily determinable fair values which should be applied prospectively.
The Group has adopted the new standard as of January 1, 2018, which did not result in a material impact on its consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of ASU 2017-01 is to change the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. ASU 2017-01 became effective for the Company on January 1, 2018. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.
Recent accounting pronouncements not yet adopted
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance supersedes existing guidance on accounting for leases with the main difference being that operating leases are to be recorded in the statement of financial position as right-of-use assets and lease liabilities, initially measured at the present value of the lease payments. For operating leases with a term of 12 months or less, a lessee is permitted to make an accounting policy election not to recognize lease assets and liabilities. For public companies, the guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the guidance is permitted. In July 2018, ASU 2016-02 was updated with ASU 2018-11, Targeted Improvements to ASC 842, which provides entities with relief from the costs of implementing certain aspects of the new leasing standard. Specifically, under the amendments in ASU 2018-11, (1) entities may elect not to recast the comparative periods presented when transitioning to ASC 842 and (2) lessors may elect not to separate lease and nonlease components when certain conditions are met. Before ASU 2018-11 was issued, transition to the new lease standard required application of the new guidance at the beginning of the earliest comparative period presented in the financial statements. The Group is in the process of completing its evaluation of the effect of the adoption of this ASU and expects the adoption will result in an increase in the assets and liabilities on the consolidated balance sheet for the operating leases and will have insignificant impact on its consolidated statements of operations and cash flows.
On June 16, 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequently in November 2018, ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments - Credit Losses. The ASUs amend the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. In addition, these amendments require the measurement of all expected credit losses for financial assets, including trade accounts receivable, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Thisinteractions. The new guidance and related amendments is effective for annual reporting periods beginning after December 15, 2019, including interim periods therein. Early application is permitted for all organizations for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2020. Early adoption is permitted. The Group adopted ASU 2020-01 in the year ended December 31, 2021 and the adoption did not have a material impact on the Group’s consolidated financial statements.
Recent accounting pronouncements not yet adopted
In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06), which simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments. This guidance also eliminates the treasury stock method to calculate diluted earnings per share for convertible instruments and requires the use of the if-converted method. The amendments are effective for fiscal years beginning after December 15, 2018.2021, including interim periods within those fiscal years, with early adoption permitted. The Group is currently assessingevaluating the impact thisof the new guidance will have on its consolidated financial statements.
In January 2017,May 2021, the FASB issued ASU 2017-04, addressing concerns regarding the costNo. 2021-04, Earnings Per Share (Topic 260), Debt — Modifications and complexityExtinguishments (Subtopic 470-50), Compensation — Stock Compensation (Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40) to clarify and reduce diversity in an issuer’s accounting for modifications or exchanges of the two-step goodwill impairment test, thefreestanding equity-classified written call options (for example, warrants) that remain equity classified after modification or exchange. The amendments in this ASU remove the second step of the test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. For public entities, the amendmentsupdate are effective for annual and interim goodwill impairment tests inall entities for fiscal years beginning after December 15, 2019. For public entities,2021, including interim periods within those fiscal years. An entity should apply the ASU’samendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. The Group is currently evaluating the impact of the new guidance on its consolidated financial statements.
In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (ASU 2021-08), which clarifies that an acquirer of a business should recognize and measure contract assets and contract liabilities in a business combination in accordance with Topic 606, Revenue from Contracts with Customers The new amendments are effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2020. For all other entities,2022, including not-for-profit entities,interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the ASU’seffective date of the amendments, with early adoption permitted. The Group is currently evaluating the impact of the new guidance on its consolidated financial statements.
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832) — Disclosures by Business Entities about Government Assistance. The amendments in this ASU require disclosures about transactions with a government that have been accounted for by analogizing to a grant or contribution accounting model to increase transparency about (1) the types of transactions, (2) the accounting for the transactions, and (3) the effect of the transactions on an entity’s financial statements. The amendments in this ASU are effective for all entities within their scope for financial statements issued for annual and interimperiods beginning after December 15, 2021. Early application of the amendments is permitted. The Group is currently evaluating the impact of the new guidance on its consolidated financial statements.
F-25F-27
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
2. SIGNIFICANT ACCOUNTING POLICIES - continued
goodwill impairment tests in fiscal years beginning after December 15, 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Group is in the process of evaluating the impact that this pronouncements on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement to ASC Topic 820, Fair Value Measurement ("ASC 820"). ASU 2018-13 modifies the disclosure requirements for fair value measurements by removing, modifying, and/or adding certain disclosures. ASU 2018-13 is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2019. An entity is permitted to early adopt by modifying existing disclosures and delay adoption of the additional disclosures until the effective date. The Group is evaluating the effect that adoption of this guidance will have on its consolidated financial statements and related disclosures.
3. BUSINESS ACQUISITIONS
AcquisitionBusiness acquisition of YundingPAI Health Inc. (“PAI”)
In March 2016,On June 12, 2020, the Group investedacquired 100% equity interest in PAI from Global Technology and paid RMB2,520 to obtain 35% equity interests in YundingInnovation Ltd (“GTI”) to expand the business of smart technology deviceshealth-related software and benefit from the synergistic effect expected from such investment.algorithms development. The investmentpurchase consideration included a previously held 40.49% equity interest held in GTI which was initially recognizedpreviously accounted as an equity-methodequity method investment asby the Group enjoyed one outfor which the fair value approximated RMB87,716, cash of three board seatsRMB1,370 and concluded that it had significant influence over the operationsRMB13,711 of Yunding. In July 2017, the Group acquired an additional 22% equity interests in Yunding for consideration of RMB1,584 in cash. The acquisition resulted in the Group obtaining control of Yunding with an ownership of 57% equity interests.
The purchase price consists of the following:
| ||||
|
| |||
| ||||
|
| |||
|
| |||
|
| |||
The Group recognized RMB2,140 of realized gain from investment in the consolidated statements of operationsloan deemed effectively settled as a result of remeasuring the 35% equity interests toacquisition. The fair value immediately beforeof previously held equity interest held in GTI was estimated by the business combination. Group with the assistance of an independent valuation appraiser by applying the income approach, market multiple approach and recent investment price approach.
The acquisition was recorded using the acquisition method of accounting. Accordingly, the acquired assets and liabilities assumed were recorded at their fair value at the date of acquisition. The acquisition-date fair value of the equity interests held by the Company immediately prior to the acquisition date was measured at fair value using a discounted cash flow method and taking into account certain factors including the management projection of discounted future cash flow and an appropriate discount rate. The purchase price allocation described below was determined by the Group with the assistance of an independent valuation appraiser. Yunding financial statements constituted less than 1% of revenue, net income, and total assets of the consolidated financial statement as of and during the year ended December 31, 2017 and 2018. The acquired net assets were recorded at their estimated fair values on the acquisition date. The acquired goodwill is not deductible for tax purposes.
F-26
TablePAI constituted less than 1% of Contents
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousandsrevenue and total assets of Renminbi (“RMB”)the consolidated financial statement as of and U.S. dollars (“US$”)
exceptduring the year ended December 31, 2020 and the results of operations attributable to PAI and pro forma results of operations for numberPAI have not been presented because they are not material to the consolidated statements of sharesoperations and per share data, or otherwise noted)
3. BUSINESS ACQUISITIONS - continued
Acquisition of Yunding – continuedcomprehensive income for the years ended December 31, 2019 and 2020.
The purchase price was allocated as of July 31, 2017,June 12, 2020, the date of acquisition, as follows:
| | | | | ||
| RMB | Amortization period | ||||
Cash |
|
| 5,554 |
|
| |
Other current assets |
|
| 4,704 |
|
| |
Property, plant and equipment |
|
|
|
| ||
Intangible assets |
| |
|
| ||
Patents |
|
|
|
| ||
Goodwill |
|
|
| |||
Other non-current assets | 261 |
|
| |||
Other current liabilities |
|
|
|
|
| |
Deferred tax liabilities |
|
|
|
|
| |
Other non-current liabilities |
|
|
| |||
|
|
|
|
| ||
Total |
|
| 102,797 |
|
|
The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under US GAAP, and comprise of (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of synergy effect from the acquisition.
4. INVENTORIES
Inventories consisted Goodwill is not allocated to the Company’s operating segments in the measure of segment assets regularly reported to and used by the chief operating decision maker. However, for the purpose of the following:annual goodwill impairment test, goodwill is allocated to the operating segments (goodwill reporting units).
|
| As of December 31, |
| |||||
|
| 2017 |
|
| 2018 |
| ||
|
| RMB |
|
| RMB |
| ||
Raw materials |
|
| 169,665 |
|
|
| 191,242 |
|
Work in process |
|
| 30,195 |
|
|
| 33,714 |
|
Finished goods |
|
| 49,875 |
|
|
| 259,666 |
|
Total |
|
| 249,735 |
|
|
| 484,622 |
|
Asset acquisition of Guoxu Insurance Brokerage Co., Ltd. (“Guoxu”)
During the years ended December 31, 2016, 2017 and 2018,In July 2020, the Group recorded write-downentered into a purchase agreement with shareholders of RMB1,037, RMB2,449 and nilGuoxu to acquire 100% of Guoxu's equity ownership for a gross consideration of RMB67,914, of which RMB35,075 was related to the obsolete inventories, respectively.effective settlement of the selling shareholder's loan payable to Guoxu upon closing. This resulted in a net cash consideration of RMB32,839.
F-27
F-28
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
3. ACQUISITIONS – CONTINUED
Asset acquisition of Guoxu Insurance Brokerage Co., Ltd. (“Guoxu”) - continued
Guoxu holds an insurance brokerage license. As of the acquisition day, the Group terminated all the labor relationship with the employees of Guoxu and did not buy any material contracts. The Group evaluated the acquisition of the purchased assets under ASC 805-Business Combination (ASC 805), and concluded that as substantially all of the fair value of the gross assets acquired is concentrated in the insurance brokerage license, the transaction did not meet the requirements to be accounted for as a business combination and therefore was accounted for as an asset acquisition.
4. DISPOSAL OF SUBSIDIARIES
Disposal of Shenzhen Yunding Information Technology Co., Ltd. (“Yunding”)
In December 2020, the Group sold 26.7% equity interest in Yunding to its founder for cash consideration of RMB22,500. The consideration also included a loan receivable from Yunding amounting to RMB24,514 to be repaid annually over three years for which the Group has a right to convert the unpaid balance into equity interest of Yunding after December 31, 2023. Yunding was previously part of the Group's self-branded products and others segment. Subsequent to this disposal, the Group remeasured its remaining 24.3% investment in Yunding at fair value and accounted for it as equity method investment because the Group retained the ability to exercise significant influence. The fair value of its remaining investment in Yunding was estimated by using recent financing transaction of Yunding. The Group recognized RMB56,522 gain from deconsolidation of a subsidiary which was recorded as part of gain from deconsolidation of a subsidiary in the consolidated statements of operations for the year ended December 31, 2020. In 2021, the Group further sold 5% equity interest of Yunding for RMB20,000. The disposal of Yunding did not represent a strategic shift and did not have a major effect on the Group's operation.
5. INVENTORIES, NET
Inventories consisted of the following:
| | | | |
| | As of December 31, | ||
|
| 2020 |
| 2021 |
| | RMB | | RMB |
Raw materials |
| 373,690 |
| 282,939 |
Work in process |
| 233,274 |
| 224,013 |
Finished goods |
| 610,573 |
| 742,375 |
Inventories, net |
| 1,217,537 |
| 1,249,327 |
During the years ended December 31, 2019, 2020 and 2021, the Group recorded a provision for the excess and obsolete inventories amounting to RMB23,799, RMB64,223 and RMB51,336, and wrote off RMB17,739, RMB59,852 and RMB47,077 respectively.
F-29
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
6. SHORT-TERM INVESTMENTS
Short-term investments included convertible bonds with maturities less than 1 year and consisted of the following:
| | | | |
| | As of December 31, | ||
|
| 2020 |
| 2021 |
| | RMB | | RMB |
Convertible bonds: |
|
|
|
|
Guangzhou Joyrun Technology Co., Ltd (“Joyrun”) (a) |
| 12,433 | | 13,273 |
Other (b) |
| 5,997 | | 6,078 |
Total: |
| 18,430 | | 19,351 |
|
| As of December 31, |
| |||||
|
| 2017 |
|
| 2018 |
| ||
|
| RMB |
|
| RMB |
| ||
Convertible bonds: |
|
|
|
|
|
|
|
|
Zepp International Limited (“Zepp”) (a) |
|
| 6,513 |
|
|
| — |
|
Shenzhen Snowball Technology Co., Ltd (“Snowball”) (b) |
|
| — |
|
|
| 16,243 |
|
Guangzhou Joyrun Technology Co., Ltd (“Joyrun”) (c) |
|
| — |
|
|
| 10,751 |
|
Abee Semi, Inc.("Abee") (d) |
|
| 7,208 |
|
|
| 8,097 |
|
Others (e) |
|
| — |
|
|
| 15,391 |
|
Total: |
|
| 13,721 |
|
|
| 50,482 |
|
(a) |
|
|
|
| In September 2018, the Group invested RMB10,500 to |
|
|
| The |
F-28
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS6.
|
| As of December 31, |
| |||||||||
|
| 2017 |
|
| 2018 |
| ||||||
|
| RMB |
|
| RMB |
| ||||||
Deferred IPO expense |
|
| 13,268 |
|
|
| — |
| ||||
Value-added tax |
|
| 13,170 |
|
|
| 19,542 |
| ||||
Short-term loans |
|
| 11,857 |
|
|
| 14,559 |
| ||||
| | | | | ||||||||
| | As of December 31, | ||||||||||
|
| 2020 |
| 2021 | ||||||||
| | RMB | | RMB | ||||||||
Value-added tax recoverable |
| 100,686 | | 198,189 | ||||||||
Other receivables |
| 21,060 | | 57,039 | ||||||||
Prepaid expenses |
| 25,863 | | 51,156 | ||||||||
Advances to suppliers |
|
| 5,128 |
|
|
| 8,359 |
|
| 874 | | 7,838 |
Other receivables |
|
| 4,656 |
|
|
| 8,049 |
| ||||
Rental deposits |
|
| 1,969 |
|
|
| 4,474 |
|
| 4,415 | | 816 |
Prepaid expenses |
|
| 1,014 |
|
|
| 3,264 |
| ||||
Total |
|
| 51,062 |
|
|
| 58,247 |
|
| 152,898 | | 315,038 |
7.
8. PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consisted of the following:
|
| As of December 31, |
| |||||||||
|
| 2017 |
|
| 2018 |
| ||||||
|
| RMB |
|
| RMB |
| ||||||
| | | | | ||||||||
| | As of December 31, | ||||||||||
|
| 2020 |
| 2021 | ||||||||
| | RMB | | RMB | ||||||||
Software and electronic equipment |
|
| 7,092 |
|
|
| 14,453 |
|
| 65,288 | | 78,854 |
Buildings |
|
| 18,592 |
|
|
| 19,342 |
|
| 19,342 | | 34,764 |
Leasehold improvements |
|
| 9,327 |
|
|
| 10,404 |
|
| 74,209 | | 81,759 |
Total |
|
| 35,011 |
|
|
| 44,199 |
|
| 158,839 | | 195,377 |
Less: accumulated depreciation |
|
| (6,256 | ) |
|
| (12,029 | ) |
| (36,387) | | (70,832) |
Construction in progress |
|
| — |
|
|
| 7,872 |
|
| 2,167 | | 9,328 |
Property, plant and equipment, net |
|
| 28,755 |
|
|
| 40,042 |
|
| 124,619 | | 133,873 |
The Group has recorded depreciation expenses of RMB2,399, RMB3,542RMB9,409, RMB14,949 and RMB5,773RMB35,109 during the years ended December 31, 2016, 20172019, 2020 and 2018,2021, respectively. NoNaN impairment was recorded during the years ended December 31, 2016, 20172019, 2020 and 2018.2021.
Construction in progress includes leasehold improvements as well as the implementation of an information technology system.F-30
F-29
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
9. INTANGIBLE ASSETS, NET
Intangible assets, net, consisted of the following:
|
| As of December 31, |
| |||||||||
|
| 2017 |
|
| 2018 |
| ||||||
|
| RMB |
|
| RMB |
| ||||||
| | | | | ||||||||
| | As of December 31, | ||||||||||
|
| 2020 |
| 2021 | ||||||||
| | RMB | | RMB | ||||||||
Intangible assets with indefinite lives: |
|
|
|
|
|
|
|
|
|
|
|
|
Domain name |
|
| 1,222 |
|
|
| 1,222 |
|
| 2,024 | | 2,024 |
Insurance brokerage license, trademark and others | | 37,382 | | 42,617 | ||||||||
Intangible assets with finite lives: |
|
|
|
|
|
|
|
|
| | | |
Patents |
|
| 4,304 |
|
|
| 63,130 |
| ||||
Patents and trademark |
| 126,423 | | 128,332 | ||||||||
Less: accumulated amortization |
|
| (187 | ) |
|
| (630 | ) |
| 20,616 | | 37,391 |
Intangible assets, net |
|
| 5,339 |
|
|
| 63,722 |
|
| 145,213 | | 135,582 |
During 2018, the Group purchased patents from Physical Enterprises Inc. ("PEI") for a total cash consideration amounting to RMB51,470. The Group acquired the patents for the purpose of facilitating their new product development. Amortization expenses for the intangible assets for the years ended December 31, 2016, 20172019, 2020 and 2018,2021, were nil, RMB175RMB7,806, RMB12,180 and RMB443,RMB16,775, respectively. Future amortization expenseexpenses relating to the existing intangible assets amounted to RMB6,313 RMB16,745 peryear for each of the next fivethree years, RMB12,179 for the fourth year, RMB9,097 for the fifth year, and RMB19,430 thereafter.
9.
10. LONG-TERM INVESTMENTS
Long-term investments consisted of the following:
| | | | |
| | As of December 31, | ||
|
| 2020 |
| 2021 |
| | RMB | | RMB |
Equity securities without readily determinable fair value |
|
|
|
|
Sifive, Inc. ("Sifive") (a) |
| 22,279 | | 21,759 |
AliveCor, Inc., (“Alivecor”) (b) | | 15,347 | | 14,988 |
Hyperfine Research, Inc. (“Hyperfine”) (c) | | 32,625 | | — |
Promaxo, Inc.("Promaxo") (d) | | 26,100 | | 25,490 |
Other equity securities without readily determinable fair value (e) |
| 67,684 | | 81,775 |
Equity securities with readily determinable fair value | | | | |
Hyperfine Inc. (c) | | — | | 31,669 |
Equity method investments: |
| |
| |
Jiangsu Yitong High-Tech Co, Ltd("Jiangsu Yitong") (f) | | — | | 960,832 |
Hefei Huaying Xingzhi Fund Partnership (limited partnership) (“Huaying Fund I”) (g) |
| 53,105 | | 61,014 |
Anhui Huaying Zhihui Wulian Fund Parnership(limited partnership)("Huaying Fund II") (h) | | 107,633 | | 200,067 |
Other equity method investments (i) |
| 47,562 | | 46,548 |
Available-for-sale investments (j) |
| 71,651 | | 108,449 |
Total |
| 443,986 | | 1,552,591 |
F-31
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
10. LONG-TERM INVESTMENTS - CONTINUED
|
| As of December 31, |
| |||||
|
| 2017 |
|
| 2018 |
| ||
|
| RMB |
|
| RMB |
| ||
Equity securities without readily determinable fair value |
|
|
|
|
|
|
|
|
Sifive, Inc. ("Sifive") (a) |
|
| — |
|
|
| 20,192 |
|
Greenwaves Technologies ("Greenwaves") (b) |
|
| — |
|
|
| 19,906 |
|
Other equity securities without readily determinable fair value (c) |
|
| 750 |
|
|
| 16,501 |
|
Equity method investments: |
|
|
|
|
|
|
|
|
Hefei Huaying Xingzhi Fund Partnership (limited partnership) (“Huaying Fund”) (d) |
|
| 55,905 |
|
|
| 56,898 |
|
Other equity method investments (e) |
|
| 8,097 |
|
|
| 11,283 |
|
Available-for-sale investments |
|
|
|
|
|
|
|
|
Sunny Infinity Ltd. ("Sunny") (f) |
|
| — |
|
|
| 49,091 |
|
Other available-for-sale investments (g) |
|
| 20,486 |
|
|
| 35,078 |
|
Total |
|
| 85,238 |
|
|
| 208,949 |
|
(a) | In |
(b) | In |
| (c) | In 2020, the Group invested USD5,000 to acquire |
| (d) | In 2020, the Group invested USD4,000 to acquire 4.05% equity interests in Promaxo. Promaxo is a private company engaging in the business of MR technology. The equity interest is not considered in-substance common shares due to substantial liquidation preference rights. Accordingly, the investment in |
|
|
| In |
The total consideration of the investment in Jiangsu Yitong was RMB960,832 and the proportion of Jiangsu Yitong’s net assets that owned by the Group was RMB137,302 as of December 31, 2021. The difference between the total consideration and the proportion of net assets was RMB823,530, which has been allocated into goodwill, intangible assets and others assets with the amount of RMB636,672, RMB173,524 and RMB13,334, respectively. The intangible assets are trademark with indefinite life and patents with definite life, which are amortized on a straight-line basis over the estimated useful life of 3 to 7 years.
F-32
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
10. LONG-TERM INVESTMENTS – CONTINUED
| (g) | In 2016, the Group invested RMB50,000 to acquire 49.5% equity interests in a limited partnership, Huaying Fund I, which is a fund engaged in investing activities in small and middle scale High Tech private companies. The Group accounted for the investment |
| (h) | In 2019, the Group invested RMB102,000 to acquire a |
| The other equity method investments represent several insignificant investments classified as equity method investments as the Group has the ability to exercise significant influence but does not have control over the |
| (j) | Available-for-sale investments represent investments in debt securities and measured at fair value. Those investments mainly include investments in convertible bonds as well as investment in preferred shares with redemption features that were considered as debt instruments. |
F-30F-33
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
10. LONG-TERM INVESTMENTS
-
|
|
|
|
The Group summarizes the condensed financial information of the Group's equity investments using equity method as a group below in accordance with Rule 4-08 of Regulation S-X:
10.
| | | | | | |
| | For the year ended December 31, | ||||
|
| 2019 |
| 2020 |
| 2021 |
| | RMB | | RMB | | RMB |
Revenue |
| 17,369 |
| 28,087 |
| 330,685 |
Gross profit |
| 5,694 |
| 15,114 |
| 198,495 |
(Loss)/income from operations |
| (22,557) |
| 3,011 |
| 140,006 |
Net (loss)/income |
| (22,551) |
| 3,042 |
| 137,681 |
Net (loss)/income attributable to ordinary shareholders |
| (22,551) |
| 3,042 |
| 137,681 |
| | | | |
| | As of December 31, | ||
| | 2020 | | 2021 |
|
| RMB |
| RMB |
Current assets |
| 156,755 |
| 941,812 |
Non-current assets |
| 359,958 |
| 780,128 |
Current liabilities |
| 360 |
| 122,430 |
Non-current liabilities |
| 2,656 |
| 36,807 |
11. FAIR-VALUE MEASUREMENT
Fair-value measurement on a recurring basis
As of December 31, 20172020 and 2018,2021, the financial assets and liabilities measured at fair value on a recurring basis mainly consist of the available-for-sale investments such as theand equity securities with readily determinable fair value. Available-for-sale investment includes convertible bonds and redeemable preferred shares, which are recorded in short-term and long-term investments. The fair value hierarchy of these investments as of December 31, 20172020 and 20182021 are as follows:
| | | | | | | | |
| | As of December 31,2020 | ||||||
| | Quoted Prices in | | | | | | |
|
| Active Market for |
| Significant Other |
| Significant | | |
|
| Identical Assets |
| Observable Inputs |
| Unobservable Inputs | | |
Description |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
|
| RMB |
| RMB |
| RMB |
| RMB |
Short-term investments: | | | | | | | | |
Convertible bonds |
| — |
| 18,430 |
| — |
| 18,430 |
Long-term investments: | | | | | | | | |
Convertible bonds | | — | | 31,218 | | — | | 31,218 |
Redeemable preferred shares | | — | | 38,499 | | 1,934 | | 40,433 |
Total: |
| — |
| 88,147 |
| 1,934 |
| 90,081 |
|
| As of December 31, 2017 |
| |||||||||||||
Description |
| Quoted Prices in Active Market for Identical Assets Level 1 |
|
| Significant Other Observable Inputs Level 2 |
|
| Significant Unobservable Inputs Level 3 |
|
| Total |
| ||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| RMB |
| ||||
Convertible bonds |
|
| — |
|
|
| 14,130 |
|
|
| — |
|
|
| 14,130 |
|
Redeemable preferred shares |
|
| — |
|
|
| 20,077 |
|
|
| — |
|
|
| 20,077 |
|
Total: |
| — |
|
|
| 34,207 |
|
| — |
|
|
| 34,207 |
| ||
F-34
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
|
| As of December 31, 2018 |
| |||||||||||||
Description |
| Quoted Prices in Active Market for Identical Assets Level 1 |
|
| Significant Other Observable Inputs Level 2 |
|
| Significant Unobservable Inputs Level 3 |
|
| Total |
| ||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| RMB |
| ||||
Convertible bonds |
|
| — |
|
|
| 50,482 |
|
|
| — |
|
|
| 50,482 |
|
Redeemable preferred shares |
|
| — |
|
|
| 84,169 |
|
|
| — |
|
|
| 84,169 |
|
Total: |
|
| — |
|
|
| 134,651 |
|
|
| — |
|
|
| 134,651 |
|
11. FAIR-VALUE MEASUREMENT - CONTINUED
Fair-value measurement on a recurring basis - continued
| | | | | | | | |
| | As of December 31, 2021 | ||||||
| | Quoted Prices in | | | | | | |
|
| Active Market for |
| Significant Other |
| Significant | | |
|
| Identical Assets |
| Observable Inputs |
| Unobservable Inputs | | |
Description |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
|
| RMB |
| RMB |
| RMB |
| RMB |
Short-term investments: | | | | | | | | |
Convertible bonds |
| — |
| 19,351 |
| — |
| 19,351 |
Long-term investments: | | | | | | | | |
Convertible bonds | | — | | 43,055 | | — | | 43,055 |
Redeemable preferred shares |
| — |
| — |
| 65,393 |
| 65,393 |
Equity securities with readily determinable fair value | | — | | 31,669 | | — | | 31,669 |
Total: |
| — |
| 94,075 |
| 65,393 |
| 159,468 |
For equity securities with readily determinable fair value, the fair value of the investment is measured as the quoted market price with discounts for lack of marketability. The investments are classified as level 2 measurement.
The Group measured the fair value of the convertible bonds based on the respective principals, expected returns and the estimated conversion value. Those convertible bonds are classified as level 2 measurement.
The Group measured the fair value of the redeemable preferred shares based on the recent transactions.transactions or based on the market approach when no recent transactions are available. Recent transactions include the purchase price agreed by an independent third party for an investment with similar terms. This investment isThese investments are classified as level 2 measurement. When no recent transactions are available, a market approach will be used by the Company to measure fair value. The market approach takes into consideration a number of factors including market multiple and discount rates from traded companies in the industry and requires the Company to make certain assumptions and estimates regarding industry factors. Specifically, some of the significant unobservable inputs included the investee's historical earning, discount of lack of marketability, investee's time to initial public offering as well as related volatility. The Company has classified these as level 3 measurement. The assumptions are inherently uncertain and subjective. Changes in any unobservable inputs may have a significant impact on the fair values.
No transfers occurred between differentThere are certain redeemable preferred shares transferred from level fair-value measurements2 to level 3 during the years presented.ended December 31, 2020 and 2021. The following table provides additional information about the reconciliation of the fair value measurements of assets using significant unobservable inputs (level 3).
| | |
| Level 3 investments | |
| RMB | |
Balance as of January 1, 2020 | | — |
Transfer from level 2 | 39,212 | |
Unrealized loss | (37,278) | |
Balance as of December 31, 2020 | 1,934 | |
Initial recognition | 24,960 | |
Transfer from level 2 | 38,499 | |
Balance as of December 31, 2021 | 65,393 |
F-35
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
11. FAIR-VALUE MEASUREMENT - CONTINUED
Fair-value measurement on a non-recurring basis
Goodwill and acquired intangible assets are measured at fair value on a non-recurring basis when an impairment is recognized. The Group measures goodwill at fair value annually or whenever events or changes in circumstances indicate that the carrying amount of a reporting unit exceeds its fair value. The fair value of goodwill is determined using discounted cash flows, and an impairment loss is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill. The Group measures acquired intangible assets using the income approach—discounted cash flow method, when events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. During the years ended December 31, 2019, 2020 and 2021, 0 impairment loss was recognized for goodwill and intangible assets.
The Group measures long-term investments (excluding the equity securities with readily determinable fair values and available-for-sale investments) at fair value on a nonrecurring basis only if an impairment indicator exist or an observable price adjustment is available in the current period. For equity securities without readily determinable fair value for which the Group elected to use the measurement alternative, starting in 2018, the investment is measured at fair value on a nonrecurring basis whenever there is an impairment or any changes resulting from observable price changes in an orderly transaction for the identical or a similar investment of the same issuer. The fair value of the investment was categorisedis categorized as level 2 in the fair value hierarchy. When evaluatinghierarchy when directly or indirectly observable inputs in the impairmentmarket place are identified. Whenever events or changes in circumstances indicate that the carrying value may no longer be recoverable, the fair value of theseaforementioned long-term investments is determined using models with significant unobservable inputs considered(Level 3 inputs), primarily include pricingthe management projection of recent rounds of financing,discounted future cash flow forecasts, liquidity factors, discount rate, and the selection of comparable companies operating in similar businesses.
discount rate. During the yearyears ended December 31, 2018,2019, 2020 and 2021, the Group recordedrecognized an impairment charge amounting to RMB7,590 related to oneloss of itsRMB2,382, NaN and NaN for the equity method investment and one of its available for sale investment. Thesecurities without readily determinable fair value of the investment was based on the future cash flow forecast using significant unobservable inputs and represented a Level 3 measurement.value.
F-31
12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
| | | | |
| | As of December 31, | ||
|
| 2020 |
| 2021 |
| | RMB | | RMB |
Accrued payroll and welfare |
| 38,797 | | 41,948 |
Deferred revenue |
| 51,780 | | 87,980 |
Product warranty |
| 32,782 | | 24,858 |
Current operating lease liabilities | | 48,120 | | 50,092 |
Accrued expenses |
| 14,979 | | 22,803 |
Reverse factoring | | — | | 39,195 |
Other tax payable | | 7,329 | | 23,541 |
Government subsidies | | 26,158 | | 3,129 |
Other current liabilities |
| 32,330 | | 22,537 |
Total | | 252,275 | | 316,083 |
F-36
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
11.12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
|
| As of December 31, |
| |||||
|
| 2017 |
|
| 2018 |
| ||
|
| RMB |
|
| RMB |
| ||
Accrued payroll and welfare |
|
| 30,207 |
|
|
| 83,925 |
|
Product warranty |
|
| 8,431 |
|
|
| 55,599 |
|
Deferred revenue |
|
| 17,876 |
|
|
| 41,863 |
|
Accrued expenses |
|
| 3,943 |
|
|
| 6,107 |
|
Other tax payable |
|
| 6,569 |
|
|
| 4,727 |
|
Accrued professional fee |
|
| 13,268 |
|
|
| 3,945 |
|
Other current liabilities |
|
| 13,504 |
|
|
| 17,809 |
|
Total |
|
| 93,798 |
|
|
| 213,975 |
|
- CONTINUED
Product warranty activities were as follows:
| | | ||
| | | ||
| RMB | |||
Balance as of January 1, |
|
| 55,599 | |
Provided during the year |
|
| 80,048 | |
Utilized during the year |
|
|
| |
Balance |
|
| 49,527 | |
Provided during the year |
|
| 74,742 | |
Utilized during the year |
|
|
| |
Balance |
|
| 32,782 | |
Provided during the year |
|
| 63,540 | |
Utilized during the year |
|
|
| |
Balance |
|
| 24,858 |
The warranty costs recorded in cost of revenuerevenues were RMB14,153, RMB23,093RMB80,048, RMB74,742 and RMB68,866RMB63,540 during the years ended December 31, 2016, 20172019, 2020 and 2018,2021, respectively. During the year ended December 31, 2018,
13. BANK BORROWINGS
In 2021, the Group recorded a one-off additional warranty charge dueborrowed approximately RMB1,473,567 in different currencies from several commercial banks and repaid RMB953,387. These bank loans are with one to an irregular quality matter relating to a specific batch of products as noted by its customer.
12. BANK BORROWING
On December 22, 2016, the Group entered into a loan agreement with Hui Shang Bank amounting to RMB10,000 with one yearseven years maturity and a floating interest rate up to 121% of the benchmark interest rate on payment date. On December 22, 2017, the loan was fully repaid by the Group.
On January 4, 2017, the Group entered into a loan agreement with Hefei Branch of China Merchants Bank amounting to RMB30,000 with one year maturity and a fixedweighted average interest rate of 5%3.83%, and will be used for the daily operations and investing activities of the Group.
In 2020, the Group borrowed approximately RMB1,207,793 in different currencies from several commercial banks and repaid RMB643,122. These bank loans are with one to three years maturity and the weighted average interest rate of 2.85%. On January 4, 2018The loans were used for the loan was fully repaid bydaily operations of the Group.
On April 2, 2018, the Group entered into a loan agreement with Hefei Branch of China Merchants Bank amounting to RMB20,000 with one year maturity and a fixed interest rate of 5%. As of December 31, 2018, the loan remains outstanding.
F-32
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
14. REVENUE AND DEFERRED 13.REVENUES
Disaggregation of revenue
All the revenues for the period waswere recognized from contracts with customers. For the yearyears ended December 31, 2018, most of the Group's revenues were generated in the PRC. Additionally,2019, 2020 and 2021, the majority of the Group'sGroup’s revenues result from sales of products which revenue iswas recognized at a point of time. The following table provides information about disaggregated revenue by products, including a reconciliation of the disaggregated revenue with reportable segmentssegments:
| ||||
| ||||
|
| |||
|
| |||
|
| |||
| | | | | | |
|
| For the years ended December 31, | ||||
|
| 2019 |
| 2020 |
| 2021 |
| | RMB | | RMB |
| RMB |
Xiaomi Wearable Products |
| 4,193,665 | | 4,438,081 | | 3,340,857 |
Self-branded products and other |
| 1,618,590 | | 1,995,282 | | 2,909,252 |
Total |
| 5,812,255 | | 6,433,363 | | 6,250,109 |
During the years ended December 31, 2019, 2020 and 2021, the majority of the Group's products are sold to resellers and distributors in the PRC. This includes products that have international versions which are first sold to the Group's domestic distributors who subsequently distribute those products internationally.
F-37
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
14. REVENUE AND DEFERRED REVENUES - CONTINUED
Contract balances
The following table provides information about receivables, deferred revenue and refund liability from contracts with customerscustomers:
| ||||
| ||||
|
| |||
|
| |||
|
| |||
|
| |||
| | | | |
| | As of December 31, | ||
|
| 2020 |
| 2021 |
| | RMB |
| RMB |
Accounts receivables |
| 298,038 | | 537,084 |
Amounts due from related parties |
| 860,213 | | 295,614 |
Deferred revenue |
| 51,780 | | 87,980 |
Refund liability (sales return) |
| 366 | | 5,745 |
Accounts receivables are recorded when the right to consideration is unconditional and payments terms on invoiced amounts are typically 30 to 60 days. Amounts due from related parties include both amounts billed (RMB623,120) and unbilled amount (RMB33,279) due from related party under the cooperation agreement. As of December 31, 2020 and 2021, the amount due from related parties include the billed amount of RMB779,538 and RMB231,485, and unbilled amounted to RMB80,675 and RMB64,129, respectively. The amount billed is recorded when the right to the consideration is unconditional and payment terms on invoiced amounts are typically 30 to 60 days. Unbilled amount due from related party relate to our contractual right to consideration under our cooperation agreement for the second instalment payment not yet invoiced. The Company recorded 0 impairment charges related to contract assets during the years ended December 31, 2019, 2020 and 2021. Contract liabilities, recorded in accrued expenses in the consolidated balance sheet, as of December 31, 2018, include payment received in advance of performance under the contract related to our software services which are realized over the estimated usage period and payment received related to a material right provided to a customer to acquire additional goods or services at a discount in a future period. The Company recorded no impairment charges related to contract assets in the period.
During the yearyears ended December 31, 2018,2019, 2020 and 2021, the Group recognized RMB17,876RMB41,863, RMB59,585 and RMB51,780 of revenue previously included in deferred revenue as of January 1, 2018, December 31, 2019 and 2020, which mainly consist of revenue recognized related to its service subscription.subscription-based service. Additionally, during the yearyears ended December 31, 2018,2019, 2020 and 2021, the Group billed RMB33,329RMB33,279, RMB102,687 and RMB80,675 to a related party, which was initially recorded as unbilled amount, mainly due to the timing of invoicing for the goods related to its cooperation agreement. The difference between the opening and closing balances of the Group'sGroup’s contract liabilities primarily results from the timing difference between the Group'sGroup’s performance and the customer'scustomer’s payment.
F-33
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
The Company is incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to income or capital gains taxes. In addition, dividend payments are not subject to withholdings tax in the Cayman Islands.
The Company’s subsidiaries, HuamiZepp HK Limited and Yunding HKGalaxy, are located in Hong KongHK and are subject to a two-tiered income tax rates for taxable income earned in Hong KongHK with effect from April 1, 2018. The first HK$2 million of profits earned by HuamiZepp HK and Yunding HKGalaxy will be taxed at 8.25%, while the remaining profits will continue to be taxed at the existing 16.5% tax rate.
The Company’sCompany's subsidiaries HuamiZepp Inc and Rill,Zepp NA are located in the U.S. and are subject to the US federal income tax. On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code including, but not limited to, (1) reducing the U.S. federal corporate tax rate, (2) requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries that is payable over eight years, and (3) bonus depreciation that will allow for full expensing of qualified property. The impact of the Tax Act is not material to our operation and resulted in a decrease inan income tax rate from 35% before January 1, 2018 toof 21% after January 1, 2018 for tax andtaxable income earned as determined in accordance with the relevant tax rules and regulations.regulations in the U.S.
F-38
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
15. INCOME TAXES - CONTINUED
The Company’s PRC subsidiaries, the VIEs and VIEs’ subsidiaries are subject to the 25% standard enterprise income tax rate except for Anhui Huami and Anhui Health and Shun Yuan that qualify as a high and new technology enterprise (“HNTE”), which isare subject to a tax rate of 15%. Anhui Huami began to qualify as HNTE in 2015 and renewed the HNTE certificate in October 2018.July 2018 and September 2021. Accordingly, Anhui Huami wasis subject to a tax rate of 15% during the years ended December 31, 2021, 2022 and 2023. Anhui Health qualifed as a HNTE in August 2020 and is subject to a tax rate of 15% during the year ended December 31, 2020, 2021 and 2022. In addition, Shun Yuan qualified as a HNTE since December 2021 and is subject to a tax rate of 15% during the years ended December 31, 2016, 20172021, 2022 and 2018.
2023.
The current and deferred components of income taxes appearing in the consolidated statements of operation are as follows:
|
| For the years ended December 31, |
| |||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||||
|
| RMB |
|
| RMB |
|
| RMB |
| |||||||||
| | | | | | | ||||||||||||
| | For the years ended December 31, | ||||||||||||||||
|
| 2019 |
| 2020 |
| 2021 | ||||||||||||
| | RMB | | RMB | | RMB | ||||||||||||
Current tax expenses |
|
| 21,556 |
|
|
| 46,573 |
|
|
| 84,931 |
|
| 105,663 | | 42,257 | | 31,543 |
Deferred tax benefits |
|
| (18,468 | ) |
|
| (18,962 | ) |
|
| (32,895 | ) |
| (27,776) | | (11,103) | | (20,798) |
Income tax expense |
|
| 3,088 |
|
|
| 27,611 |
|
|
| 52,036 |
| ||||||
Income tax expenses |
| 77,887 | | 31,154 | | 10,745 | ||||||||||||
The significant components of the Group’s deferred tax assets and liabilities were as follows:
|
| As of December 31, |
| |||||||||
|
| 2017 |
|
| 2018 |
| ||||||
|
| RMB |
|
| RMB |
| ||||||
| | | | | ||||||||
|
| As of December 31, | ||||||||||
|
| 2020 |
| 2021 | ||||||||
| | RMB | | RMB | ||||||||
Deferred tax assets |
|
|
|
|
|
|
|
| |
|
|
|
Accrued expenses |
|
| 7,919 |
|
|
| 28,585 |
| ||||
Accrued expenses and other current liabilities | | 60,823 | | 47,005 | ||||||||
Net operating loss carry forwards |
|
| 33,976 |
|
|
| 46,447 |
| | 62,945 | | 75,100 |
Intra-entity transfer of certain intangible assets | | — | | 28,290 | ||||||||
Total deferred tax assets |
|
| 41,895 |
|
|
| 75,032 |
| | 123,768 | | 150,395 |
Less: valuation allowance |
|
| — |
|
|
| — |
| | (3,578) | | (6,976) |
Deferred tax assets, net |
|
| 41,895 |
|
|
| 75,032 |
| | 120,190 | | 143,419 |
As of December 31, 2018,2021, the Group had RMB204,677RMB411,276 operating losses deriving from entities in the PRC, Hong KongHK, U.S., Canada, and United States.etc. The operating loss in PRC of RMB152,074with amounted to RMB327,051 can be carried forward for five years, or ten years if qualify as HNTE and if not utilized and some will begin to expire in 2020, if not utilized.2022. The operating loss incurred in the United StatesU.S. before December 31, 2017 can be carried forward for 20 years to offset future taxable profit, while other losses from the year of 2018incurred after December 31, 2017 may be carried forward indefinitely. The tax losses incurred in Hong KongHK can be carried forward without an expiration date.
F-34
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
14. INCOME TAXES - continuedincome.
Management assesses the available positive and negative evidence in certain entities in the PRC, HK, U.S. and United StatesCanada to estimate if sufficient future taxable income will be generated to utilize the existing deferred tax assets and determines the valuation allowance on an entity by entity basis. In making such determination, the Group considers the following factors, among other matters, when determining whether some portion or all of the deferred tax assets will more likely than not be realized: the nature, frequency and severity of recent losses, forecasts of future profitability, the duration of statutory carry-forward periods, the Group'sGroup’s experience with tax attributes expiring unused and tax planning alternatives. The Group'sGroup’s ability to realize deferred tax assets depends on its ability to generate sufficient taxable income within the carry-forward periods provided for in the tax law. On the basis of this evaluation, for the years ended December 31, 2016, 20172020 and 2018,2021, the Company believes the net operating loss carry-forwards could be ultimately realized in the Grouprecorded RMB3,578 and noRMB6,976 valuation allowance has been recorded for the deferred tax assets.
F-39
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
15. INCOME TAXES - CONTINUED
Reconciliation between the income tax expense computed by applying the PRC enterprise tax rate of 25% to income before income tax and the actual provisionincome tax expense were as follows:
|
| For the years ended December 31, |
| |||||||||||||||
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||||||||
|
| RMB |
|
| RMB |
|
| RMB |
| |||||||||
| | | | | | | ||||||||||||
| | For the years ended December 31, | ||||||||||||||||
|
| 2019 |
| 2020 |
| 2021 | ||||||||||||
| | RMB | | RMB | | RMB | ||||||||||||
Income before income tax |
|
| 28,863 |
|
|
| 191,900 |
|
|
| 386,613 |
|
| 652,370 | | 265,609 | | 106,669 |
Tax expense at PRC enterprise income tax rate of 25% |
|
| 7,216 |
|
|
| 47,975 |
|
|
| 96,653 |
|
| 163,093 | | 66,402 | | 26,667 |
Income tax on tax holidays |
|
| (16,533 | ) |
|
| (30,740 | ) |
|
| (58,327 | ) |
| (72,396) | | (41,869) | | (19,387) |
Tax effect of permanence differences |
|
| (621 | ) |
|
| (8,190 | ) |
|
| (22,733 | ) |
| (31,088) | | (20,001) | | (34,587) |
Effect of income tax rate differences in jurisdictions other than the PRC |
|
| 13,026 |
|
|
| 14,364 |
|
|
| 36,443 |
|
| 16,270 | | 21,625 | | 23,666 |
Change in tax rate |
|
| — |
|
|
| 4,202 |
|
|
| — |
|
| — | | 3,460 | | 9,549 |
Changes in valuation allowances | | 2,008 | | 1,537 | | 4,837 | ||||||||||||
Income tax expense |
|
| 3,088 |
|
|
| 27,611 |
|
|
| 52,036 |
|
| 77,887 | | 31,154 | | 10,745 |
If the tax holiday granted to Anhui Huami, Anhui Health and Shun Yuan was not available the Group’s income tax expense would have increased by RMB16,533, RMB30,740 and RMB58,327, the basic net income per share attributable to the ordinary shareholders of the Company would have decreased by RMB0.30, RMB0.45 and RMB0.28 duringfor the years ended December 31, 2016, 20172019, 2020 and 2018, respectively,2021, the increase in income tax expenses and the diluteddecrease in net income per share attributable to the ordinary shareholders of the Companyamounts would have decreased by RMB0.30, RMB0.45 and RMB0.26 during the years ended December 31, 2016, 2017 and 2018, respectively.be as follows:
| | | | | | |
| | For the years ended December 31, | ||||
|
| 2019 |
| 2020 |
| 2021 |
| | RMB | | RMB | | RMB |
Increase in income tax expenses |
| 72,396 | | 41,869 | | 19,387 |
Decrease in net income per share - basic |
| 0.30 | | 0.17 | | 0.08 |
Decrease in net income per share - diluted |
| 0.28 | | 0.16 | | 0.07 |
Under the Income Tax Law effective from January 1, 2008, the rules for determining whether an entity is resident in the PRC for tax purposes have changed and the determination of residence depends among other things on the “place of actual management”. If the Group, or its non-PRC subsidiaries, were to be determined as a PRC resident for tax purposes, they would be subject to a 25% income tax rate on their worldwide income including the income arising in jurisdictions outside the PRC. The Group does not believe that its legal entities organized outside of the PRC are considered PRC residents.
If the Company was to be a non-resident for PRC tax purposes, dividends paid to it out of profits earned after January 1, 2008 would be subject to a withholding tax. In the case of dividends paid by PRC entities to the entities organized outside of the PRC or any foreign investors, the withholding tax would be 10%, unless any entities organized outside of the PRC or any such foreign investors'investors’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.
Aggregate undistributed earnings of the Company’s PRC subsidiaries and VIEs that are available for distribution was RMB350,251amounted to RMB1,935,920 and RMB860,613RMB2,228,550 as of December 31, 20172020 and 2018,2021, respectively. Upon distribution of such earnings, the Company will be subject to PRC EIT taxes, the amount of which is impractical to estimate. The Company did not record any tax on any of the aforementioned undistributed earnings because the relevant subsidiaries and VIEs do not intend to declare dividends and the Company intends to permanently reinvest it within the PRC. Additionally, no0 deferred tax liability was recorded for taxable temporary differences attributable to the undistributed earnings because the Company believes the undistributed earnings can be distributed in a manner that would not be subject to income tax.
The Group did not identify any significant unrecognized tax benefits for the years ended December 31, 2016, 20172019, 2020 and 2018,2021, respectively. The Group did not incur any significant interest and penalties related to potential underpaid income tax expenses and also does not anticipate any significant increases or decreases in unrecognized tax benefits in the next twelve months. The Group has no material unrecognized tax benefits which would favorably affect the effective income tax rate in future periods.
F-35F-40
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
14.15. INCOME TAXES- continued CONTINUED
According to the PRC Tax Administration and Collection Law, the tax authority may require the taxpayer or the withholding agent to make delinquent tax payment within three years if the underpayment of taxes is resulted from the tax authority’s act or error. No late payment surcharge will be assessed under such circumstances. The statute of limitation will be three years if the underpayment of taxes is due to the computational errors made by the taxpayer or the withholding agent. Late payment surcharge will be assessed in such case. The statute of limitation will be extended to five years under special circumstances which are not clearly defined (but an underpayment of tax liability exceeding US$15 (RMB0.1 million) is specifically listed as a “special circumstance”). The statute of limitation for transfer pricing related issue is ten years. There is no statute of limitation in the case of tax evasion. Therefore, the Group’s PRC domiciled entities are subject to examination by the PRC tax authorities based on the above.
15.
16. ORDINARY SHARES
The Company’s Amended and Restated CertificateAs of Formation authorizesDecember 31, 2021, the Company to issuehad 405,462,685 ordinary shares authorized with a par value of US$0.0001 per share approximately. Asshare. There are two classes of December 31, 2017, the Company had 91,304,327 ordinary shares issued and outstanding.
In February 2018,which include the Group completed its IPO upon which the Group's ordinary shares were divided into class A ordinary shares and class B ordinary shares. The ordinary shares before the offering were converted to class B ordinary shares. The 41,600,000 shares issued through the IPO were classified as Class A ordinary shares. All of the Group's Series A, B-1 and B-2 preferred shares were automatically converted into 94,537,315 Class B ordinary shares. 13,359,788 Class B ordinary shares were re-designated to Class A ordinary shares on a one-for-one basis.
Immediately prior to the completion of its IPO, the Group granted 12,064,825 Class B ordinary shares to its preferred shareholders in consideration of their waivers of the conditions of a qualified initial public offering as provided in the shareholders agreement between the Group and its preferred shareholders. The Group recorded the issuance at fair value and treated it as a deemed dividend to its preferred shareholders. The Group initially recorded the deemed dividend against retained earnings to reduce it to zero with the remaining amounts charged against additional paid-in capital. Additionally, the deemed dividend reduced the Group's income available to ordinary shareholders.
Holders of class A ordinary shares are entitled to one vote per share, while holders of class B ordinary shares are entitled to ten votes per share. As of December 31, 2018, there
In April 2019, the Group completed its secondary offering upon which 3,174,600 class A ordinary shares were 57,303,093 Class Aissued and 184,376,67928,316,400 Class B ordinary shares issued and outstanding.
During the year ended December 31, 2018, the Group repurchased a total of 488,000 ordinary shares from employees and shareholders. The difference between the repurchase price and the fair value of the ordinary shares at the time of repurchase was immaterial. Those shares were immediately cancelled subsequent to the repurchase.
F-36
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
The significant terms of the Seriesconverted into Class A Preferred Shares, Series B-1 Preferred Shares and Series B-2 Preferred Shares issued by the Company are as follows:
Conversion rights
Optional Conversion
Each holder of Preferred Shares shall have the right, at such holder’s sole discretion, to convert all or any portion of the Preferred Shares into Ordinary Shares at any time. The conversion rate for Preferred Shares shall be determined by dividing the applicable Preferred Share Issue Price by the applicable conversion price then in effect at the date of the conversion.
Conversion price adjustment
The initial conversion price will be the applicable Preferred Share Issue Price, which will be subject to adjustments to reflect stock dividends, stock splits and other events (the “Preferred Share Conversion Price”), being no less than par value.
The conversion price is subject to (1) Adjustment for Share Dividends, Subdivisions, Combinations or Consolidations of Ordinary Shares; (2) Adjustments for Other Distributions; (3) Adjustments for Reclassification, Exchange and Substitution; (4) Deemed issue of additional ordinary shares.
Automatic Conversion
Each Preferred Share shall automatically be converted into ordinary shares ofDuring December 2021, the Company repurchased 2,656,164 class A shares from the market for a total consideration of US$3,411 (RMB21,798) at the then applicable Preferred Share Conversion Price
|
|
|
|
Voting rights
Each Preferred Share shall carry a numberweighted average price of votes equal to the number of Ordinary Shares then issuable upon its conversion into Ordinary Shares at the record date for determination of the shareholders entitled to vote on such matters, or, if no such record date is established, at the date such vote is taken or any written consent of shareholders is solicited.
Redemption rights
Redemption Condition for Series A Preferred Shares:
The Series A Preferred Shares is redeemable at any time after the earlier of:
|
|
|
|
F-37
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and1.284 per share, data, or otherwise noted)
16. PREFERRED SHARES – CONTINUED
Redemption Condition for Series B Preferred Shares:
The Series B Preferred Shares is redeemable, at any time after the earlier of:
|
|
|
|
Redemption Price for Series A Preferred Shares:
The redemption price of each Series A preferred share (the “Series A Redemption Price) shall be the higher Of:
|
|
|
|
Redemption Price for Series B Preferred Shares:
The redemption price of each Series B preferred share (the “Series B Redemption Price”, together with the “Series A Redemption Price”, the “Redemption Price”) shall be the higher of:
|
|
|
|
Dividends rights
No dividend, whether in cash, in property or in shares of the capital of the Company, shall be paid on any other class or series of shares of the Company unless and until a cumulative dividend at the rate of eight percent (8%) of the applicable Preferred Share Issue Price per annum per Preferred Share is first paid in full on the Preferred Shares (on an as-converted basis).
Dividends shall be paid on the Series B Preferred Shares, payable out of funds or assets when and as such funds or assets become legally available therefor on parity with each other, on an as-converted basis and prior and in preference to any dividend on the Series A Preferred Shares; after full and unconditional payment of all dividends on the Series B Preferred Shares, dividends shall be paid on the Series A Preferred Shares, payable out of funds or assets when and as such funds or assets become legally available therefor on parity with each other, on an as-converted basis and prior and in preference to any dividend on the Ordinary Shares; after full and unconditional payment of all dividends on the Series B Preferred Shares and Series A Preferred Shares, dividends shall be paid on all the Preferred Shares and the Ordinary Shares then issued, outstanding, payable out of funds or assets whenshares are reserved for the employees and as such funds or assets become legally available therefor on parity with each other, on an as-converted basis; provided that such dividends shall be payable only when, as, and if declared by the Board of Directors. Holders of the Preferred Shares shall also be entitled to receive any non-cash dividends declared by the Board on an as-converted basis.
F-38
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
16. PREFERRED SHARES – CONTINUED
Liquidation rights:
Liquidation Preferences
In the event of any liquidation, dissolution or winding up of the Company, either voluntary or involuntary, all assets and funds of the Company legally available for distribution among holders of the outstanding Shares (on an as-converted to basis)non-employees in the following order and manner:
|
|
|
|
|
|
F-39
Table of Contentsshare incentive plan.
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
16. PREFERRED SHARES – CONTINUED
Liquidation Event
The following events shall be deemed a liquidation, dissolution or winding up of the Company (each, a “Liquidation Event”):
|
|
|
|
The change in the balance of Series Preferred included in mezzanine equity during the years ended December 31, 2016, 2017 and 2018 are as follows:
|
| Series A Preferred |
|
| Series B-1 Preferred |
|
| Series B-2 Preferred |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Balance as of January 1, 2016 |
|
| 19,799 |
|
|
| 21,041 |
|
|
| 231,439 |
|
Accretion of Preferred A shares |
|
| 3,209 |
|
|
| — |
|
|
| — |
|
Accretion of Preferred B shares |
|
| — |
|
|
| 2,738 |
|
|
| 30,121 |
|
Balance as of December 31, 2016 |
|
| 23,008 |
|
|
| 23,779 |
|
|
| 261,560 |
|
Accretion of Preferred A shares |
|
| 3,762 |
|
|
| — |
|
|
| — |
|
Accretion of Preferred B shares |
|
| — |
|
|
| 3,127 |
|
|
| 34,382 |
|
Balance as of December 31, 2017 |
|
| 26,770 |
|
|
| 26,906 |
|
|
| 295,942 |
|
Accretion of Preferred A shares |
|
| 177 |
|
|
| — |
|
|
| — |
|
Accretion of Preferred B shares |
|
| — |
|
|
| 368 |
|
|
| 4,049 |
|
Conversion to ordinary shares |
|
| (26,947 | ) |
|
| (27,274 | ) |
|
| (299,991 | ) |
Balance as of December 31, 2018 |
|
| — |
|
|
| — |
|
|
| — |
|
The Group recognizes changes in the redemption value ratably over the redemption period. Increases in the carrying amount of the redeemable preferred shares are recorded by charges against retained earnings, or in the absence of retained earnings, by charges as reduction of additional paid-in capital until additional paid-in capital is reduced to zero. Once paid-in capital is reduced to zero, the redemption value measurement adjustment is recognized as an increase in accumulated deficit. All of these preferred shares were converted to ordinary shares upon the Qualified IPO which was completed in February 2018.
F-40
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
Restricted Share owned by the founders
As one of the condition to the closing of the Preferential Equity Interests in January 2014, two founders entered into a share restriction agreement with the preferential equity interests shareholders. Pursuant to this agreement, those founders are prohibited from transferring, selling, assigning, pledging or disposing in any way their equity interests in the Company before such interest is vested. The equity interests held by the Founders were 50% converted to restricted equity interests and vest in 24 equal and continuous monthly installments for each month starting from January 2014, provided that those founders remain full-time employees of the Group at the end of such month. A total of 45,567,164 restricted shares were held by those founders as of April 2015. In April 2015, as one of the condition of the closing of the preferred shareholder agreement, the agreement was amended to (1) restrict additional shares and extend the vesting period for an additional 48 months and (2) restrict shares held by four other founders similar to the restrictions imposed in January 2014. The Group also obtained an irrevocable and exclusive option to repurchase all of the restricted shares held by those founders at par value both in January 2014 and April 2015.
The share restriction agreement between the founders and the Company was accounted for as a grant of restricted stock awards under a stock-based compensation plan. Accordingly, the Group measured the fair value of the restricted shares of the Founders at the grant date and recognizes the amount as compensation expense over the service period. Additionally, the modification of the restriction in April 2015 was accounted as a modification of share-based compensation. The Group calculated the incremental fair value resulting from the modification and recorded it as share-based compensation over the revised vesting term.
A summary of non-vested restricted share activity during the year ended December 31, 2018 is presented below:
| ||||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
The Group determined that the non-vested restricted shares are participating securities as the holders of the non-vested restricted shares have a non-forfeitable right to receive dividends with all ordinary shares but the non-vested restricted shares do not have a contractual obligation to fund or otherwise absorb the Group’s losses. See note 23 for details.
During the years ended December 31, 2016, 2017 and 2018, the Group recorded share-based compensation expense of RMB50,842, RMB51,463 and RMB55,311 related to the unvested shares of the Founders respectively.
Share options
2015 Share Incentive Plan
On October 21, 2015, the Group adopted the 2015 share incentive plan (“2015 Plan”) which consists of a share incentive plan for U.S. service providers (“U.S. Plan”) and a share incentive plan for PRC service providers (“PRC Plan”). The maximum aggregate number of ordinary shares that may be issued under the 2015 Plan is 14,328,358 ordinary shares to be allocated to employees, officers, directors or consultants of the Company.
During the years ended December 31, 2016, 20172019, 2020 and 2018,2021, the Group granted 140,000, nil and nilNaN share options to certain personnel under the US2015 Plan. Those options have an exercise price of US$0.1 per share and vest over four years. 25% of the share options vest on the first anniversary, while the remaining vest 1/3 yearly after each one-year continuous service. The share options expire 10 years from the date of grant.
During the years ended December 31, 2016, 2017 and 2018, the Group granted 925,235, 1,545,688 and nil share options to certain personnel under the PRC Plan. Those options have an exercise price of US$0 per share and expire 10 years from the date of grant. Those options also include an exercise provision whereas shares become exercisable after the closing of an IPO. The Group has recorded nil, nil and RMB40,449 share-based compensation expense for the years ended December 31, 2016, 2017 and 2018 related to such options, respectively.
During the years ended December 31, 2016, 2017 and 2018, the Group granted nil, 500,000 and nil share options to certain personnel under the U.S. Plan which were fully vested as of the grant date. Those options have an exercise price range from US$0.79 to US$0.99 per share and expire 10 years from the date of grant.
F-41
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
17. SHARE-BASED PAYMENT – CONTINUED
Share options – continued
2018 Share Incentive Plan
In January 2018, The Company adopted the 2018 share incentive plan ("(“2018 Plan"Plan”), commencing on January 1, 2018, which provides additional incentives to employees, directors and consultants to promote the success of the Group’s business. Under the 2018 share incentive plan, the maximum aggregate number of shares which may be issued initially pursuant to all awards under the 2018 Plan is 9,559,607 ordinary shares, assuming the underwriters do not exercise their over-allotment option.shares. The number of shares reserved for future issuances under the 2018 Plan will be increased by (i) a number equal to 1.0% of the total number of outstanding shares immediately after IPO, or (ii) such number of shares as may be determined by the board of directors, on the first day of each calendar year during the term under 2018 Plan.
F-41
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
17. SHARE-BASED PAYMENT – CONTINUED
2018 Share Incentive Plan - continued
During the yearyears ended December 31, 2018,2019, 2020 and 2021, the Group granted 6,988,469651,000, 4,030,108 and 8,988,000 share options to certain personnel under the 2018 Plan. The weighted average exercise price of these options is US$0.35 per share. Duringgranted during the yearyears ended December 31, 2018, the2019, 2020 and 2021 was US$0 per share, US$0 per share and US$0.01 per share. The Group has recorded RMB9,523RMB33,618, RMB42,316 and RMB64,415 share-based compensation expenseexpenses related to options in 2015 plan and 2018 plan for such options.the years ended December 31, 2019, 2020 and 2021, respectively.
The Group calculated the estimated fair value of the options on the respective grant dates using the binomial option pricing model with assistance from independent valuation firms. Assumptions used to determine the fair value of share options granted during the years ended December 31, 2016, 20172019, 2020 and 20182021 are summarized in the following table:
|
| For the years ended December 31, |
| ||||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| ||||||||||
| | | | | | | | ||||||||||||
| | For the years ended December 31, |
| ||||||||||||||||
|
| 2019 |
| 2020 |
| 2021 |
| ||||||||||||
| | RMB | | RMB | | RMB | | ||||||||||||
Risk-free interest rate |
| 1.62%-2.85% |
|
|
| 2.2 | % |
| 2.04%-2.83% |
|
| 2.14 | % | 0.67%-0.72 | % | 1.66 | % | ||
Expected volatility |
|
| 46.2 | % |
|
| 49.0 | % |
| 36%-52.5% |
|
| 50.4 | % | 51.9%-52.0 | % | 52.2 | % | |
Expected life of option (years) |
|
| 10 |
|
| 9.76-10 |
|
| 1-10 |
|
| 10 |
| 10 |
| 10 | | ||
Expected dividend yield |
|
| 0.0 | % |
|
| 0.0 | % |
|
| 0.00 | % |
| 0.0 | % | 0.0 | % | 0.0 | % |
Fair value per ordinary share |
|
| 7.5 |
|
|
| 12.56 |
|
| 15.03-16.85 |
|
| 12.65 |
| 21.60-23.10 |
| 8.05-12.98 | | |
(i) Risk-free interest rate
Risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the contractual term of the options.
(ii) Expected life of option (years)
Expected life of option (years) represents the expected years to vest the options.
(iii) Volatility
The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the contractual term of the options.
(iv) Dividend yield
The dividend yield was estimated by the Group based on its expected dividend policy over the contractual term of the options.
(v) Fair value of underlying ordinary shares
During the year ended December 31, 2018,2019, 2020 and 2021, the fair value of the underlying ordinary shares is determined based on the closing market price of the share. During the years ended December 31, 2016 and 2017, the estimated fair value of ordinary shares as of the respective dates was determined based on a retrospective valuation with the assistance of a third party appraiser.
F-42
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
17. SHARE-BASED PAYMENT – CONTINUED
2018 Share options –Incentive Plan - continued
A summary of the stock option activity under the 2015 and 2018 Plan during the year ended December 31, 20182021 is included in the table below.
|
| Options granted Share Number |
|
| Weighted average exercise price per option |
| ||
|
|
|
|
|
| US$ |
| |
Outstanding at January 1, 2018 |
|
| 7,338,559 |
|
|
| 0.16 |
|
Granted |
|
| 6,988,469 |
|
|
| 0.35 |
|
Exercised |
|
| 774,325 |
|
|
| 0.66 |
|
Cancelled and forfeited |
|
| 209,473 |
|
|
| 0.15 |
|
Outstanding at December 31, 2018 |
|
| 13,343,230 |
|
|
| 0.23 |
|
| | | | |
|
| |
| Weighted average |
| | | | exercise price |
| | Number of options | | per option |
| | | | US$ |
Outstanding at January 1, 2021 |
| 14,280,814 |
| 0.20 |
Granted |
| 8,988,000 |
| 0.01 |
Exercised |
| (3,011,184) |
| 0.53 |
Forfeited |
| (3,459,477) |
| 0.07 |
Outstanding at December 31, 2021 |
| 16,798,153 |
| 0.07 |
The following table summarizes information regarding the share options grantedas of December 31, 2018:2021:
|
| December 31, 2018 |
| |||||||||||||||||||||
|
| Options Number |
|
| Weighted- average exercise price per option |
|
| Weighted- average remaining exercise contractual life (years) |
|
| Aggregate intrinsic value |
| ||||||||||||
|
|
|
|
|
| US$ |
|
|
|
|
|
| US$ |
| ||||||||||
| | | | | | | | | ||||||||||||||||
| | December 31, 2021 | ||||||||||||||||||||||
| | | | | | Weighted- | | | ||||||||||||||||
| | | | | | average remaining | | | ||||||||||||||||
| | | | Weighted- | | exercise | | | ||||||||||||||||
| | | | average exercise | | contractual | | Aggregate | ||||||||||||||||
|
| Options Number |
| price per option |
| life (years) |
| intrinsic value | ||||||||||||||||
| | | | US$ | | | | US$ | ||||||||||||||||
Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding |
|
| 13,343,230 |
|
|
| 0.23 |
|
|
| 8.38 |
|
|
| 29,776 |
|
| 16,798,153 | | 0.07 |
| 7.74 | | 20,080 |
Exercisable |
|
| 6,582,663 |
|
|
| 0.13 |
|
|
| 7.42 |
|
|
| 15,308 |
|
| 8,317,698 | | 0.07 |
| 6.60 | | 9,931 |
Expected to vest |
|
| 6,760,567 |
|
|
| 0.32 |
|
|
| 9.31 |
|
|
| 14,468 |
|
| 8,480,455 | | 0.07 |
| 8.85 | | 10,149 |
The total intrinsic value of options exercised during the years ended December 31, 2016, 20172019, 2020 and 20182021 amounted RMB 262, RMB1,695RMB13,608, RMB32,010 and RMB6,858,RMB14,094, respectively.
The weighted average grant date fair value of options granted during the year ended December 31, 2016, 20172019, 2020 and 20182021 was RMB5.67, RMB11.22RMB12.65, RMB22.42 and RMB15.12RMB12.95 per share, respectively.
During the years ended December 31, 2016, 20172019, 2020 and 2018,2021, the Group recorded share-based compensation expenseexpenses of RMB394, RMB4,713RMB33,618, RMB42,316 and RMB49,972RMB64,415 for the options granted under the 2015 Plan and 2018 Plan.
In January 2018, the Group amended and accelerated the vesting schedule of 6,817,372 previously granted options, which became immediately exercisable. The Group recognized the remaining compensation cost immediately for those shares upon the modification.
As of December 31, 2018,2021, there was RMB96,369RMB90,278 of unrecognized compensation expenses forrelated to the options.
F-43
Table of ContentsRestricted Stock Units
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”)During the years ended December 31, 2019, 2020 and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
17. SHARE-BASED PAYMENT – CONTINUED
Restricted Share
On October 21, 2015,2021, the Company granted 4,740,77730,000, 2,216,120 and 2,034,432 restricted shares understock units respectively to employees. Most of the U.S. Plan to employees at exercise price of US$0 per share.
These shares have a vesting period of four or five years of employment services with the first one-fourthvarious vesting on the first anniversary from the grant date, and the remaining three-fourth vestingpercentage in each year, or 20% on an annual basis over a three-year period ending on the fourth anniversary of the grant date.five-year vesting period. The non-vested sharesrestricted stock units are not transferable and may not be sold or pledged and the holder has no voting or dividend right on the non-vested shares. In the event a non-vested shareholder’s employment for the Company is terminated for any reason prior to the fourth anniversary of the grant date, the holder’s right to the non-vested shares will terminate effectively. The outstanding non-vested shares shall be forfeited and automatically transferred to and reacquired by the Company at nil consideration.
The Group recognized compensation expense over the four year service period on a straight line basis. The aggregate fair value of the restricted shares at the grant dates was RMB25,397. The fair values of non-vested shares are measured at the fair value of the Company’s ordinary shares on the grant-date which was RMB5.36 (US$0.84).
As of December 31, 2018, there was RMB118 unrecognized compensation cost related to non-vested shares which is expected to be recognized over a weighted average vesting period of 0.04 years.
A summary of the restricted share activity for the year ended December 31, 2016, 2017 and 2018 is presented below:
| ||||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
|
| |||
During the years ended December 31, 2016, 2017 and 2018, the Group recorded compensation expense of RMB6,499, RMB6,611 and RMB3,992 for the restricted shares, respectively.
Restricted Stock Units
During the year ended December 31, 2016, 2017 and 2018, the Company granted 745,500, 1,700,000 and 658,056 restricted stock units respectively to employees at an exercise price of US$0 per share. These shares have a vesting period of four years of employment services with the first one-fourth vesting on the first anniversary from grant date, and the remaining three-fourth vesting on an annual basis over a three-year period ending on the fourth anniversary of the grant date. The restricted stock units (“RSU”) are not transferable and may not be sold or pledged and the holder has no voting or dividend right on the non-vested shares. In the event a non-vested shareholder’s employment for the Company is terminated for any reason prior to the fourth anniversary of the grant date, the holder’s right to the non-vested shares will terminate effectively.immediately. The outstanding restricted stock units shall be forfeited and automatically transferred to and reacquired by the Company at nilNaN consideration.
F-43
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
17. SHARE-BASED PAYMENT – CONTINUED
Restricted Stock Units - continued
The Group recognized compensation expenseexpenses over the four year service period on a straight linestraight-line basis. The aggregate fair value of the restricted stock units at grant dates was RMB41,713. TheRMB136,342 as of December 31, 2021.The weighted average grant-date fair valuesvalue of non-vested shares are measured atwas RMB21.67 for the year ended December 31, 2021. The fair value of the Company’s ordinary shares on the grant-date which were RMB5.96, RMB11.38vested restricted stock units was RMB79, RMB21,020 and RMB15.87RMB11,648 during the years ended December 31, 2016, 20172019, 2020 and 2018.2021.
During the years ended December 31, 2016, 20172019, 2020 and 2018,2021, the Group recorded compensation expenseexpenses of RMB nil, nilRMB3,598, RMB22,838 and RMB25,434RMB18,707 for the restricted stock units, respectively.
As of December 31, 2018,2021, there was RMB8,906RMB49,397 unrecognized compensation costexpenses related to restricted stock units which is expected to be recognized over a weighted average vesting period of 3.41 3.11 years. The weighted average granted fair value of restricted stock units granted during the years ended December 31, 2016, 20172019, 2020 and 20182021 were RMB7.5RMB12.65 per RSU, RMB12.54RMB22.84 per RSU and RMB15.75RMB21.44 per RSU.
F-44
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
17. SHARE-BASED PAYMENT – CONTINUED
Restricted Stock Units - continued
A summary of the restricted stock units activity during the year ended December 31, 20182021 is presented below:
| | | ||
| RSUs | |||
Unvested balance |
|
| 1,816,842 | |
Granted |
|
| 2,034,432 | |
|
|
| (254,171) | |
Vested |
|
| (517,667) | |
Unvested balance |
|
| 3,079,436 |
Restricted Share owned by the founders
As one of the conditions to the closing of the Preferential Equity Interests in January 2014, 2 founders entered into a share restriction agreement with the preferential equity interests shareholders. Pursuant to this agreement, those founders are prohibited from transferring, selling, assigning, pledging or disposing in any way their equity interests in the Company before such interest is vested. The equity interests held by the Founders were 50% converted to restricted equity interests and vested in 24 equal and continuous monthly installments for each month starting from January 2014, provided that those founders remain full-time employees of the Group at the end of such month. A total of 45,567,164 restricted shares were held by those founders as of April 2015. In April 2015, as one of the condition of the closing of the preferred shareholder agreement, the agreement was amended to (1) restrict additional shares and extend the vesting period for an additional 48 months and (2) restrict shares held by four other founders similar to the restrictions imposed in January 2014. The Group also obtained an irrevocable and exclusive option to repurchase all of the restricted shares held by those founders at par value both in January 2014 and April 2015.
The share restriction agreement between the founders and the Company was accounted for as a grant of restricted shares awards under a share-based compensation plan. Accordingly, the Group measured the fair value of the restricted shares of the Founders at the grant date and recognizes the amount as compensation expense over the service period. Additionally, the modification of the restriction in April 2015 was accounted as a modification of share-based compensation. The Group calculated the incremental fair value resulting from the modification and recorded it as share-based compensation over the revised vesting term. The founder restricted shares have been fully vested in 2019 and no further grant activity in 2020 and 2021.
The Group determined that the non-vested restricted shares are participating securities as the holders of the non-vested restricted shares have a non-forfeitable right to receive dividends with all ordinary shares but the non-vested restricted shares do not have a contractual obligation to fund or otherwise absorb the Group's losses. See Note 22 for details.
F-44
|
|
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
17. SHARE-BASED PAYMENT – CONTINUED
Restricted Share owned by the founders - continued
During the years ended December 31, 2019, 2020 and 2021, the Group recorded share-based compensation expense of RMB17,794, NaN and NaN related to the unvested shares of the Founders respectively.
Total share-based compensation recognized during the years ended December 31, 2019, 2020 and 2021 was as follows:
|
| For the years ended December 31, |
| |||||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||||||||
|
| RMB |
|
| RMB |
|
| RMB |
| |||||||||
| | | | | | | ||||||||||||
| | For the years ended December 31, | ||||||||||||||||
|
| 2019 |
| 2020 |
| 2021 | ||||||||||||
| | RMB | | RMB | | RMB | ||||||||||||
Cost of revenues | | 55 | | — | | — | ||||||||||||
General and administrative |
|
| 55,109 |
|
|
| 55,804 |
|
|
| 87,857 |
|
| 40,684 | | 38,605 |
| 32,247 |
Research and development |
|
| 2,626 |
|
|
| 6,983 |
|
|
| 42,167 |
|
| 11,191 | | 23,978 |
| 42,677 |
Selling and Marketing |
|
| — |
|
|
| — |
|
|
| 4,271 |
| ||||||
Cost of revenues |
|
| — |
|
|
| — |
|
|
| 414 |
| ||||||
Total stock-based compensation expense |
|
| 57,735 |
|
|
| 62,787 |
|
|
| 134,709 |
| ||||||
Selling and marketing |
| 3,198 | | 2,571 |
| 8,198 | ||||||||||||
Total share-based compensation expenses |
| 55,128 | | 65,154 |
| 83,122 | ||||||||||||
18. MAINLAND CHINA CONTRIBUTION PLAN
Full time employees of the Group in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Group to accrue for these benefits based on certain percentages of the employees’ salaries. The total provisions for such employee benefits were RMB19,290, RMB24,539RMB63,799, RMB64,734 and RMB39,495RMB104,650 during the years ended December 31, 2016, 20172019, 2020 and 2018.2021.
19. NONCONTROLLING INTERESTS
| ||||
| ||||
|
| |||
|
| |||
|
|
| ||
|
| |||
|
|
| ||
|
|
| ||
|
|
F-45
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
The Group is mainly engaged in the business of smart wearable technology development. The Group’s chief operating decision maker (“CODM”) has been identified as the Chief Executive Officer of the Group, who reviews financial information of operating segments when making decisions about allocating resources and assessing performance of the Group. An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, and is identified on the basis of the internal financial reports that are provided to and regularly reviewed by the Group’s CODM. During the years ended December 31, 2016, 20172019, 2020 and 2018,2021, the Group identified two2 operating segments. Those segments include Xiaomi Wearable Productswearable products and Self-branded products and others. The Xiaomi wearable products segment comprise of sales of Xiaomi-branded products. The self-branded products and others segment comprises of self-branded products. Both Xiaomi Wearable Productwearable product and Self-branded products and others have been identified as reportable segments.
The Group primarily operates in the PRC and substantially all of the Group’s revenue and long-lived assets are mostly located in the PRC.
The Group’s CODM evaluates performance based on each reporting segment’s revenue, costs of revenues and gross profit. Revenues, cost of revenues and gross profits by segment are presented below. Separate financial information of operating income by segment is not available.
|
| For the year ended December 31, 2016 |
| |||||||||
|
| Xiaomi Wearable Products |
|
| Self-branded products and others |
|
| Total |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Revenues |
|
| 1,434,136 |
|
|
| 122,340 |
|
|
| 1,556,476 |
|
Cost of revenues |
|
| 1,182,646 |
|
|
| 97,678 |
|
|
| 1,280,324 |
|
Gross Profit |
|
| 251,490 |
|
|
| 24,662 |
|
|
| 276,152 |
|
F-45
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
|
| For the year ended December 31, 2017 |
| |||||||||
|
| Xiaomi Wearable Products |
|
| Self-branded products and others |
|
| Total |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Revenues |
|
| 1,614,512 |
|
|
| 434,384 |
|
|
| 2,048,896 |
|
Cost of revenues |
|
| 1,232,792 |
|
|
| 321,402 |
|
|
| 1,554,194 |
|
Gross Profit |
|
| 381,720 |
|
|
| 112,982 |
|
|
| 494,702 |
|
19. SEGMENT INFORMATION - CONTINUED
|
| For the year ended December 31, 2018 |
| |||||||||
|
| Xiaomi Wearable Products |
|
| Self-branded products and others |
|
| Total |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Revenues |
|
| 2,439,534 |
|
|
| 1,205,801 |
|
|
| 3,645,335 |
|
Cost of revenues |
|
| 1,883,509 |
|
|
| 822,376 |
|
|
| 2,705,885 |
|
Gross Profit |
|
| 556,025 |
|
|
| 383,425 |
|
|
| 939,450 |
|
| | | | | | |
| | For the year ended December 31, 2019 | ||||
| | | | Self-branded | | |
| | Xiaomi wearable | | products | | |
|
| Products |
| and others |
| Total |
| | RMB | | RMB | | RMB |
Revenues |
| 4,193,665 | | 1,618,590 | | 5,812,255 |
Cost of revenues |
| 3,296,696 | | 1,047,816 | | 4,344,512 |
Gross Profit |
| 896,969 | | 570,774 | | 1,467,743 |
| | | | | | |
| | For the year ended December 31, 2020 | ||||
| | | | Self-branded | | |
| | Xiaomi wearable | | products | | |
|
| Products |
| and others |
| Total |
| | RMB | | RMB | | RMB |
Revenues |
| 4,438,081 | | 1,995,282 | | 6,433,363 |
Cost of revenues |
| 3,706,495 | | 1,394,203 | | 5,100,698 |
Gross Profit |
| 731,586 | | 601,079 | | 1,332,665 |
| | | | | | |
| | For the year ended December 31, 2021 | ||||
| | | | Self-branded | | |
| | Xiaomi wearable | | products | | |
|
| Products |
| and others |
| Total |
| | RMB | | RMB | | RMB |
Revenues |
| 3,340,857 | | 2,909,252 | | 6,250,109 |
Cost of revenues |
| 2,754,086 | | 2,190,381 | | 4,944,467 |
Gross Profit |
| 586,771 | | 718,871 | | 1,305,642 |
The Group does not evaluate its segment on a fully allocated cost basis nor does the Group keeps track of segment assets separately.
F-46
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
21.20. STATUTORY RESERVES AND RESTRICTED NET ASSETS
PRC legal restrictions permit payments of dividends by the Group’s PRC subsidiaries only out of their retained earnings, if any, determined in accordance with PRC regulations. Prior to payment of dividends, pursuant to the laws applicable to the PRC Domestic Enterprises and PRC Foreign Investment Enterprises, the PRC subsidiaries must make appropriations from after-tax profit to non-distributable statutory reserve funds as determined by the Board of Directors of the Group. Subject to certain cumulative limits including until the total amount set aside reaches 50% of its registered capital, the general reserve fund requires annual appropriations of not less than 10% of after-tax profit (as determined under accounting principles and financial regulations applicable to PRC enterprises at each year-end);. These reserve funds can only be used for specific purposes and are not distributable as cash dividends. As of December 31, 2015, the company’s profit appropriation made to the reserve fund reacheddividends and the maximum required amount ofis 50% of registered capital and amounted to RMB1,509. Accordingly, no additional profit appropriation was made duringcapital. During the yearsyear ended December 31, 2016, 20172019, 2020 and 2018.2021, the Group accrued an additional RMB92, RMB5,997 and NaN statutory reserve from the new appropriable profit earned by certain PRC entities in the Group.
As a result of these PRC laws and regulations, the Group’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets to the Company either in the form of dividends, loans or advances. The balancebalances of restricted net assets were RMB154,342, RMB163,350RMB153,943, RMB180,981 and RMB153,851RMB252,220 as of December 31, 2016, 20172019, 2020 and 2018,2021, respectively.
22.
F-46
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
21. RELATED PARTY BALANCES AND TRANSACTIONS
| ||
Name |
| Relationship with the Group |
Xiaomi Communication Technology Co. Ltd.( | | Controlled by one of the Company’s shareholders |
Xiaomi Technology Co. Ltd. |
| |
| | Controlled by one of the Company’s shareholders |
Guangzhou Xiaomi Information Service Co. Ltd | | Controlled by one of the Company’s shareholders |
Youpin Information Technology Co. Ltd. (“Youpin Information”, together with Xiaomi Communication, Xiaomi Technology, Xiaomi | | Controlled by one of the Company’s shareholders |
Hefei
| |
|
|
|
|
| Significant influence by the Group |
Hefei Jingyu Micro-electronics (“Hefei Jingyu”) | | Significant influence by the Group |
Gongqingcheng Yunding Ruiheng Investment Partnership (Limited Partnership). (“Gongqingcheng Yunding”) | | Controlled by the founder of a company that the Group can exercise significant influence |
Hefei Yizhi Electronic Technology Co., Ltd (“Hefei Yizhi”) | | Controlled by one of the Company's shareholders |
(1)Balances:
| | | | |
| | As of December 31, | ||
| | 2020 | | 2021 |
|
| RMB |
| RMB |
Amount due from related parties: |
|
|
|
|
Xiaomi Communication (a) |
| 830,871 | | 286,341 |
Yunding (b) | | 2,064 | | 2,330 |
Gongqingcheng Yunding (c) | | 22,500 | | 2,500 |
Youpin Information (a) |
| 2,278 | | 885 |
Others |
| 2,500 | | 3,558 |
Total | | 860,213 | | 295,614 |
| | | | |
| | As of December 31, | ||
| | 2020 | | 2021 |
|
| RMB |
| RMB |
Amount due to related parties, current: |
|
|
|
|
Hefei Jingyu (d) | | — | | 48,052 |
Xiaomi Technology(e) |
| 10,293 | | 1,562 |
Others |
| 892 | | 509 |
Total |
| 11,185 | | 50,123 |
F-47
|
| As of December 31, |
| |||||
|
| 2017 |
|
| 2018 |
| ||
|
| RMB |
|
| RMB |
| ||
Amount due from related parties: |
|
|
|
|
|
|
|
|
Xiaomi Communication (a) |
|
| 566,732 |
|
|
| 631,204 |
|
Xiaomi Information (a) |
|
| 908 |
|
|
| 9,727 |
|
Xiaomi Technology (a) |
|
| — |
|
|
| 7,442 |
|
Hangzhou Yunyou (b) |
|
| — |
|
|
| 5,143 |
|
Others (c) |
|
| 10,814 |
|
|
| 2,883 |
|
Total |
|
| 578,454 |
|
|
| 656,399 |
|
F-47
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
21. RELATED PARTY BALANCES AND TRANSACTIONS –- CONTINUED
(2)Transactions:
| | | | | | |
| | For the years ended December 31, | ||||
| | 2019 | | 2020 | | 2021 |
|
| RMB |
| RMB |
| RMB |
Sales to related parties: |
|
|
|
|
|
|
Xiaomi Communication |
| 4,271,135 | | 4,447,957 | | 3,340,857 |
Xiaomi Youpin | | — | | — | | 9,175 |
Xiaomi Information |
| 9,870 | | — | | — |
Others |
| — | | 1,800 | | — |
Total |
| 4,281,005 | | 4,449,757 | | 3,350,032 |
| | | | | | |
| | For the years ended December 31, | ||||
| | 2019 | | 2020 | | 2021 |
|
| RMB |
| RMB |
| RMB |
Others: |
|
|
|
|
|
|
Hefei Jingyu (d) | | — | | — | | 146,847 |
Purchase from related parties (f) | | 12,183 | | 12,000 | | — |
|
|
|
| As of December 31, |
| |||||
|
| 2017 |
|
| 2018 |
| ||
|
| RMB |
|
| RMB |
| ||
Amount due to related parties, current: |
|
|
|
|
|
|
|
|
Huaying Fund |
|
| (3,061 | ) |
|
| — |
|
Xiaomi Mobile (d) |
|
| (4,752 | ) |
|
| (10,350 | ) |
Others |
|
| (330 | ) |
|
| (345 | ) |
Total |
|
| (8,143 | ) |
|
| (10,695 | ) |
Amount due to related party, non-current: |
|
|
|
|
|
|
|
|
Huaying Fund |
|
| (3,076 | ) |
|
| — |
|
Total |
|
| (3,076 | ) |
|
| — |
|
|
|
|
| For the years ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Sales to related parties: |
|
|
|
|
|
|
|
|
|
|
|
|
Xiaomi Communication |
|
| 1,448,960 |
|
|
| 1,773,595 |
|
|
| 2,798,824 |
|
Xiaomi Information |
|
| — |
|
|
| 1,318 |
|
|
| 17,859 |
|
Xiaomi Technology |
|
| 711 |
|
|
| 2,072 |
|
|
| — |
|
Others |
|
| 256 |
|
|
| 1,655 |
|
|
| 312 |
|
Total |
|
| 1,449,927 |
|
|
| 1,778,640 |
|
|
| 2,816,995 |
|
|
| For the years ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Others: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan provided to related parties (b) |
|
| 16,071 |
|
|
| (8,000 | ) |
|
| 5,143 |
|
Investments disposed to a related party (e) |
|
| — |
|
|
| 22,047 |
|
|
| 3,061 |
|
| The amount due from Xiaomi represents receivables from the sales of products and |
(b) |
|
| The amount due from |
| (c) | In December 2020, the Group |
| (e) | The |
| During 2019, purchase from related parties mainly included the intangible assets purchased from Hefei Huaheng which amounted to RMB11,321. During 2020, the Group made a prepayment of RMB12,000 to purchase a building owned by Hefei Yizhi. The Group |
23.
22. NET (LOSS) INCOME PER SHARE
During the years ended December 31, 2016, 2017 and 2018, the Group has determined that its convertible redeemable participating preferred shares are participating securities as the preferred shares participate in undistributed earnings on an as-if-converted basis. The holders of the preferred shares are entitled to receive dividends on a pro rata basis, as if their shares had been converted into ordinary shares. The Group determined that the nonvested restricted shares of the founders are participating securities as the holders of the nonvested restricted shares have a nonforfeitable right to receive dividends with all ordinary shares but the nonvested restricted shares do not have a contractual obligation to fund or otherwise absorb the Company’s losses. Accordingly, the Group uses the two class method of computing net lossincome per share, for ordinary shares and nonvested restricted shares and preferred shares according to the participation rights in undistributed earnings.
F-48
HUAMIZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
22. NET (LOSS) INCOME PER SHARE –- CONTINUED
However, undistributed loss is only allocated to ordinary shareholders because holders of preferred shares and nonvested restricted shares are not contractually obligated to share losses.
|
| For the years ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Basic net income per share calculation Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income for the year attributable to the Company: |
|
| 23,946 |
|
|
| 167,682 |
|
|
| 340,046 |
|
Less: Accretion of Series A Shares |
|
| 3,209 |
|
|
| 3,762 |
|
|
| 177 |
|
Less: Accretion of Series B-1 Shares |
|
| 2,738 |
|
|
| 3,127 |
|
|
| 368 |
|
Less: Accretion of Series B-2 Shares |
|
| 30,121 |
|
|
| 34,382 |
|
|
| 4,049 |
|
Less: Deemed dividend to preferred shareholders |
|
| — |
|
|
| — |
|
|
| 209,752 |
|
Less: Undistributed earnings allocated to Series A preferred shareholders |
|
| — |
|
|
| 48,753 |
|
|
| 4,521 |
|
Less: Undistributed earnings allocated to Series B-1 preferred shareholders |
|
| — |
|
|
| 1,361 |
|
|
| 126 |
|
Less: Undistributed earnings allocated to Series B-2 preferred shareholders |
|
| — |
|
|
| 14,220 |
|
|
| 1,319 |
|
Less: Undistributed earnings allocated to participating nonvested restricted shares |
|
| — |
|
|
| 15,957 |
|
|
| 6,244 |
|
Net (loss)/income attributed to ordinary shareholders for computing net (loss)/income per ordinary shares—basic |
|
| (12,122 | ) |
|
| 46,120 |
|
|
| 113,490 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares outstanding used in computing net (loss)/income per ordinary shares – basic |
|
| 55,612,626 |
|
|
| 67,777,592 |
|
|
| 211,873,704 |
|
Net (loss)/income per ordinary share attributable to ordinary shareholders—basic |
|
| (0.22 | ) |
|
| 0.68 |
|
|
| 0.54 |
|
Diluted net (loss)/income per share calculation |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)/income attributable to ordinary shareholders for computing net (loss)/income per ordinary shares—basic |
|
| (12,122 | ) |
|
| 46,120 |
|
|
| 113,490 |
|
Add: adjustments to undistributed earnings to participating securities |
|
| — |
|
|
| 3,519 |
|
|
| 648 |
|
Net (loss) income attributed to ordinary shareholders for computing net (loss) income per ordinary shares—basic |
|
| (12,122 | ) |
|
| 49,639 |
|
|
| 114,138 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average ordinary shares basic outstanding |
|
| 55,612,626 |
|
|
| 67,777,592 |
|
|
| 211,873,704 |
|
Effect of potentially diluted stock options, restricted stocks and RSUs |
|
| — |
|
|
| 8,514,309 |
|
|
| 13,160,946 |
|
Weighted average ordinary shares outstanding used in computing net (loss) income per ordinary shares—dilute |
|
| 55,612,626 |
|
|
| 76,291,901 |
|
|
| 225,034,650 |
|
Net (loss) income per ordinary share attributable to ordinary shareholders—diluted |
|
| (0.22 | ) |
|
| 0.65 |
|
|
| 0.51 |
|
F-49
TableThe computation of Contents
HUAMI CORPORATION
NOTES TO THE CONSOLIDATED STATEMENTS
(Amounts in thousands of Renminbi (“RMB”)basic and U.S. dollars (“US$”)
except for number of shares anddiluted net income per share data, or otherwise noted)for the years ended December 31, 2019, 2020 and 2021 is as follows:
| | | | | | |
| | For the years ended December 31, | ||||
| | 2019 | | 2020 | | 2021 |
|
| RMB |
| RMB |
| RMB |
Basic net income per share calculation Numerator: |
|
|
|
|
|
|
Net income for the year attributable to the Company: |
| 575,196 | | 228,753 | | 137,803 |
Less: Undistributed earnings allocated to participating nonvested restricted shares |
| 2,450 |
| — |
| — |
Net income attributed to ordinary shareholders for computing net income per ordinary shares—basic |
| 572,746 |
| 228,753 |
| 137,803 |
Denominator: |
| |
| |
| |
Weighted average ordinary shares outstanding used in computing net income per ordinary shares – basic |
| 243,648,186 |
| 248,470,684 |
| 252,167,610 |
Net income per ordinary share attributable to ordinary shareholders—basic |
| 2.35 |
| 0.92 |
| 0.55 |
Diluted net income per share calculation |
| |
| |
| |
Net income attributable to ordinary shareholders for computing net income per ordinary shares—basic |
| 572,746 |
| 228,753 |
| 137,803 |
Add: adjustments to undistributed earnings to participating securities |
| 117 |
| — |
| — |
Net income attributed to ordinary shareholders for computing net income per ordinary shares—diluted |
| 572,863 |
| 228,753 |
| 137,803 |
Denominator: |
| |
| |
| |
Weighted average ordinary shares outstanding used in computing net income per ordinary shares - basic |
| 243,648,186 |
| 248,470,684 |
| 252,167,610 |
Effect of potentially diluted share options, restricted shares and RSUs |
| 12,310,986 |
| 11,881,310 |
| 12,201,019 |
Weighted average ordinary shares outstanding used in computing net income per ordinary shares—diluted |
| 255,959,172 |
| 260,351,994 |
| 264,368,629 |
Net income per ordinary share attributable to ordinary shareholders—diluted |
| 2.24 |
| 0.88 |
| 0.52 |
23. NET (LOSS) INCOME PER SHARE – CONTINUED
For the yearyears ended December 31, 2016, 20172019, 2020 and 2018,2021, the following shares outstanding were excluded from the calculation of diluted net (loss)/income per ordinary shares, as their inclusion would have been anti-dilutive for the yearyears presented:
|
| For the years ended December 31, |
| |||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| |||
|
| RMB |
|
| RMB |
|
| RMB |
| |||
Shares issuable upon exercise of share options, restricted stocks and RSUs |
|
| 11,891,695 |
|
|
| 12,683,366 |
|
|
| 705,407 |
|
Shares issuable upon vesting of nonvested restricted shares |
|
| 34,175,372 |
|
|
| 23,450,173 |
|
|
| 11,657,620 |
|
Shares issuable upon conversion of Series A shares |
|
| 71,641,792 |
|
|
| 71,641,792 |
|
|
| — |
|
Shares issuable upon conversion of Series B-1 shares |
|
| 2,000,000 |
|
|
| 2,000,000 |
|
|
| — |
|
Shares issuable upon conversion of Series B-2 shares |
|
| 20,895,523 |
|
|
| 20,895,523 |
|
|
| — |
|
| | | | | | |
| | For the years ended December 31, | ||||
| | 2019 | | 2020 | | 2021 |
|
| RMB |
| RMB |
| RMB |
Shares issuable upon exercise of share options, restricted shares and RSUs |
| 294,352 | | 89,165 | | 301,946 |
Shares issuable upon vesting of nonvested restricted shares |
| 1,042,234 | | — | | — |
24. COMMITMENTS AND CONTINGENCIES
Lease commitments
Future minimum payments under lease commitments as of December 31, 2018 were as follows:F-49
|
| RMB |
| |
2019 |
|
| 16,333 |
|
2020 |
|
| 6,648 |
|
2021 and after |
|
| 3,171 |
|
|
|
| 26,152 |
|
Capital commitments
As of December 31, 2017, the group had a future minimum capital commitment for the purchase a building which amounted to RMB423,441. During the year ended December 31, 2018, the agreement was cancelled. Subsequent to December 31, 2018, the Group entered into a five-year rental agreement for the use of this building.
F-50
HUAMIZEPP HEALTH CORPORATION
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE INOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
(Amounts in thousands of Renminbi (“RMB” and U.S. dollars (“US$”))
except for number of shares and per share data, or otherwise noted)
|
| For the years ended December 31, |
| |||||||||
|
| 2017 |
|
| 2018 |
|
| 2018 |
| |||
|
| RMB |
|
| RMB |
|
| US$ |
| |||
|
|
|
|
|
|
|
|
|
| (Note2) |
| |
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
| 34,470 |
|
|
| 458,371 |
|
|
| 66,667 |
|
Term deposit |
|
| — |
|
|
| 96,969 |
|
|
| 14,104 |
|
Prepaid expenses and other current assets |
|
| 14,284 |
|
|
| 3,782 |
|
|
| 550 |
|
Amount due from related parties |
|
| 101,624 |
|
|
| 314,658 |
|
|
| 45,765 |
|
Total current assets |
|
| 150,378 |
|
|
| 873,780 |
|
|
| 127,086 |
|
Investments in subsidiaries |
|
| 435,085 |
|
|
| 963,064 |
|
|
| 140,072 |
|
Total assets |
|
| 585,463 |
|
|
| 1,836,844 |
|
|
| 267,158 |
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accrued expense and other current liabilities |
|
| 10,070 |
|
|
| 4,564 |
|
|
| 664 |
|
Amount due to related parties |
|
| — |
|
|
| 21,365 |
|
|
| 3,107 |
|
Total current liabilities |
|
| 10,070 |
|
|
| 25,929 |
|
|
| 3,771 |
|
Total liabilities |
|
| 10,070 |
|
|
| 25,929 |
|
|
| 3,771 |
|
Mezzanine equity |
|
|
|
|
|
|
|
|
|
|
|
|
Series A convertible redeemable participating preferred shares (“Series A Preferred Shares”) (US$0.0001 par value; 71,641,792 and nil shares authorized, issued and outstanding as of December 31,2017 and 2018, respectively; liquidation value of RMB24,870 and nil as of December 31, 2017 and 2018, respectively) |
|
| 26,770 |
|
|
| — |
|
|
| — |
|
Series B-1 convertible redeemable participating preferred shares (“Series B-1 Preferred Shares”) (US$0.0001 par value; 2,000,000 and nil shares authorized, issued and outstanding as of December 31, 2017 and 2018, respectively; liquidation value of RMB33,188 and nil as of December 31, 2017 and 2018, respectively) |
|
| 26,906 |
|
|
| — |
|
|
| — |
|
Series B-2 convertible redeemable participating preferred shares (“Series B-2 Preferred Shares”) (US$0.0001 par value; 20,895,523 and nil shares authorized, issued and outstanding as of December 31, 2017 and 2018, respectively; liquidation value of RMB364,145 and nil as of December 31, 2017 and 2018, respectively) |
|
| 295,942 |
|
|
| — |
|
|
| — |
|
Total mezzanine equity |
|
| 349,618 |
|
|
| — |
|
|
| — |
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary shares (US$0.0001 par value; 405,462,685 and nil shares authorized as of December 31, 2017 and 2018, respectively; 91,304,327 and nil shares issued and outstanding as of December 31, 2017 and 2018, respectively) |
|
| 56 |
|
|
| — |
|
|
| — |
|
Class A Ordinary shares (US$0.0001 par value; nil and 9,800,000,000 shares authorized as of December 31, 2017 and 2018; nil and 57,303,093 shares issued and outstanding as of December 31, 2017 and 2018, respectively) |
|
| — |
|
|
| 36 |
|
|
| 5 |
|
Class B Ordinary shares(US$0.0001 par value; nil and 200,000,000 shares authorized as of December 31, 2017 and 2018; nil and 184,376,679 shares issued and outstanding as of December 31, 2017 and 2018, respectively) |
|
| — |
|
|
| 115 |
|
|
| 17 |
|
Additional paid-in capital |
|
| 72,427 |
|
|
| 1,373,577 |
|
|
| 199,779 |
|
Accumulated retained earnings |
|
| 131,192 |
|
|
| 340,046 |
|
|
| 49,457 |
|
Accumulated other comprehensive income |
|
| 22,100 |
|
|
| 97,141 |
|
|
| 14,129 |
|
Total equity |
|
| 225,775 |
|
|
| 1,810,915 |
|
|
| 263,387 |
|
Total liabilities, mezzanine equity and equity |
|
| 585,463 |
|
|
| 1,836,844 |
|
|
| 267,158 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-51
HUAMI CORPORATION
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
(Amounts in thousands of Renminbi (“RMB” and U.S. dollars (“US$”))
except for number of shares and per share data, or otherwise noted)
|
| For the year ended December 31, |
| |||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| 2018 |
| ||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Note2) |
| |
Cost |
|
| — |
|
|
| — |
|
|
| 414 |
|
|
| 60 |
|
Gross profit |
|
| — |
|
|
| — |
|
|
| 414 |
|
|
| 60 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling and marketing |
|
| — |
|
|
| — |
|
|
| 4,271 |
|
|
| 621 |
|
General and administrative expenses |
|
| 54,916 |
|
|
| 57,898 |
|
|
| 99,881 |
|
|
| 14,528 |
|
Research and development |
|
| 2,626 |
|
|
| 6,984 |
|
|
| 42,167 |
|
|
| 6,133 |
|
Total operating expenses |
|
| 57,542 |
|
|
| 64,882 |
|
|
| 146,319 |
|
|
| 21,282 |
|
Operating loss |
|
| (57,542 | ) |
|
| (64,882 | ) |
|
| (146,733 | ) |
|
| (21,342 | ) |
Interest Income |
|
| — |
|
|
| — |
|
|
| 2,185 |
|
|
| 318 |
|
Equity in earnings of subsidiaries and VIEs |
|
| 81,488 |
|
|
| 232,564 |
|
|
| 484,594 |
|
|
| 70,481 |
|
Net income |
|
| 23,946 |
|
|
| 167,682 |
|
|
| 340,046 |
|
|
| 49,457 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-52
HUAMI CORPORATION
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands of Renminbi (“RMB” and U.S. dollars (“US$”))
except for number of shares and per share data, or otherwise noted)
|
| For the years ended December 31, |
| ||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
| 2018 |
| ||||
|
| RMB |
|
| RMB |
|
| RMB |
| US$ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
| (Note2) |
| |
Net income |
|
| 23,946 |
|
|
| 167,682 |
|
|
| 340,046 |
|
| 49,457 |
|
Other comprehensive income, net of tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment |
|
| 5,262 |
|
|
| (3,175 | ) |
|
| 75,041 |
|
| 10,914 |
|
Unrealized gain on available-for-sale investments and others, (net of tax effect of nil, RMB 1,554 and nil for years ended December 31, 2016, 2017 and 2018, respectively) |
|
| 303 |
|
|
| 9,484 |
|
|
| — |
|
| — |
|
Comprehensive income attributable to Huami Corporation |
|
| 29,511 |
|
|
| 173,991 |
|
|
| 415,087 |
|
| 60,371 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-53
HUAMI CORPORATION
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”),
except sharefor number of shares and per share related data, or otherwise noted)
|
| For the years ended December 31, |
| |||||||||||||
|
| 2016 |
|
| 2017 |
|
| 2018 |
|
| 2018 |
| ||||
|
| RMB |
|
| RMB |
|
| RMB |
|
| US$ |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Note2) |
| |
Cash Flow from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
| 23,946 |
|
|
| 167,682 |
|
|
| 340,046 |
|
|
| 49,457 |
|
Equity in earnings of subsidiaries |
|
| (81,488 | ) |
|
| (232,564 | ) |
|
| (484,594 | ) |
|
| (70,481 | ) |
Share-based compensation |
|
| 57,736 |
|
|
| 62,787 |
|
|
| 134,709 |
|
|
| 19,592 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
| — |
|
|
| (14,284 | ) |
|
| 8,625 |
|
|
| 1,255 |
|
Accrued expense and other current liabilities |
|
| 2 |
|
|
| 10,043 |
|
|
| (5,507 | ) |
|
| (801 | ) |
Amount due to a related party |
|
| — |
|
|
| (8,500 | ) |
|
| 4,489 |
|
|
| 653 |
|
Net Cash provided by (used in) Operating Activities |
|
| 196 |
|
|
| (14,836 | ) |
|
| (2,232 | ) |
|
| (325 | ) |
Cash Flow from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount due from related parties |
|
| (122,728 | ) |
|
| 21,646 |
|
|
| (196,158 | ) |
|
| (28,530 | ) |
Investment in subsidiaries |
|
| (2,400 | ) |
|
| (9,772 | ) |
|
| (10,056 | ) |
|
| (1,463 | ) |
Purchase of term deposits |
|
| — |
|
|
| — |
|
|
| (385,028 | ) |
|
| (56,000 | ) |
Maturity of term deposits |
|
| — |
|
|
| — |
|
|
| 288,771 |
|
|
| 42,000 |
|
Proceed received from loan to third parties |
|
| — |
|
|
| — |
|
|
| 3,578 |
|
|
| 521 |
|
Loans provided to third party |
|
| — |
|
|
| — |
|
|
| (2,406 | ) |
|
| (349 | ) |
Net Cash (used in) provided by Investing Activities |
|
| (125,128 | ) |
|
| 11,874 |
|
|
| (301,299 | ) |
|
| (43,821 | ) |
Cash Flow from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from initial public offering |
|
| — |
|
|
| — |
|
|
| 657,062 |
|
|
| 95,566 |
|
Exercise of share options |
|
| 24 |
|
|
| 89 |
|
|
| 3,486 |
|
|
| 506 |
|
Payment for repurchase of ordinary shares |
|
| — |
|
|
| — |
|
|
| (8,157 | ) |
|
| (1,186 | ) |
Net Cash provided by Financing Activities |
|
| 24 |
|
|
| 89 |
|
|
| 652,391 |
|
|
| 94,886 |
|
Net decrease in cash and cash equivalent |
|
| (124,908 | ) |
|
| (2,873 | ) |
|
| 348,860 |
|
|
| 50,740 |
|
Effect of exchange rate changes |
|
| 5,565 |
|
|
| (3,175 | ) |
|
| 75,041 |
|
|
| 10,914 |
|
Cash and cash equivalents at beginning of the year |
|
| 159,861 |
|
|
| 40,518 |
|
|
| 34,470 |
|
|
| 5,013 |
|
Cash and cash equivalents at end of the year |
|
| 40,518 |
|
|
| 34,470 |
|
|
| 458,371 |
|
|
| 66,667 |
|
The accompanying notes are an integral part of these condensed consolidated financial statement.
F-54
HUAMI CORPORATION
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I
FINANCIAL INFORMATION OF PARENT COMPANY
NOTES OF THE CONDENSED FINANCIAL STATEMENT
1. BASIS FOR PREPARATION23. LEASES
The condensedGroup's leases consist of operating leases for administrative office spaces in different cities in the PRC and overseas and financial informationlease which is immaterial. The Group determines if an arrangement is a lease at inception. Some lease agreements contain lease and non-lease components, which the Group chooses to account for as separate components. The allocation of the Company has been prepared usingconsideration between the same accounting policies as set outlease and the non-lease components is based on the relative stand-alone prices of lease components included in the lease contracts.
The following table represents lease costs recognized in the Group's consolidated statements of operation for the years ended December 31, 2019, 2020 and 2021. Lease costs are included in selling expenses, general and administrative expenses and research and development expenses on the Group's consolidated statements of operations.
| | | | | | |
| | | | |
| |
| | For the years ended December 31, | ||||
| | 2019 | | 2020 |
| 2021 |
| | RMB | | RMB |
| RMB |
Operating lease cost(1) | | 30,788 | | 57,080 | | 41,595 |
Sublease income | | (1,382) | | (537) | | (3,591) |
Total lease cost | | 29,406 | | 56,543 | | 38,004 |
| (1) | Operating lease cost includes short-term lease costs, which was not material in the period presented. |
The following table represents the components of leases that are recognized on the Group’s consolidated financial statements except that the Company has used the equity method to account for investments in its subsidiaries and VIEs.
2. CONVENIENCE TRANSLATION
Translations of balances in condensed financial information of parent company balance sheets statementsas of operations statementsDecember 31, 2020 and 2021.
| | | | | |
| | As of December 31, |
| ||
| | 2020 | | 2021 |
|
| | RMB | | RMB |
|
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from operating leases | | 42,313 |
| 49,644 | |
Non-cash Right-of-use assets in exchange for new lease liabilities: | | | | | |
Operating leases | | 96,348 |
| 2,157 | |
Weighted average remaining lease term: | | | | | |
Operating leases | | 3.68 years |
| 2.80 years | |
Weighted average discount rate: | | | | | |
Operating leases | | 5.25 | % | 5.27 | % |
The following is a maturity analysis of comprehensive income and statements ofthe annual undiscounted cash flows from RMB into US$ as of and duringfor the year ended December 31, 2018 is solely2021:
| | |
Year ending December 31, |
| RMB |
2022 |
| 51,748 |
2023 |
| 45,338 |
2024 |
| 25,660 |
2025 | | 8,354 |
Total lease payments |
| 131,100 |
Less: imputed interest |
| 9,891 |
Present value of lease liabilities |
| 121,209 |
F-50
ZEPP HEALTH CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands of Renminbi (“RMB”) and U.S. dollars (“US$”)
except for number of shares and per share data, or otherwise noted)
24. SUBSEQUENT EVENT
Dividend
On March 17, 2022, the convenienceCompany announced a special cash dividend of US$0.025 per ordinary share (US$0.1 per ADS) on its outstanding shares to shareholders of record as of the readerclose of trading on March 28, 2022. The ex-dividend date is March 25, 2022 and were calculated at the rate of US$1.00 = RMB6.8755, representing the rate as certified by the statistical release of the Federal Reserve Board of United States on December 31, 2018. No representation is made that the RMB amounts could have been, or could be, converted, realized or settled into U.S. dollar at that rate on December 31, 2018, or at any other ratedividend was paid in April 2022.
3. INVESTMENTS IN SUBSIDIARIES AND VIEs
The Company and its subsidiaries and VIEs were included in the consolidated financial statements where the intercompany transactions and balances were eliminated upon consolidation. For purpose of the Company’s standalone financial statements, its investments in subsidiaries and VIEs were reported using the equity method of accounting. The Company’s share of income and losses from its subsidiaries and VIEs were reported as equity in earnings of subsidiaries and VIEs in the accompanying parent company financial statements.
