Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

o

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2019.

 

 

OR

 

 

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

OR

 

 

o

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .

 

Commission file number: 001-38369

 

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)

 

Building H8, No. 2800, Chuangxin Road

Hefei, 230088

People’s Republic of China

(Address of Principal Executive Offices)

 

David Cui, Chief Financial Officer

Building H8, No. 2800, Chuangxin Road

Hefei, 230088

People’s Republic of China

Phone: +86 551-65837200

Email: david.cui@huami.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*

 

*Not for trading, but only in connection with the listing on the New York Stock Exchange.

 

HMI

 

New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

(Title of Class)

 


Table of Contents

 

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, 2019, there were (i) 91,459,708 Class A ordinary shares issued and outstanding, par value US$0.0001 per share (excluding the 4,099,780 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), and (ii) 156,060,279 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.

o Yes   x 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.

o Yes   x 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.

x Yes   o 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).

x Yes   o 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 o

 

Accelerated filer x

 

Non-accelerated filer o

 

Emerging growth company x

 

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† provided pursuant to Section 13(a) of the Exchange Act. x

 

†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 which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP x

 

International Financial Reporting Standards as issued
by the International Accounting Standards Board
o

 

Other o

 

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.

o Item 17   o 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).

o Yes   x 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.

 

o Yes   o No

 


Table of Contents

 

TABLE OF CONTENTS

 

INTRODUCTION

1

 

 

FORWARD-LOOKING STATEMENTS

1

 

 

PART I

 

2

 

 

 

ITEM 1.

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

2

ITEM 2.

OFFER STATISTICS AND EXPECTED TIMETABLE

2

ITEM 3.

KEY INFORMATION

2

ITEM 4.

INFORMATION ON THE COMPANY

37

ITEM 4A.

UNRESOLVED STAFF COMMENTS

61

ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

61

ITEM 6.

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

80

ITEM 7.

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

91

ITEM 8.

FINANCIAL INFORMATION

94

ITEM 9.

THE OFFER AND LISTING

94

ITEM 10.

ADDITIONAL INFORMATION

95

ITEM 11.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

107

ITEM 12.

DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

107

 

 

 

PART II.

 

109

 

 

 

ITEM 13.

DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

109

ITEM 14.

MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

109

ITEM 15.

CONTROLS AND PROCEDURES

110

ITEM 16A.

AUDIT COMMITTEE FINANCIAL EXPERT

111

ITEM 16B.

CODE OF ETHICS

111

ITEM 16C.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

111

ITEM 16D.

EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

111

ITEM 16E.

PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

111

ITEM 16F.

CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

111

ITEM 16G.

CORPORATE GOVERNANCE

112

ITEM 16H.

MINE SAFETY DISCLOSURE

112

 

 

 

PART III.

 

112

 

 

 

ITEM 17.

FINANCIAL STATEMENTS

112

ITEM 18.

FINANCIAL STATEMENTS

112

ITEM 19.

EXHIBITS

112

 

i


Table of Contents

 

INTRODUCTION

 

Unless otherwise indicated and except where the context otherwise requires, in this annual report on Form 20-F:

 

·                  “ADSs” refer to our American depositary shares, each of which represents four Class A ordinary shares;

 

·                  “ADRs” refer to the American depositary receipts that evidence our ADSs;

 

·                  “China” or the “PRC” refers to the People’s Republic of China, excluding, for the purpose of this annual report only, Hong Kong, Macau and Taiwan;

 

·                  “Class A ordinary shares” refer to our class A ordinary shares, par value US$0.0001 per share;

 

·                  “Class B ordinary shares” refer to our class B ordinary shares, par value US$0.0001 per share;

 

·                  “Huami,” “we,” “us,” “our company” or “our” refer to Huami Corporation, our Cayman Islands holding company and its subsidiaries, its consolidated variable interest entities and the subsidiaries of the consolidated variable interest entities;

 

·                  “Memorandum and Articles” refer to the second amended and restated memorandum of association and articles of association adopted by a special resolution passed on January 12, 2018 and effective on February 12, 2018;

 

·                  “Mobile App MAUs” refer to monthly active users of our mobile apps, which are represented by the number of accounts that have been logged into on our mobile apps during a given calendar month. The numbers of our Mobile App MAUs are calculated using internal company data that have not been independently verified. It is possible that some users may have set up more than one account;

 

·                  “ordinary shares” refer to our Class A and Class B ordinary shares, par value US$0.0001 per share;

 

·                  “Our platform” refers to the products and mobile apps that we provide to users and platform partners;

 

·                  “our VIEs” refer to Anhui Huami Information Technology Co., Ltd., a company incorporated in the PRC, and Huami (Beijing) Information Technology Co., Ltd., a company incorporated in the PRC;

 

·                  “RMB” or “Renminbi” refers to the legal currency of China;

 

·                  “Shunyuan Kaihua” or “our WFOE” refers to Beijing Shunyuan Kaihua Technology Co., Ltd., a wholly owned foreign enterprise incorporated with limited liability in the PRC;

 

·                  “US$,” “U.S. dollars,” “$,” or “dollars” refer to the legal currency of the United States;

 

·                  “Xiaomi” refers to Xiaomi Corporation, of which we have been a major partner to design and manufacture Xiaomi Wearable Products; and

 

·                  “Xiaomi Wearable Products” refer to Xiaomi-branded smart bands, watches (excluding children watches and quartz watches), scales and associated accessories.

 

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.

 

1


Table of Contents

 

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:

 

·                  our goals and strategies;

 

·                  our future business development, financial conditions and results of operations;

 

·                  the expected growth of the smart wearable devices industry;

 

·                  our expectations regarding demand for and market acceptance of our products and services;

 

·                  our expectations regarding our relationships Xiaomi, our other distributors, customers, contract manufacturers, component suppliers, strategic partners and other stakeholders;

 

·                  competition in our industry; and

 

·                  relevant government policies and regulations relating to our industry.

 

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 RMB6.9618 to US$1.00, the exchange rate in effect as of December 31, 2019 as set forth in the H.10 statistical release of The Board of Governors of the Federal Reserve System. We make no representation that any Renminbi or U.S. dollar amounts could have been, or could be, converted into U.S. dollars or Renminbi, as the case may be, at any particular rate, or at all.

 

PART I

 

ITEM 1.                                                IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

 

Not applicable.

 

ITEM 2.                                                OFFER STATISTICS AND EXPECTED TIMETABLE

 

Not applicable.

 

ITEM 3.                                                KEY INFORMATION

 

A.                                    Selected Financial Data

 

Our Selected Consolidated Financial Data

 

The following selected consolidated statements of operating data for the years ended December 31, 2017, 2018 and 2019, selected consolidated balance sheet data as of December 31, 2018 and 2019 and selected consolidated cash flow data for the years ended December 31, 2017, 2018 and 2019 have been derived from our audited consolidated financial statements included elsewhere in this annual report. The selected consolidated statements of operating data for the years ended December 31, 2015 and 2016, the selected consolidated balance sheet data as of December 31, 2015, 2016 and 2017 and selected consolidated cash flow data for the years ended December 31, 2015 and 2016 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.

 

2


Table of Contents

 

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,

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

 

 

RMB

 

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

 

5,812,255

 

834,878

 

Cost of revenues(2)

 

785,867

 

1,280,324

 

1,554,194

 

2,705,885

 

4,344,512

 

624,050

 

Gross profit

 

110,591

 

276,152

 

494,702

 

939,450

 

1,467,743

 

210,828

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses(3)

 

61,553

 

132,304

 

153,827

 

263,220

 

430,822

 

61,884

 

General and administrative expenses(3)

 

69,984

 

102,644

 

114,880

 

213,973

 

248,462

 

35,689

 

Selling and marketing expenses(3)

 

19,168

 

27,821

 

44,026

 

96,538

 

181,975

 

26,139

 

Total operating expenses

 

150,705

 

262,769

 

312,733

 

573,731

 

861,259

 

123,712

 

Operating (loss)/income

 

(40,114

)

13,383

 

181,969

 

365,719

 

606,484

 

87,116

 

Other income and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Realized gain from investments

 

 

 

2,373

 

261

 

1,822

 

262

 

Interest income

 

255

 

754

 

3,003

 

11,595

 

33,478

 

4,809

 

Gain from fair value change of long-term investments

 

 

 

 

7,860

 

 

 

Impairment loss from long-term investments

 

 

 

 

(7,590

)

(2,600

)

(373

)

Other income

 

1,109

 

14,726

 

4,555

 

8,768

 

13,186

 

1,894

 

(Loss)/income before income tax

 

(38,750

)

28,863

 

191,900

 

386,613

 

652,370

 

93,708

 

Income tax benefit/(expense)

 

897

 

(3,088

)

(27,611

)

(52,036

)

(77,887

)

(11,188

)

(Loss)/income before (loss)/income from equity method investments

 

(37,853

)

25,775

 

164,289

 

334,577

 

574,483

 

82,520

 

(Loss)/income from equity method investments

 

 

(1,829

)

2,806

 

1,743

 

(1,112

)

(160

)

Net (loss)/income

 

(37,853

)

23,946

 

167,095

 

336,320

 

573,371

 

82,360

 

Less: net loss attributable to non-controlling interest

 

 

 

(587

)

(3,726

)

(1,825

)

(262

)

Net (loss)/income attributable to Huami Corporation

 

(37,853

)

23,946

 

167,682

 

340,046

 

575,196

 

82,622

 

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

 

2.35

 

0.34

 

Diluted (loss)/income per ordinary share

 

(1.22

)

(0.22

)

0.65

 

0.51

 

2.24

 

0.32

 

 


Notes:

 

(1)         Includes RMB876.7 million, RMB1,449.9 million, RMB1,778.6 million, RMB2,817.0 million and RMB4,281.0 million (US$614.9 million) with related parties for the years ended December 31, 2015, 2016, 2017, 2018 and 2019, respectively.

 

(2)         Includes RMB762.9 million, RMB1,198.3 million, RMB1,355.5 million, RMB2,141.1 million and RMB3,342.1 million (US$480.1 million) with related parties for the years ended December 31, 2015, 2016, 2017, 2018 and 2019, respectively.

 

(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, 2015, 2016, 2017, 2018 and 2019, we recorded share-based compensation expenses of RMB37.2 million, RMB50.8 million, RMB51.5 million, RMB55.3 million and RMB17.8 million (US$2.6 million), respectively, in relation to the vesting of the restricted shares of our founders under the share restriction agreements.

 

3


Table of Contents

 

The following table presents our selected consolidated balance sheet data as of the dates indicated.

 

 

 

As of December, 31

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

 

 

RMB

 

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

 

1,803,117

 

259,002

 

Accounts receivable (net of allowance of nil, nil and nil as of December 31, 2017, 2018 and 2019, respectively)

 

21,924

 

19,707

 

32,867

 

58,925

 

188,940

 

27,140

 

Amount due from related parties (net of allowance of nil, nil and nil as of December 31, 2017, 2018 and 2019, respectively)

 

172,966

 

476,698

 

578,454

 

656,399

 

1,421,170

 

204,138

 

Inventories

 

89,946

 

192,372

 

249,735

 

484,622

 

893,806

 

128,387

 

Non-current assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

2,926

 

10,801

 

28,755

 

40,042

 

64,350

 

9,243

 

Total assets

 

529,079

 

972,896

 

1,465,517

 

3,258,481

 

5,174,743

 

743,306

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable

 

252,073

 

524,072

 

707,782

 

1,064,106

 

1,999,951

 

287,275

 

Bank borrowings

 

 

10,000

 

30,000

 

20,000

 

 

 

Total liabilities

 

277,823

 

634,370

 

887,735

 

1,448,903

 

2,677,155

 

384,550

 

Total liabilities, mezzanine equity and equity

 

529,079

 

972,896

 

1,465,517

 

3,258,481

 

5,174,743

 

743,306

 

 

The following table presents our selected cash flows for the years indicated.

 

 

 

Years Ended December 31,

 

 

 

2015

 

2016

 

2017

 

2018

 

2019

 

 

 

RMB

 

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

 

427,999

 

61,479

 

Net cash used in investing activities

 

(4,911

)

(99,387

)

(38,881

)

(324,841

)

(112,703

)

(16,188

)

Net cash provided by financing activities

 

214,063

 

10,024

 

20,089

 

639,170

 

25,609

 

3,678

 

Net increase/(decrease) in cash and cash equivalents

 

202,385

 

(72,097

)

219,544

 

1,021,934

 

340,905

 

48,969

 

Exchange rate effect on cash and cash equivalents

 

10,226

 

5,262

 

(3,175

)

60,357

 

11,274

 

1,619

 

Cash, cash equivalents and restricted cash at the beginning of year

 

7,376

 

219,987

 

153,152

 

369,521

 

1,451,812

 

208,540

 

Cash, cash equivalents and restricted cash at end of year

 

219,987

 

153,152

 

369,521

 

1,451,812

 

1,803,991

 

259,128

 

 

B.                                    Capitalization and Indebtedness

 

Not applicable.

 

C.                                    Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

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.

 

Xiaomi is the sole customer and distribution channel for all Xiaomi Wearable Products, and it held 14.5% of our total outstanding shares as of March 31, 2020. For the years ended December 31, 2017, 2018 and 2019, sales of Xiaomi Wearable Products contributed 78.8%, 66.9% and 72.2% 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. 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.”

 

4


Table of Contents

 

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, 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. 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. 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.

 

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. In the event that Xiaomi dedicates less resources in promoting and selling our products, our revenue may decrease as well. If 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 an effective and efficient manner, or at all. 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 watches we designed and manufactured for Xiaomi and our self-branded watches that are available on Xiaomi’s platforms, 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- and Amazfit-branded products) contributed 86.6%, 90.7% and 91.8% of our total revenues in the years ended December 31, 2017, 2018 and 2019, 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 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. We have obtained the medical device registration certificate for our ECG health band products, and we will also need to obtain the same certificate if our other products are to be used for medical 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 National Medical Products Administration regulations will subject us to enforcement actions such as fines, civil penalties or recalls of products, which could harm our reputation and operating results.

 

5


Table of Contents

 

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 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. 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. 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.

 

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 3.1 million units in 2018 to approximately 3.9 million units in 2019. For the year ended December 31, 2019, revenues from our self-branded products and others segment, substantially all of which was from the sales of our self-branded products, were RMB1,618.6 million (US$232.5 million), representing 27.8% of our total revenues. 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.

 

6


Table of Contents

 

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 Spain, Indonesia and Paraguay (with respect to Amazfit and related logos). The trademark holder in Indonesia has transferred its right to us. 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 to a number of manufacturers while each of our self-branded product lines is assigned to a corresponding manufacturer. 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, 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.

 

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, health crisis, 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.

 

7


Table of Contents

 

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 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.

 

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 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 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.

 

8


Table of Contents

 

Our patents, know-how, trade secrets and other intellectual property rights and proprietary rights are critical to our success. Any failure to obtain, maintain, enforce or protect our patents and other intellectual property rights would materially and adversely harm our business, competitive position, results of operations and financial condition.

 

We rely on intellectual property rights such as patents, trademarks, copyrights, and domain names in China and other foreign jurisdictions to carry out our business 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 various developing countries around the world, such as in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Accordingly, we may 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 of 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 diversion of our managerial and financial resources, and could put our intellectual property at risk of being invalidated or narrowed in scope. We can provide no assurance that we will prevail in such litigation, and even if we do prevail, we may not obtain a 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.

 

We may not be able 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 in foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our business, 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 any 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 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. 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 pending applications for the registration of “Huami” were initially unsuccessful, challenged or rejected in China, Egypt, Australia, Colombia, EU, Saudi Arabia and India. As such, we currently cannot use the “华米” trademark in certain categories of products and our self-branded products are sold under the brand name of “Amazfit.” In addition, this company currently manufactures and sells products and service lines similar to ours under the “华米” 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. 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.

 

9


Table of Contents

 

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 be no assurance, however, that we will be able to register the trademark of “Amazfit” in all of the categories or formats as we desire. As of the date of this annual report, the pending application of the “Amazfit” logo was initially unsuccessful in China, and the pending applications for registration of “Amazfit” and related logos were initially unsuccessful, challenged or rejected in Thailand, Pakistan, Paraguay, Philippines, Egypt, Colombia, Malaysia, Ukraine and Indonesia for reasons including but not limited to third parties having already registered similar marks in those countries.

 

Accordingly, 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 receive from time to time letters alleging infringement of patents, trademarks or other intellectual property rights by us.

 

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 rely on cloud servers maintained by cloud service providers to store our data, and the majority of the data we collected are hosted at Xiaomi’s cloud servers. We are in the process of transferring our overseas data to the Amazon Web Services, and we expect to finish the transfer in 2020. 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.

 

We have adopted security policies and measures, including encryption technology, to protect our proprietary data 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 breach of the technology that we use to protect confidential information. We 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 using our products and mobile apps. Such individuals or entities obtaining our users’ confidential or private information may further engage in various other illegal activities using 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, could have a material and adverse effect on our public image, reputation, financial condition and results of operations.

 

10


Table of Contents

 

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 of China and the Standardization Administration of China jointly issued the Standard of Information Security Technology—Personal Information Security Specification, which has come into effect in May 2018 and was further amended in March 2020. Pursuant to this 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. On November 28, 2019, the Secretary Bureau of the Cyberspace Administration of China, the General Office of the Ministry of Industry and Information Technology, the General Office of the Ministry of Public Security and the General Office of the State Administration for Market Regulation jointly promulgated the Identification Method of Illegal Collection and Use of Personal Information Through App, which provides guidance for the regulatory authorities to identify the illegal collection and use of personal information through mobile apps, and for the app operators to conduct self-examination and self-correction and for other participants to voluntarily monitor compliance. 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. However, 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. 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. The GDPR requires submission of personal data breach notifications to designated European privacy regulator in each country our products are distributed in, and includes significant penalties for non-compliance with the notification obligation as well as other requirements of the regulation.

 

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. 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.

 

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. 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 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.

 

11


Table of Contents

 

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.

 

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.

 

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 23.8% in 2017 to 44.2% in 2018, and further to 51.6% in 2019. 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;

 

12


Table of Contents

 

·                  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.

 

The occurrence of any of these risks could negatively affect our international business and consequently our business and operating results. In addition, the concern over these risks may also prevent us from entering into or releasing certain of our products in certain markets.

 

We had in the past relied on Xiaomi’s brand recognition and distribution channels in markets outside China. In 2019, we explored 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. 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 products. Our marketing and branding activities may not achieve anticipated results. If we fail to enhance our marketing approaches and experiment with new marketing methods, or fail to do so in 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 product 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. 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.

 

13


Table of Contents

 

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 products. This will lead to increases in warranty costs, regulatory proceedings and product recalls, which could harm not only our revenue and operating 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, we offer an 18-month warranty which includes a six-month warranty to Xiaomi and an additional 12-month warranty to end-users. For products sold directly to end users, the warranty period is 12 months to end users. 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.

 

Our business, financial condition and results of operations may be adversely affected by the COVID-19 outbreak in China and globally.

 

The ongoing COVID-19 outbreak has restricted general commercial activities in affected regions and resulted in reduced business volume. It has also caused temporary closures of our offices and limited access by our employees to certain warehouses and logistics centers. The number of our products manufactured reduced in January and February 2020 as our contracted manufacturing facilities have been temporarily shut down, and the manufacturing facilities have still been in ramp-up to its full capacity since March. We estimate a decrease in demand for smart wearable products, both in China and overseas, which may negatively affect our sales performance. In addition, the worldwide outbreak may not only adversely affect our sales performance overseas, but also lead to components and raw materials shortages as we source those from south east Asia, Europe and other areas around the world. We cannot guarantee that our manufacturing capabilities and sales performance will not continue to be negatively affected due to the COVID-19 outbreak. 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 outbreak. 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 outbreak may negatively affect our financial results for fiscal year of 2020, maybe even beyond. The extent to which this outbreak 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 outbreak and the actions to contain this outbreak 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.

 

14


Table of Contents

 

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 directors Mr. De Liu is also a co-founder and a senior vice president of Xiaomi. Such association may give rise to potential conflicts of interest, especially with regarding to our business cooperation with Xiaomi. 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, Mr. Liu will still be entitled to vote in our board meeting, and we cannot assure you that Mr. Liu’s decision will not be impacted by any potential conflict of interest arising from his relationship with Xiaomi.

 

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 is 14,328,358 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. As of March 31, 2020, awards to purchase 13,796,269 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, 2020, awards to purchase 6,936,025 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. As of December 31, 2019, our unrecognized share-based compensation expenses amounted to RMB55.7 million (US$8.0million).

 

15


Table of Contents

 

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.

 

16


Table of Contents

 

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 may 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.

 

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, 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. 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 RMB423.3 million (US$60.8 million) of short-term and long-term investments as of December 31, 2019.

 

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.

 

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.

 

17


Table of Contents

 

COVID-19 had a severe and negative impact on the Chinese and the global economy in the first quarter of 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 was facing numerous challenges. The growth rate of the Chinese economy had gradually slowed since 2010, and the impact of COVID-19 on the Chinese economy in 2020 is likely to be severe. China had a negative gross domestic product, or GDP growth in the first quarter of 2020, which broke the record of the continued GDP growth in China for the past decades. 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, even before 2020. Unrest, terrorist threats and the potential for war in the Middle East and elsewhere may increase market volatility across the globe. There have also been concerns about the relationship between China and other countries, including the surrounding Asian countries, which may potentially have economic effects. In particular, there is significant uncertainty about the future 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. Any severe or prolonged slowdown in the global or Chinese economy may materially and adversely affect our business, results of operations and financial 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. 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.

 

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, and we may incorporate 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.

 

18


Table of Contents

 

We do not maintain insurance coverage which could expose us to significant costs and business disruption.

 

We do not maintain liability insurance coverage for our products and business operation. A successful liability claim against us due to injuries suffered by our users 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.

 

Although our management has concluded that our internal control over financial reporting was effective as of December 31, 2019, historically, we and our independent registered accounting firm have identified one material weakness, as latest as in the course of auditing our consolidated financial statements for the year ended December 31, 2018. We will endeavor to maintain an effective internal control system, but any failure may cause our management and our independent registered public accounting firm to not be able to conclude that we have effective internal control over financial reporting at a reasonable assurance level in the future. This could in turn result in the loss of investor confidence in the reliability of our financial statements and negatively impact the trading price of our ADSs. Furthermore, 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.

 

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 4. Information on the Company—C. Organizational Structure” for further details.

 

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. 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;

 

19


Table of Contents

 

·                  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.

 

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.

 

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 3. Key Information—D. Risk 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.

 

20


Table of Contents

 

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 how contractual arrangements in the context of a VIE should be interpreted or enforced under PRC law. There remain significant uncertainties regarding the ultimate outcome of such arbitration should legal action become necessary. 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.

 

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.

 

21


Table of Contents

 

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 took effect on January 1, 2020, and replaced the previous 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, together with their implementation rules and ancillary regulations, or collectively, the Outdated FIE Laws. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Foreign Investment.”

 

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 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 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

 

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.

 

22


Table of Contents

 

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.

 

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.

 

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.

 

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 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.

 

23


Table of Contents

 

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.

 

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 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.

 

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.

 

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.

 

24


Table of Contents

 

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 record-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 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. 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.

 

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 transactions in an effort to reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. 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.

 

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.

 

25


Table of Contents

 

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 takes control of an affiliated PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires, 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, PRC national security review rules which became effective in September 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.

 

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.

 

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.

 

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 our PRC resident shareholders, namely Wang Huang, Yunfen Lu, Meihui Fan, Bin Fan, Yi Zhang and Xiaojun Zhang, have completed all necessary initial 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. 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.

 

26


Table of Contents

 

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 4. Information on the Company—B. Business Overview—Regulation—Regulation on Employee Share Options.”

 

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.

 

We believe that Huami Corporation is not a PRC resident enterprise for PRC tax purposes. See “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 Huami 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.

 

27


Table of Contents

 

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.

 

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-resident 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.

 

28


Table of Contents

 

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. Therefore, our independent registered public accounting firm is not currently inspected fully by the PCAOB. This lack of PCAOB inspections in the PRC prevents the PCAOB from regularly evaluating our independent registered public accounting firm’s audits and its quality control procedures. As a result, investors may be deprived of the benefits of PCAOB inspections. 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. On April 21, 2020, the SEC and the PCAOB issued another joint statement reiterating the PCAOB’s inability to inspect audit work paper and practices of registered accounting firms in China, with respect to their audit work of U.S. reporting companies. However, it remains unclear what further actions the SEC and PCAOB will take to address the problem.

 

Inspections of other firms that the PCAOB has conducted outside the PRC have identified deficiencies in those firms’ audit procedures and quality control procedures, which may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of auditors in the PRC makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures as compared to auditors outside of the PRC that are subject to PCAOB inspections. Investors may lose confidence in our reported financial information and procedures and the quality of our financial statements.

 

As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in particular China’s, in June 2019, a bipartisan group of lawmakers introduced bills in both houses of the U.S. Congress that would require the SEC to maintain a list of issuers for which PCAOB is not able to inspect or investigate an auditor report issued by a foreign public accounting firm. The Ensuring Quality Information and Transparency for Abroad-Based Listings on our Exchanges (EQUITABLE) Act prescribes increased disclosure requirements for these issuers and, beginning in 2025, the delisting from U.S. national securities exchanges such as the New York Stock Exchange of issuers included on the SEC’s list for three consecutive years. Enactment of this legislation or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers, including us, and the market price of our ADSs could be adversely affected. It is unclear if this proposed legislation would be enacted.

 

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. The CSRC initiated a procedure whereby, under its supervision and subject to its approval, requested classes of documents held by the accounting firms could be sanitized of problematic and sensitive content so as to render them capable of being made available by the CSRC to US regulators. Under the terms of the settlement, the underlying proceeding against the four PRC-based accounting firms was deemed dismissed with prejudice at the end of four years starting from the settlement date, which was on February 6, 2019. Despite the final ending of the proceedings, the presumption is that all parties will continue to apply the same procedures, where the SEC will continue to make its requests for the production of documents to the CSRC, and the CSRC will normally process those requests applying the sanitization procedure. We cannot predict whether, in cases where the CSRC does not authorize production of requested documents to the SEC, the SEC will further challenge the four PRC-based accounting firms’ compliance with U.S. law. If additional challenges are imposed on the PRC affiliates of the “big four” accounting firms, we may be unable to timely file future financial statements in compliance with the requirements of the Exchange Act.

 

29


Table of Contents

 

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.

 

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 2019, the trading prices of our ADSs on NYSE have ranged from US$7.33 to US$19.06 per ADS.

 

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;

 

30


Table of Contents

 

·                  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.

 

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.

 

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.

 

31


Table of Contents

 

Because we do not expect to pay dividends in the foreseeable future, you must rely on a price appreciation of our ADSs for return on your investment.

 

We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of 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 dividend 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.

 

As of March 31, 2020, holders of our Class B ordinary shares held an aggregate of 142,686,699 Class B ordinary shares, which represent 57.6% of the total outstanding shares and 93.1% 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.

 

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.

 

32


Table of Contents

 

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, 2020, our officers, directors and principal shareholders collectively held 56.0% 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.

 

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 (2020 Revision) 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 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.

 

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.

 

33


Table of Contents

 

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.

 

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 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.

 

34


Table of Contents

 

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 right 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.

 

35


Table of Contents

 

We will incur increased costs after we cease to qualify as an “emerging growth company.”

 

We are a public company and have 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, a compensation committee composed entirely of independent directors and an audit committee with a minimum of three members. 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.

 

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 will be a passive foreign investment company, or PFIC, 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 (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 (the “asset test”). Based on our income and assets (taking into account the market price of our ADSs), we do not believe that we were a PFIC for the taxable year ended December 31, 2019 and do not anticipate becoming a PFIC in the current taxable year or in the foreseeable future. However, no assurance can be given in this regard because the determination of whether we are or will become a PFIC is a fact-intensive inquiry made on an annual basis that depends, in part, upon the composition of our income and assets. Fluctuations in the market price of our ADSs may cause us to become a PFIC for the current or subsequent taxable years because the value of our assets for the purpose of the asset test may be determined by reference to the market price of our ADSs. The composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets.

 

36


Table of Contents

 

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 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

 

ITEM 4.                INFORMATION ON THE COMPANY

 

A.                                    History and Development of the Company

 

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 Huami Corporation in Cayman Islands as our offshore holding company to facilitate financing and offshore listing. Shortly following its incorporation, Huami Corporation established a wholly-owned Hong Kong subsidiary, Huami HK Limited. From December 2014 to April 2015, our Cayman holding company Huami 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 HK 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 US$103.9 million in net proceeds after deducting underwriting commissions and discounts and the offering expenses payable by us.

 

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.

 

Our principal executive offices are located at Building H8, No. 2800, Chuangxin Road, Hefei, 230088, People’s Republic of China. Our telephone number at this address is +86 551-65837200. 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.

 

SEC 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://www.huami.com/investor. The information contained on our website is not a part of this annual report.

 

37


Table of Contents

 

B.                                    Business Overview

 

We are a cloud-based healthcare services provider with world-leading smart wearable technology. We shipped 42.3 million units of smart wearable devices in 2019, and we had shipped 121.6 million units between our inception and December 31, 2019. We collaborate with partners across many verticals such as sports and social network, mobile payment and health and related industries. It is our mission to connect health with technology.

 

Our Smart Devices

 

Our smart devices mainly include smart bands, smart watches and smart scales. We have been a major partner of Xiaomi to design and manufacture Xiaomi Wearable Products. 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. We obtained the China National Medical Products Administration Class II medical device approval for our ECG health band products in April 2018. We are also expanding into new smart device categories. In early 2020, we unveiled four new products spanning three verticals that go beyond smart bands and watches: Amazfit Home Studio, a smart gym hub; Amazfit AirRun, a foldable next-generation treadmill; Amazfit PowerBuds, true wireless stereo fitness earphones with Clip-to-Go design; and Amazfit ZenBuds, sleep-comfort and health monitoring earphones.

 

Smart Bands

 

Mi Band Series

 

Mi Band series is our smart band series that is designed and manufactured for Xiaomi. We introduced the first generation of Mi Band in July 2014, and subsequently Mi Band 2 in June 2016 and Mi Band 3 in May 2018.

 

In June 2019, we launched Mi Band 4, which offers a full color display and heart rate monitor. Users can change the theme of screen and can view call, text and app notifications on Mi Band 4. It is 50 meters waterproof as tested by the National Watch Quality Supervision and Inspection Center. Mi Band 4 comes with a standard version, a more advanced NFC version, and Marvel’s The Avengers limited edition. Mi Band 4 NFC version offers additional functions such as built-in voice query function, control of Mi home furniture through Xiaomi’s intelligent voice assistant (Xiao AI) and payment function.

 

Amazfit Health Bands

 

Amazfit Health Band is what we believe to be one of the first smart band trackers in the market equipped with ECG sensors that have the capabilities to accurately capture heart rate variability and ECG, enabling users to monitor their heart conditions on a real-time basis. We first introduced the Amazfit Health Band in April 2017, which allows us to utilize our proprietary big data technology to analyze users’ heart conditions and notify users who are at heightened risks of cardiovascular diseases through our mobile apps.

 

We launched Amazfit Health Band Huangshan-1 version in August 2019. Our proprietary Huangshan-1 combined with the RealBeats TM AI biological data engine we developed enables 7*24 hours of uninterrupted accurate heart rate monitoring and high precision ECG monitoring for the users. If any heart abnormity is detected, the Huangshan-1 Band will issue alarm immediately. Huangshan-1 Band also enables friends and families of the users to closely follow the health condition of the users through the Amazfit Health cloud service.

 

Smart Watches

 

We have a large variety of smart watch offerings under our Amazfit brand, primarily consisting of the following six series, including flagship, fashion, sport, outdoor and classic and health series.

 

·                  Amazfit Nexo. Amazfit Nexo is our flagship smart watch, introduced in June 2019. It is the second generation of Amazfit Verge. In addition to the functions of last generation, Amazfit Nexo could make 4G LTE phone calls independently with a built-in eSIM module. It could also connect the users’ Bluetooth earphones for enhanced convenience. The 7*24 heart rate recording makes Amazfit Nexo is a valuable training and performance-tracking tool. It also offers an ECG version, and users could make subscription on Amazfit Health APP to get the online doctor interpretation of their electrocardiogram.

 

38


Table of Contents

 

·                  Amazfit GTR and GTS. We launched the Amazfit GTR and GTS smartwatch to cater to consumer’s preference for fashionable-looking smart watches. Amazfit GTR comes with a luxurious metal-ceramic covering and a 7*24 display retina screen. It offers hundreds of personalized dials, including a dial with zircon edging designed for female consumers and the Iron Man limited edition designed for Marvel fans. In addition to the fashionable design, Amazfit GTR offers powerful functions, including automatic detects of arrhythmia, built-in GPS and GLONASS dual-positioning system, accurate capture of movement track, 50 meters waterproof and all-day heart rate and activity data monitoring. Amazfit GTS offers all functions of Amazfit GTR, and comes with a square screen that carries more information.

 

·                  Amazfit Stratos. Amazfit Stratos is designed for athletic consumers suitable to their sports needs. It was introduced in December 2017. The latest Amazfit Stratos 3, launched in September 2019, has two chips built-in to support both professional sports mode and daily life mode. It provides various activity and sports modes, covering everyday activities and exercises as well as competitive sports such as triathlon and trail running. Under trail running, hiking and climbing modes, its battery life is up to 70 hours with the GPS continually operating. In addition to the key metrics such as pace, cadence and distance, Amazfit Stratos 3 also provides performance indicators such as maximum oxygen uptake (V02 max), training load, training effect and recovery time.

 

·                  Amazfit T-Rex. Amazfit T-Rex is our outdoor series. It is strong and durable, and operates smoothly in harsh environments. It passed the test for 12 military supply standards. Amazfit T-Rex has a battery life of 20 days. It offers functions such as 50 meters waterproof, 14 sports modes, built-in common tools, and all-day heart rate and activity data monitoring and GPS and GLONASS dual-positioning system.

 

·                  Amazfit Bip. Our classic series, Amazfit Bip, is a lightweight GPS-enabled sports smart watch, first introduced in July 2017. It has a battery life of up to 30 days for regular use and up to 45 days with minimal functions running, 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. In August 2019, we introduced a lighter version, Amazfit Bip Lite.

 

·                  Amazfit Health Watch. Amazfit Health Watch, released in June 2019, demonstrates our expertise in health and wearable technology. It is a smart watch with health monitoring at its core, applying our proprietary Huangshan-1 processor based on RISC-V architecture and with RealBeats AI biological data engine integrated for local real-time screening of arrhythmias, including atrial fibrillation. The Amazfit Health Watch is equipped with a 1.28-inch display and weighs only 25 grams. Using our proprietary bio-tracking optical sensor BioTracker PPG, it offers a 7*24-hour uninterrupted accurate heart rate monitoring as well as measuring of other aspects of heart health supported by the ECG sensor equipped. We cooperated with the Department of Cardiovascular Medicine of Peking University First Hospital to test the accuracy of Amazfit Health Watch’s heart condition monitoring function. The 12-lead electrocardiogram test showed that the accuracy rate of ECG AF judgment of Amazfit Health Watch is 97.24%, and the accuracy rate of AFPG judgment is 95.52%.

 

In addition to the six series, we designed and manufactured the Timex Ironman R330 GPS smartwatch, which was launched in early 2020. We plan to launch Amazfit X, our most cutting-edge concept smart watch, in 2020.

 

Smart Scales

 

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.

 

39


Table of Contents

 

Mi Body Fat Scale

 

Mi Body Fat Scale is our advanced smart scale that measures weight, body fat rate, muscle mass, body water percentage, bone mass, metabolism, visceral fat level, BMI, body shape and body health level score. It was first introduced in February 2017. It recognizes up to 16 individual users separately with no limit on weight records storing on cloud service.

 

Others

 

We also offer a wide range of accessories including bands, watch straps, earphones, sportswear, home gym, treadmill 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.

 

Products in Development

 

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.

 

Our Mobile Apps

 

We mainly offer two mobile apps: our “Mi Fit” mobile app and our “Amazfit” mobile 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” mobile app is designed with a focus on sports and fitness functions while our “Amazfit” 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. Since our inception in 2013, we have amassed a large user base. As of December 31, 2019, we had 30.7 million Mobile App MAUs and 148.1 registered users of our mobile apps.

 

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 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.

 

·                  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.

 

Data Technology

 

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.

 

40


Table of Contents

 

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, GPS tracking algorithm, swimming algorithm, 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, 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.

 

Big Data Technology

 

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.

 

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.

 

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/leak 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. 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” or “Amazfit” 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 share with third parties our users’ personal data to other companies for advertising or any other purposes.

 

41


Table of Contents

 

Research and Development

 

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, 2019, our total research and development staff consisted of 679 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, 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 team 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 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.

 

·                  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.

 

·                  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 pressure, and etc., with the bio-sensors embedded in our wearable devices.

 

42


Table of Contents

 

Huangshan

 

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.

 

Although we expect to continue to make significant investments for the design and manufacture of our products, we believe our proprietary 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. We started mass production of Huangshan-1 and applied Huangshan-1 to our Amazfit-branded health-oriented products in August 2019. Furthermore, we are developing our next generation AI chip, Huangshan-2, which will be more intelligent than its predecessor and enable more healthcare related functionality to further differentiate our future smart watch products.

 

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 Wi-Fi.

 

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 distribute certain insurance products on our platform. 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.

 

Our Relationship with Xiaomi

 

We have been a 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. 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. 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.

 

43


Table of Contents

 

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.

 

Manufacturing and Fulfillment

 

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 few raw material and in-process inventories and achieve “just in time” 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. One of the key components 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 of our self-branded product lines is assigned to a corresponding manufacturer. 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.

 

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.

 

44


Table of Contents

 

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.

 

Strategic Collaborations

 

Collaboration with PAI Health

 

In June 2018, we began to collaborate with PAI Health, a heart health software company, to deliver health risk assessment services 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 associated with an inactive lifestyle, 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.

 

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 started to explore opportunities to develop new products and increase global presence in the smart wearables marketplace, pairing Timex’s longstanding expertise as watchmakers with our artificial intelligence technology, App design and manufacturing capabilities. Together, we aim at developing a new generation of smart watches that deliver on performance, style, craftsmanship and price. In February 2020, Timex launched the new Ironman R300, the first Timex product designed and manufactured by us. 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 AliveCor

 

In October 2019, we made a minority interest investment in AliveCor, Inc., one of the industry-leading players in artificial intelligence based personal ECG technology, and a provider of enterprise cardiology solutions with CE and FDA clearance. In connection with this investment, we entered into a licensing agreement with AliveCor, pursuant to which AliveCor Inc. granted us a license under certain patents, algorithm and trademark rights of AliveCor Inc. covering software and devices for wearable and other mobile devices to record ECGs and analyze those ECGs. Leveraging the cutting-edge technology of AliveCor, we will explore the opportunity to deliver new high-performance ECG form factors to global markets.

 

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 2019, we engaged in various marketing and branding activities, both in China and globally, to promote our Amazfit brand. 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 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. In

 

45


Table of Contents

 

2019, we explored 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.

 

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 internal 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.

 

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, 2020, we had obtained 388 patents and had submitted 357 additional patent applications. Our issued PRC patents will expire between 2020 and 2040 and our issued foreign patents will expire between 2024 and 2044. As of March 31, 2020, we had registered 817 trademarks and had submitted 664 additional trademark applications. Our registered PRC trademarks will expire between 2020 and 2030 but can be renewed. Our registered foreign trademarks will expire between 2021 and 2033 but can be renewed. As of March 31, 2020, we had obtained 28 software copyrights.

 

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 Xiaomi, 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;

 

46


Table of Contents

 

·                  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 we leverage Xiaomi’s brand recognition and sales channel for Xiaomi Wearable Products, we expect to further expand our own sales channels for our Amazfit products, both in China and globally.

 

We have also developed proprietary chipsets that are highly power efficient. For example, Mi Band 4 can run up to 20 days under normal usage after a full charge. Additionally, this feature allows our 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.

 

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.”

 

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 in the first quarter of each year.

 

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.

 

Regulation on Foreign Investment

 

Investment activities in the PRC by foreign investors are principally governed by the Catalogue for the Guidance of Foreign Investment Industry, or the Catalogue, which was promulgated and is amended from time to time by the Ministry of Commerce, or the MOFCOM, and the National Development and Reform Commission, or NDRC, and together with the FIE and their respective implementation rules and ancillary regulations. The Catalogue lays out the basic framework for foreign investment in China, classifying businesses into three categories with regard to foreign investment: “encourage,” “restricted” and “prohibited.” Industries not listed in the catalog are generally deemed as falling into a fourth category “permitted” unless specifically restricted by other PRC laws. On June 30, 2019, the MOFCOM and the NDRC jointly released the Catalogue of Industries for Encouraging Foreign Investment (2019 Version) and the Special Management Measures (Negative List) for the Access of Foreign Investment (2019), or the 2019 Negative List, which became effective on July 30, 2019, to amend and supplement the Guidance Catalog and replace the previous negative list thereunder.

 

On March 15, 2019, the National People’s Congress promulgated the FIL, which came into effect on January 1, 2020 and replaced the Outdated FIE Laws. 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”

 

47


Table of Contents

 

will differ from the 2019 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.

 

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.

 

Regulation on Product Quality

 

The PRC Product Quality Law applies to all production and sale activities in China. 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.

 

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

 

48


Table of Contents

 

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.

 

Regulation on Torts

 

Under the Tort Law of the PRC which became effective on July 1, 2010, if 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 a warning, 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, and its implementation rules, most recently 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, 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 adopts the principle of “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, 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 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

 

49


Table of Contents

 

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.

 

Patent Enforcement

 

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, 2020, we had 247 patents granted and 193 patent applications pending in China, 141 patents granted and 164 patent applications pending outside China.

 

Trademark Law

 

The PRC Trademark Law and its implementation rules protect registered trademarks. The PRC Trademark Office of National Intellectual Property Administration is responsible for the registration and administration of trademarks throughout the PRC. The Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. As of March 31, 2020, we owned 540 registered trademarks in different applicable trademark categories and were in the process of applying to register 192 trademarks in China, 277 registered trademarks in different applicable trademark categories and were in the process of applying to register 472 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 RMB5.0 million.

 

Software Copyright Law

 

In order to further implement the Computer Software Protection Regulations promulgated by the State Council on December 20, 2001, and amended subsequently, 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, 2020, we have registered 28 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 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

 

50


Table of Contents

 

domain names. On September 25, 2002, CNNIC promulgated the Implementation Rules of Registration of Domain Name, or the CNNIC Rules, which was renewed on June 5, 2009 and May 29, 2012, respectively. Pursuant to the Administrative Measures on the Internet Domain Names and the CNNIC 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 on Resolution of the Top Level Domains Disputes, file a suit to the People’s Court or initiate an arbitration procedure. As of March 31, 2020, we have registered 85 domain names.

 

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 Market Regulation, or the 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 SAMR 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, SAMR or its local branches may revoke violators’ licenses or permits for their advertising business operations.

 

On July 4, 2016, the State 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 prescription 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

 

51


Table of Contents

 

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 is truthful, accurate and in full compliance with PRC laws and regulations.

 

Regulation on Medical Device

 

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 National Medical Products Administration 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 National Medical Products Administration. 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 National Medical Products Administration.

 

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 National Medical Products Administration 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. To comply with these laws and regulations, we have adopted security policies and measures to protect our cyber system and user information.

 

Regulations 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

 

52


Table of Contents

 

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.

 

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.

 

Regulation on Employment

 

The Labor Law of the PRC, effective on January 1, 1995 and subsequently amended on August 27, 2009 and December 29, 2018, the PRC Employment 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.

 

53


Table of Contents

 

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 amended on 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.

 

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.

 

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.

 

54


Table of Contents

 

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 Taxpayers to Enjoy Treatments under Tax Treaties”, or SAT Circular No. 60, non-resident 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 HK 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 Renminbi 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.

 

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 Renminbi by restricting how the converted Renminbi may be used. SAFE Circular No. 142 provides that the Renminbi 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 Renminbi capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such Renminbi capital may not be changed without SAFE’s approval, and such Renminbi capital may not in any case be used to repay Renminbi loans if the proceeds of such loans have not been used. On March 30, 2015, SAFE issued 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 Renminbi 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 Renminbi for purposes beyond the business scope, for entrusted loans or for inter-company Renminbi loans. SAFE promulgated the

 

55


Table of Contents

 

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 Renminbi capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue Renminbi entrusted loans to a prohibition against using such capital to issue loans to non-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.

 

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 required registrations with the local counterpart of SAFE in relation to our financing and restructuring to our shareholding structure.

 

Regulation on Employee Share Options

 

56


Table of Contents

 

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 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.

 

Regulation on Dividend Distributions

 

As 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 the Company Law, and the EIT Law and its implementation rules.

 

Under the current regulatory regime of the PRC, foreign-invested enterprises in the PRC may pay dividends only out of their retained earnings, if any, determined in accordance with PRC accounting standards and regulations. A PRC company is required to set aside as statutory reserve funds at least 10% of its after-tax profit, until the cumulative amount of such reserve funds reaches 50% of its registered capital unless laws and 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.

 

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:

 

57


Table of Contents

 

 


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 90.1%, 2.1285%, 2.1285%, 2.1285%, 2.1285% and 1.386% equity interests in Beijing Huami, respectively. They are either directors or employees of our company.

 

(2)         Messrs. Wang Huang and Yunfen Lu are beneficial owners of the shares of our company and hold 99.4% and 0.6% equity interests in Anhui Huami, respectively. They are also directors of our company.

 

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.

 

Agreements that provide us with effective control over the VIEs

 

Shareholder Voting Proxy Agreements and Powers of Attorney. Pursuant to the second amended and restated Shareholder Voting Proxy Agreement, dated 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 March 20, 2020, our WFOE, Beijing Huami and each of the shareholders of Beijing Huami entered into the 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.

 

58


Table of Contents

 

Equity Pledge Agreements. Pursuant to the second amended and restated Equity Pledge Agreement, dated 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 March 20, 2020, our WFOE, Beijing Huami and each of the shareholders of Beijing Huami entered into the second amended and restated Equity Pledge Agreement, which contains terms substantially similar to the Equity Pledge Agreement described above.

 

As of the date of this annual report, we have completed the registration of the equity pledge of Anhui Huami with the competent office of the State Administration for Market Regulation in accordance with the PRC Property Rights Law , and we are in the process of applying for the registration of the equity pledge of Beijing Huami.

 

Loan 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.

 

Agreements that allow us to receive economic benefits from the VIEs

 

Exclusive Consultation and Service Agreements. Pursuant to the second amended and restated Exclusive Consultation Service Agreement, dated 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 March 20, 2020, our WFOE, Beijing Huami and each of the shareholders of Beijing Huami entered into the second amended and restated Exclusive Consultation and Service Agreement, which contains terms substantially similar to the Exclusive Consultation and Service Agreement described above.

 

59


Table of Contents

 

Agreements that provide us with the option to purchase the equity interests in and assets of the VIEs

 

Exclusive Option Agreements. Pursuant to the second amended and restated Exclusive Option Agreement, dated 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 March 20, 2020, our WFOE, Beijing Huami and each of the shareholders of Beijing Huami entered into the 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.

 

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

 

Our headquarters are located in Hefei, where we own and lease the office building with an aggregate floor area of approximately 45,508 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 Cupertino.

 

We currently lease and occupy 6,438 square meters of office space in Shenzhen, 4,363 square meters of office space in Beijing, 1,438 square meters of office space in Nanjing, 791 square meters of office space in Vancouver, 365 square meters of office space in Cupertino, 277 square meters of office space in Shanghai and 182 square meters of office space in Xi’an. These leases vary in duration from 1 year to 7 years.

 

60


Table of Contents

 

ITEM 4A.                                       UNRESOLVED STAFF COMMENTS

 

None.

 

ITEM 5.                                                OPERATING AND FINANCIAL 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.

 

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. For the years ended December 31, 2017, 2018 and 2019, research and development expenses accounted for 49.2%, 45.9% and 50.0% of our total operating expenses and 7.5%, 7.2% and 7.4% 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 a 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, 2017, 2018 and 2019, revenues from our Xiaomi Wearable Products segment represented 78.8%, 66.9% and 72.2% of our total revenues, respectively. In addition, we leverage Xiaomi’s established distribution network and global presence for the sales and promotion of our self-branded products and international expansion. Therefore, maintaining a close and mutually beneficial relationship with Xiaomi is critical to our operations and future growth.

 

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 expansion

 

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 both in China and globally, which may cause our selling and marketing expenses to increase in the near future. Selling and marketing expenses as a percentage of our revenues were low historically, but it is possible that they may increase.

 

International expansion also represents a significant opportunity to further grow our business. With our close collaboration with Xiaomi, we have leveraged and plan to continue to leverage Xiaomi’s global distribution network and fan base to expand into Xiaomi’s key target markets. At 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.

 

61


Table of Contents

 

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.

 

Impact of COVID-19 on Our Operations.

 

The 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 2020 will be affected by the spread of COVID-19. The COVID-19 has impact on the smart wearable industry, especially on consumers’ demand for smart wearable products, the manufacturing capabilities and supply chains. The extent to which COVID-19 impacts our results of operations in 2020 may depend on the future developments of the outbreak, including new information concerning the global severity of and actions taken to contain the outbreak, which are highly uncertain and unpredictable. In addition, our results of operations could be adversely affected to the extent that the outbreak 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 may be adversely affected by the COVID-19 outbreak in China and globally.”

 

The spread of COVID-19 may negatively affect our results of operations in fiscal year of 2020. We estimate a decrease in demand for smart wearable products, both in China and overseas, due to the downturn in the macroeconomic environment resulted therefrom. Consequently, our sales performance may be negatively affected. In addition, the number of our products manufactured reduced in January and February 2020 as our contracted manufacturing facilities have been temporarily shut down, and the manufacturing facilities have still been in ramp-up to its full capacity since March. The worldwide outbreak may not only adversely affect our sales performance overseas, but also lead to components and raw materials shortages as we source those from south east Asia, Europe and other areas around the world. At the time of this filing, we have taken a series of measures in response to the outbreak, including, among others, remote working arrangement for our employees. These measures could reduce the capacity and efficiency of our operations, which in turn could negatively affect our results of operations.

 

Our cash position at the end of 2019 was RMB1.8 billion (US$0.3 billion). In addition, in early 2020, we borrowed approximately RMB882 million of loan in different currencies from several commercial banks. We will pay close attention to the development of the COVID-19 outbreak, perform further assessment of its impact and take relevant measures to minimize the impact.

 

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,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

%

 

RMB

 

%

 

RMB

 

US$

 

%

 

 

 

(in thousands, except for percentages)

 

Xiaomi Wearable Products

 

1,614,512

 

78.8

 

2,439,534

 

66.9

 

4,193,665

 

602,382

 

72.2

 

Self-branded products and others(1)

 

434,384

 

21.2

 

1,205,801

 

33.1

 

1,618,590

 

232,496

 

27.8

 

Total revenues

 

2,048,896

 

100.0

 

3,645,335

 

100.0

 

5,812,255

 

834,878

 

100.0

 

 


Note:

 

(1)         The revenue for self-branded products and others includes sales to Xiaomi of RMB163.4 million, RMB359.3 million and RMB77.5 million (US$11.1 million) for the years ended December 31, 2017, 2018 and 2019, respectively.

 

We generate revenues primarily from sales of Xiaomi Wearable Products and our self-branded products. Our Xiaomi Wearable Products include Xiaomi-branded smart bands, 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.

 

62


Table of Contents

 

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.

 

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, we offer an 18-month warranty which includes a six-month warranty to Xiaomi and an additional 12-month warranty to end-users. For products sold directly to end users, the warranty period is 12 months to end users. 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,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

%

 

RMB

 

%

 

RMB

 

US$

 

%

 

 

 

(in thousands, except for percentages)

 

Xiaomi Wearable Products

 

1,232,792

 

79.3

 

1,883,509

 

69.6

 

3,296,696

 

473,541

 

75.9

 

Self-branded products and others

 

321,402

 

20.7

 

822,376

 

30.4

 

1,047,816

 

150,509

 

24.1

 

Total cost of revenues

 

1,554,194

 

100.0

 

2,705,885

 

100.0

 

4,344,512

 

624,050

 

100.0

 

 

The following table sets forth the gross profit and gross margin by segment:

 

 

 

Years Ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

(in thousands, except for percentages)

 

Xiaomi Wearable Products

 

381,720

 

556,025

 

896,969

 

128,841

 

Self-branded products and others

 

112,982

 

383,425

 

570,774

 

81,987

 

Total gross profit

 

494,702

 

939,450

 

1,467,743

 

210,828

 

Xiaomi Wearable Products

 

23.6

%

22.8

%

21.4

%

 

 

Self-branded products and others

 

26.0

%

31.8

%

35.3

%

 

 

Overall gross margin

 

24.1

%

25.8

%

25.3

%

 

 

 

Operating expenses

 

We classify our operating expenses into three categories: research and development, general and administrative, and selling and marketing.

 

Research and Development 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.

 

63


Table of Contents

 

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, 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.

 

Results of Operations

 

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,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

%

 

RMB

 

%

 

RMB

 

US$

 

%

 

 

 

(in thousands, except for percentages)

 

Summary Consolidated Statements of Operating Data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues(1)

 

2,048,896

 

100.0

 

3,645,335

 

100.0

 

5,812,255

 

834,878

 

100.0

 

Cost of revenues(2)

 

1,554,194

 

75.9

 

2,705,885

 

74.2

 

4,344,512

 

624,050

 

74.7

 

Gross profit

 

494,702

 

24.1

 

939,450

 

25.8

 

1,467,743

 

210,828

 

25.3

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses(3)

 

153,827

 

7.5

 

263,220

 

7.2

 

430,822

 

61,884

 

7.4

 

General and administrative expenses(3)

 

114,880

 

5.6

 

213,973

 

5.9

 

248,462

 

35,689

 

4.3

 

Selling and marketing expenses(3)

 

44,026

 

2.1

 

96,538

 

2.6

 

181,975

 

26,139

 

3.1

 

Total operating expenses

 

312,733

 

15.3

 

573,731

 

15.7

 

861,259

 

123,712

 

14.8

 

Operating income

 

181,969

 

8.9

 

365,719

 

10.0

 

606,484

 

87,116

 

10.4

 

Realized gain from investments

 

2,373

 

0.1

 

261

 

0.0

 

1,822

 

262

 

0.0

 

Interest income

 

3,003

 

0.1

 

11,595

 

0.3

 

33,478

 

4,809

 

0.6

 

Gain from fair value change of long-term investments

 

 

 

7,860

 

0.2

 

 

 

 

Impairment loss from long-term investments

 

 

 

(7,590

)

(0.2

)

(2,600

)

(373

)

(0.0

)

Other income

 

4,555

 

0.2

 

8,768

 

0.2

 

13,186

 

1,894

 

0.2

 

Income before income tax

 

191,900

 

9.4

 

386,613

 

10.6

 

652,370

 

93,708

 

11.2

 

Income tax (expense)

 

(27,611

)

(1.3

)

(52,036

)

(1.4

)

(77,887

)

(11,188

)

(1.3

)

Income before loss from equity method investments

 

164,289

 

8.0

 

334,577

 

9.2

 

574,483

 

82,520

 

9.9

 

Income/(loss) from equity method investments

 

2,806

 

0.1

 

1,743

 

0.0

 

(1,112

)

(160

)

(0.0

)

Net income

 

167,095

 

8.2

 

336,320

 

9.2

 

573,371

 

82,360

 

9.9

 

 


Notes:

 

(1)         Includes RMB1,778.6 million, RMB2,817.0 million and RMB4,281.0 million (US$614.9 million) with related parties for the years ended December 31, 2017, 2018 and 2019, respectively.

 

(2)         Includes RMB1,355.5 million, RMB2,141.1 million and RMB3,342.1 million (US$480.1 million) with related parties for the years ended December 31, 2017, 2018 and 2019, respectively.

 

(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 and 2019, we recorded share-based compensation expenses of RMB51.5 million, RMB55.3 million and RMB17.8 million (US$2.6 million), respectively, in relation to the vesting of the restricted shares of our founders under the share restriction agreements.

 

64


Table of Contents

 

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

 

Revenues

 

Our revenues increased by 59.4% from RMB3,645.3 million for the year ended December 31, 2018 to RMB5,812.3 million (US$834.9 million) for the year ended December 31, 2019, 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 71.9% from RMB2,439.5 million for the year ended December 31, 2018 to RMB4,193.7 million (US$602.4 million) for the year ended December 31, 2019. The increase was primarily attributable to an increase in shipment volume of our Xiaomi Wearable Products from approximately 24.4 million in 2018 to approximately 38.4 million in 2019.

 

Self-branded products and others. Our self-branded products and others segment revenues increased by 34.2% from RMB1,205.8 million in 2018 to RMB1,618.6 million (US$232.5 million) in 2019. The increase was primarily attributable to an increase in shipment volume of our self-branded products from approximately 3.1 million in 2018 to approximately 3.9 million in 2019.

 

Cost of revenues

 

Our cost of revenues increased by 60.6% from RMB2,705.9 million for the year ended December 31, 2018 to RMB4,344.5 million (US$624.1 million) for the year ended December 31, 2019. 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 75.0% from RMB1,883.5 million for the year ended December 31, 2018 to RMB3,296.7 million (US$473.5 million) for the year ended December 31, 2019. The increase was in line with the sales growth of our Xiaomi Wearable Products.

 

Self-branded products and others. Cost of revenues for our self-branded products and others segment increased by 27.4% from RMB822.4 million for the year ended December 31, 2018 to RMB1,047.8 million (US$150.5 million) for the year ended December 31, 2019. 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 increased by 56.2% from RMB939.5 million for the year ended December 31, 2018 to RMB1,467.7 million (US$210.8 million) for the year ended December 31, 2019.

 

Research and development expenses

 

Research and development expenses increased by 63.7% from RMB263.2 million for the year ended December 31, 2018 to RMB430.8 million (US$61.9 million) for the year ended December 31, 2019, primarily due to (i) an increase of RMB106.7 million in the salary and welfare compensation of research and development personnel; and (ii) an increase of RMB55.8 million in testing costs associated with our pipeline products, partially offset by a decrease of RMB31.0 million in share-based compensation expenses. The completion of our initial public offering in February 2018 and the amendment of certain vesting schedules of previously granted options triggered an acceleration of share-based compensation expenses recognition in 2018.

 

General and administrative expenses

 

General and administrative expenses increased by 16.1% from RMB214.0 million for the year ended December 31, 2018 to RMB248.5 million (US$35.7 million) for the year ended December 31, 2019, primarily due to (i) an increase of RMB38.1 in personnel-related costs; (ii) an increase of RMB20.3 million in professional fee related to improving operation management and business expansion; (iii) an increase of RMB8.1 million in miscellaneous expenses supporting our daily operation; and (v) an increase of RMB5.4 million in rental fee in relation to the open of several new offices, partially offset by a decrease of RMB47.2 million in share-based compensation. The completion of our initial public offering in February 2018 and the amendment of certain vesting schedules of previously granted options triggered an acceleration of share-based compensation expenses recognition in 2018.

 

65


Table of Contents

 

Selling and marketing expenses

 

Selling and marketing expenses increased by 88.5% from RMB96.5 million for the year ended December 31, 2018 to RMB182.0 million (US$26.1 million) for the year ended December 31, 2019, primarily due to (i) an increase of RMB59.5 million in advertising and promotional for our self-branded products, both in China and overseas market; (ii) an increase of RMB22.2 million in personnel-related costs.

 

Operating income

 

As a result of the factors set out above, we recorded an operating income of RMB606.5 million (US$87.1 million) for the year ended December 31, 2019, as compared to an operating income of RMB365.7 million for the year ended December 31, 2018.

 

Interest income

 

Interest income represents interest earned on bank deposits. We had interest income of RMB33.5 million (US$4.8 million) in 2019 and RMB11.6 million in 2018.

 

Other income

 

We had other income of RMB8.8 million in 2018 and RMB13.2 million (US$1.9 million) in 2019.

 

Income tax expenses

 

We recorded income tax expenses in the amount of RMB52.0 million in 2018 and RMB77.9 million (US$11.2 million) in 2019. The increase in income tax expenses for the year ended December 31, 2019 was attributable to an increase 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 RMB 58.3 million in 2018 and RMB72.4 million (US$10.4  million) in 2019.

 

Net income

 

As a result of the foregoing, our net income increased by 70.5% from RMB336.3 million for the year ended December 31, 2018 to RMB573.4 million (US$82.4 million) for the year ended December 31, 2019.

 

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

 

Revenues

 

Our revenues increased by 77.9% from RMB2,048.9 million for the year ended December 31, 2017 to RMB3,645.3 million for the year ended December 31, 2018, primarily due to an increase in shipment volume of both of our Xiaomi Wearable Products and self-branded products, in particular, the increase in shipment volume of our self-branded products from approximately 1.0 million in 2017 to approximately 3.1 million in 2018.

 

Xiaomi Wearable Products. Our Xiaomi Wearable Products segment revenues increased by 51.1% from RMB1,614.5 million for the year ended December 31, 2017 to RMB2,439.5 million for the year ended December 31, 2018. The increase was primarily attributable to an increase in shipment volume of our Xiaomi Wearable Products from approximately 17.1 million in 2017 to approximately 24.4 million in 2018.

 

Self-branded products and others. Our self-branded products and others segment revenues increased by 177.6% from RMB434.4 million in 2017 to RMB1,205.8 million in 2018. The increase was primarily attributable to an increase in shipment volume of our self-branded products from approximately 1.0 million in 2017 to approximately 3.1 million in 2018.

 

66


Table of Contents

 

Cost of revenues

 

Our cost of revenues increased by 74.1% from RMB1,554.2 million for the year ended December 31, 2017 to RMB2,705.9 million for the year ended December 31, 2018. 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% from RMB1,232.8 million for the year ended December 31, 2017 to RMB1,883.5 million for the year ended December 31, 2018. The increase was in line with the sales growth of our Xiaomi Wearable Products.

 

Self-branded products and others. Cost of revenues for our self-branded products and others segment increased by 155.9% from RMB321.4 million for the year ended December 31, 2017 to RMB822.4 million for the year ended December 31, 2018. The increase was in line with the sales growth of our self-branded products.

 

Gross profit

 

Our gross profit increased by 89.9% from RMB494.7 million for the year ended December 31, 2017 to RMB939.5 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 RMB153.8 million for the year ended December 31, 2017 to RMB263.2 million for the year ended December 31, 2018, primarily due to (i) an increase by RMB50.6 million in personnel-related costs in connection with hiring and retaining research and development staff; (ii) an increase by RMB35.2 million in share-based compensation; (iii) an increase by RMB10.8 million in other expenses, including travel expenses and professional services; and (iv) an increase by RMB5.5 million in intellectual property protection-related expenses.

 

General and administrative expenses

 

General and administrative expenses increased by 86.3% from RMB114.9 million for the year ended December 31, 2017 to RMB214.0 million for the year ended December 31, 2018, primarily due to (i) an increase by RMB48.6 million increase in personnel-related costs in connection with hiring and retaining administrative staff; (ii) an increase by RMB32.1 million in share-based compensation; (iii) an increase by RMB8.4 million in foreign exchange losses and (iv) an increase by RMB3.6 million in fees for professional services.

 

Selling and marketing expenses

 

Selling and marketing expenses increased by 119.3% from RMB44.0 million for the year ended December 31, 2017 to RMB96.5 million for the year ended December 31, 2018, primarily due to (i) an increase by RMB21.0 million in personnel-related costs in connection with hiring and retaining selling and marketing staff; (ii) an increase by RMB20.2 million in advertisement expenses, including expenses for promoting our products on e-commerce platforms and (iii) an increase by RMB4.3 million share-based compensation.

 

Operating income

 

As a result of the factors set out above, we recorded an operating income of RMB365.7 million for the year ended December 31, 2018, as compared to an operating income of RMB182.0 million for the year ended December 31, 2017.

 

67


Table of Contents

 

Interest income

 

Interest income represents interest earned on bank deposits. We had interest income of RMB11.6 million in 2018 and RMB3.0 million in 2017.

 

Other income

 

We had other income of RMB4.6 million in 2017 and RMB8.8 million in 2018.

 

Income tax benefits/(expenses)

 

We recorded income tax expenses in the amount of RMB27.6 million in 2017 and RMB52.0 million in 2018. The increase in income tax expenses for the year ended December 31, 2018 was attributable to an increase in taxable income.

 

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.

 

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.

 

Hong Kong

 

Our subsidiary incorporated in Hong Kong, Huami HK Limited, is subject to 16.5% Hong Kong profit tax on its taxable income generated from operations in Hong Kong for the years of assessment 2016/2017 and 2017/2018. Commencing from the year of assessment 2018/2019, the first HK$2.0 million of profits earned by Huami HK 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. 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 HK 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 July 2018. Accordingly Anhui Huami was subject to a tax rate of 15% during the years ended December 31, 2017, 2018 and 2019. 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 HK 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.”

 

68


Table of Contents

 

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 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.”

 

Critical Accounting Policies

 

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.

 

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 recognition

 

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. 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. We recorded an increase to retained earnings and amount due from related parties of RMB33,329 as of January 1, 2018 due to the cumulative impact of adopting Topic 606.

 

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 years ended December 31, 2018 and 2019, we generated 66.9% and 72.2% of revenue from one customer for sales of exclusively designed and manufactured smart wearable devices, and 33.1% and 27.8% 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.

 

69


Table of Contents

 

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 and from RMB1.72 to RMB10.62 per unit for the years ended December 31, 2018 and 2019, respectively. 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 years ended December 31, 2018 and 2019, we generated 33.1% and 27.8% 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, 2018 and 2019, we generated 66.9% and 72.2% 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 controlled by 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 our 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.

 

70


Table of Contents

 

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.

 

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 RMB1.30 to RMB5.69 per unit for the years ended December 31, 2017. 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, 2017, we generated 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, 2017, we generated 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 controlled by 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 us 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.

 

71


Table of Contents

 

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, 2018 and 2019, returns were 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 is 12-month. We have the obligation, at our customers’ 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.

 

Inventories

 

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 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. We assess the valuation of inventory and periodically write down and writes off the value for estimated excess and obsolete inventory based upon the product life cycle. For the fiscal years ended December 31, 2017, 2018 and 2019, the inventories provision amounted to RMB2.4 million, nil and RMB23.8 million, respectively.

 

Acquired intangible asset

 

Acquired intangible assets other than goodwill consist 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 over the estimated useful life of nine to ten years.

 

Leases

 

We lease administrative office spaces in different cities in the PRC and overseas under operating leases. We determine whether an arrangement constitutes a lease and records lease liabilities and right-of-use assets on our consolidated balance sheets at the lease commencement. We measure our 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 that we would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. We estimate our incremental borrowing rate based on an analysis of publicly traded debt securities of companies with credit and financial profiles similar to our company. We measure right-of-use assets based on the corresponding lease liability adjusted for payments made to the lessor at or before the commencement date, and initial direct costs it incurs under the lease. We begin recognizing operating lease expense when the lessor makes the underlying asset available to us. Our leases have remaining lease terms of up to five 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, we did not include renewal option periods in the lease term for which it is not reasonably certain to exercise.

 

72


Table of Contents

 

For short-term leases, we record operating lease expense in our 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 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 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.

 

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 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.

 

During the years ended December 31, 2017, 2018 and 2019, 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.

 

(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, 2017, 2018 and 2019, we recorded nil, nil and RMB2.4 million impairment losses on our equity securities without readily determinable fair values.

 

73


Table of Contents

 

(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 “income/(loss) 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, RMB4.1 million, and RMB218.0 thousand (US$31.3 thousand) impairment losses on its equity method investments during the years ended December 31, 2017, 2018 and 2019.

 

(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 available-for-sale 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, RMB3.5 million and nil impairment losses on our available-for-sale investments during the years ended December 31, 2017, 2018 and 2019.

 

Income taxes

 

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 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 we believe 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. We recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense.

 

74


Table of Contents

 

Share-based payment

 

Share-based payment transactions with employees, such as share options are measured based on the grant date fair value of the equity instrument. We 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.

 

We estimated the fair value of share options using the binomial option-pricing model with the assistance from an independent valuation firm. The fair value of each option grant is estimated on the date of grant with the following key assumptions:

 

 

 

May 31,
2017

 

August 27,
2017

 

March 25,
2018

 

June 3,
2018

 

December
24, 2018

 

May 31,
2019

 

Risk-free interest rate

 

2.11% - 2.28%

 

2.07% - 2.17%

 

2.04% - 2.82%

 

2.79% - 2.83%

 

2.57%

 

2.14%

 

Contractual term (number of years)

 

10

 

10

 

1 - 10

 

7 - 10

 

10

 

10

 

Expected volatility

 

45.8% - 49.5%

 

49.2% - 49.5%

 

36% - 49%

 

50.3% - 52.5%

 

50.6%

 

50.4%

 

Expected dividend yield

 

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, 2017, 2018 and 2019, we recorded share-based compensation expenses of RMB6.6 million, RMB29.4 million and RMB3.7 million (US$0.5 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 interest in the Company before such interest is vested. The equity interest held by these founders were 50% converted to restricted equity interest 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, 2017, 2018 and 2019 we recorded share-based compensation expenses of RMB51.5 million, RMB55.3 million and RMB17.8 million (US$2.6 million) related to the unvested shares of the founders.

 

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 and its subsidiary.

 

75


Table of Contents

 

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 WFOE. 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 there 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.

 

Recent Accounting Pronouncements

 

For a summary of recently issued accounting pronouncements, see Note 2 to the consolidated financial statements of Huami Corporation and its subsidiaries pursuant to Item 17 of Part III of this annual report.

 

B.                                    Liquidity and Capital Resources

 

The following table sets forth the movements of our cash flows for the periods presented:

 

 

 

Years Ended December 31,

 

 

 

2016

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

(in thousands)

 

Selected Consolidated Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

17,266

 

238,336

 

707,605

 

427,999

 

61,479

 

Net cash used in investing activities

 

(99,387

)

(38,881

)

(324,841

)

(112,703

)

(16,188

)

Net cash provided by financing activities

 

10,024

 

20,089

 

639,170

 

25,609

 

3,678

 

Net (decrease)/increase in cash and cash equivalents

 

(72,097

)

219,544

 

1,021,934

 

340,905

 

48,969

 

Exchange rate effect on cash and cash equivalents

 

5,262

 

(3,175

)

60,357

 

11,274

 

1,619

 

Cash, cash equivalents and restricted cash at the beginning of year

 

219,987

 

153,152

 

369,521

 

1,451,812

 

208,540

 

Cash, cash equivalents and restricted cash at end of year

 

153,152

 

369,521

 

1,451,812

 

1,803,991

 

259,128

 

 

As of December 31, 2017, 2018 and 2019, our cash, cash equivalents and restricted cash were RMB369.5 million, RMB1,451.8 million and RMB1,804.0 million (US$259.1 million), respectively, out of which RMB66.5 million, RMB513.5 and RMB717.6 million (US$103.1 million) were held in U.S. dollars, and RMB303.0 million, RMB937.7 million and RMB1,084.3 million (US$155.7 million) were held in Renminbi, as of December 31, 2017, 2018 and 2019, respectively. Our cash, cash equivalents and restricted cash primarily consist of cash at banks and on hand. 70.3% of our cash, cash equivalents and restricted cash as of December 31, 2019 were held in China, and 69.8% 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.

 

76


Table of Contents

 

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 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.

 

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. 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, no additional profit appropriation was required to be made to the reserve fund since December 31, 2015.

 

Operating activities

 

Net cash provided by operating activities for the year ended December 31, 2019 was RMB428.0 million (US$61.5 million). The difference between our net income of RMB573.4 million (US$82.4 million) and the net cash provided by operating activities was primarily due to additional RMB249.7 million (US$35.9 million) used in working capital, partially offset by the adjustment of RMB104.3 million (US$15.0 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 (US$110.7 million) in amount due from related parties, an increase by RMB433.0 million (US$62.2 million) in inventories, and an increase by RMB130.0 million (US$18.7 million) in accounts receivable, partially offset by an increase by RMB935.8 million (US$134.4 million) in accounts payable and an increase by RMB86.2 million (US$12.4 million) in accrued expense and other current liabilities.

 

77


Table of Contents

 

Net cash provided by operating activities for the year ended December 31, 2018 was RMB707.6 million. The difference between our net income of RMB336.3 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.

 

As of December 31, 2017, 2018 and 2019, we had amount due from related parties of RMB578.5 million, RMB656.4 million and RMB1,421.2 million (US$204.1 million), respectively, among which RMB567.6 million, RMB648.4 million and RMB1,418.6 million (US$203.8 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, 2017, 2018 and 2019 was collected in the first quarter of 2018, 2019 and 2020, respectively.

 

Investing activities

 

Net cash used in investing activities was RMB112.7 million (US$16.2 million) for the year ended December 31, 2019, primarily due to purchase of long term investments of RMB180.9 million (US$26.0 million), purchase of property, plant and equipment of RMB34.3 million (US$4.9 million) and purchase of intangible assets of RMB11.8 million (US$1.7 million), partially offset by proceeds from the maturity of term deposits of RMB97.0 million (US$13.9 million).

 

Net cash used in investing activities was RMB324.8 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.

 

Financing activities

 

Net cash provided by financing activities for the year ended December 31, 2019 was RMB25.6 million (US$3.7 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 borrowing of RMB20.0 million (US$2.9 million).

 

Net cash provided by financing activities for the year ended December 31, 2018 was RMB639.2 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.

 

Capital Expenditures

 

Our capital expenditures are primarily incurred for purchases of property, plant and equipment and intangible assets. Our capital expenditures were RMB24.5 million, RMB69.2 million and RMB46.1 million (US$6.6 million) in the years ended December 31, 2017, 2018 and 2019, respectively. We will continue to make capital expenditures to meet the expected growth of our business.

 

78


Table of Contents

 

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,

 

 

 

2017

 

2018

 

2019

 

2018

 

2019

 

Huami and its wholly-owned subsidiaries

 

0.3

%

0.2

%

0.2

%

26.5

%

17.0

%

VIEs

 

99.7

%

99.8

%

99.8

%

73.5

%

83.0

%

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, 2019 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.                                    Off-balance Sheet Arrangements

 

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.

 

F.                                     Tabular Disclosure of Contractual Obligations

 

The following table sets forth our contractual obligations as of December 31, 2019:

 

 

 

Payment due by December 31,

 

 

 

Total

 

2020

 

2021 - 2022

 

2023 - 2025

 

After 2025

 

 

 

(in thousands of RMB)

 

Lease commitments(1)(2)

 

202,071

 

41,727

 

83,660

 

76,684

 

 

Total

 

202,071

 

41,727

 

83,660

 

76,684

 

 

 

79


Table of Contents

 


Note:

 

(1)         Lease commitments consist of the commitments under the lease agreements for our office premises. We lease our office facilities with various expiration dates beyond 2020.

 

(2)         As of December 31, 2017, we had a minimum capital commitment of RMB423.3 million in connection with the purchase of a building under an agreement between Anhui Huami and Hefei High-Tech Administrative Office. In December 2018, the agreement was terminated. In March 2019, the two parties entered into a five-year lease agreement, the payment under which is included in the table, in connection with the same building.

 

G.                                   Safe Harbor

 

See “Forward-Looking Statements” on page 2 of this annual report.

 

ITEM 6.                DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

 

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

 

44

 

Chairman of the Board of Directors and Chief Executive Officer

De Liu

 

46

 

Director

Yunfen Lu

 

54

 

Director

Xiaojun Zhang

 

48

 

Director

Jimmy Lai

 

63

 

Independent Director

Hongjiang Zhang

 

59

 

Independent Director

David Cui

 

51

 

Chief Financial Officer

Mike Yan Yeung

 

49

 

Chief Operating Officer

Hui Wang

 

42

 

Vice President of Health and Medical Business Group and General Manager of Beijing Operations

Pengtao Yu

 

38

 

Chief Industrial Designer

 

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.

 

80


Table of Contents

 

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.

 

81


Table of Contents

 

Ms. Yunfen Lu has served as our director since April 2015. Ms. Lu also serves as the director of Anhui Huami, Beijing Huami and Huami HK Limited. Ms. Lu has a wealth of experience in financial accounting and supply chain management. From April 2009 to December 2013, 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. 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. 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.

 

Mr. Jimmy Lai has served as our director since February 2018. Mr. Lai has served as the chief financial officer of China Online Education Group, an 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., an 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 in 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 senior advisor of Carlyle Group and Chairman of Beijing Academy of AI. He also serves as an independent director of AAC Technologies Holdings Inc. and BabyTree Group, both Hong Kong listed companies, and an independent director of Digital China Ltd. listed in Shenzhen Stock Exchange in China. From October 2011 to November 2016, Dr. Zhang 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. 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 the capacity of the chief executive officer of Kingsoft, he also served as a director at Cheetah Mobile Inc., Xunlei Limited and 21 Vianet Group, Inc., all U.S. listed companies. 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. During his time at Microsoft, Dr. Zhang led Microsoft’s research and development agenda in China, including strategy, planning, R&D and incubation for products, services and solutions. 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.

 

82


Table of Contents

 

Mr. David Cui has served as our chief financial officer since August 2017. 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, and 9F, Inc, a Nasdaq-listed leading digital financial account platform in China, since August 2019. Mr. Cui has extensive experience in public accounting and financial management. From August 2015 to April 2017, Mr. Cui is the chief financial officer of China Digital Video Holdings Limited, a company listed on the Hong Kong Stock Exchange. 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. Cui was the chief financial officer in iKang Healthcare Group, Inc., 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 auditor in the Audit and Advisory Services practice 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 CPA in the United States and Canada.

 

Mr. Mike Yan Yeung has 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.

 

Dr. Hui Wang has served as our vice president of health & medical business group and general manager of Beijing operations since August 2014. Prior to joining us, 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, Dr. Wang worked at NEC Labs China from 2005 to 2007. 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 Yu has 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.

 

83


Table of Contents

 

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.

 

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.

 

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 of Directors and Executive Officers

 

For the fiscal year ended December 31, 2019, we paid an aggregate of approximately RMB23.1 million (US$3.3 million) in cash to our executive officers and RMB0.6 million (US$0.1 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, 2020, awards to purchase 13,796,269 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. As of the date of this annual report, no grantees resident in China have exercised their options.

 

The following paragraphs describe the principal terms of the 2015 Plan.

 

84


Table of Contents

 

Types of 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.

 

2018 Share Incentive Plan

 

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 14,339,410 as of January 1, 2020. As of March 31, 2020, awards to purchase 6,936,025 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. Grantees of our share incentive awards under the 2018 Plan resident in China were not permitted to exercise their options prior to the completion of our initial public offering. As of the date of this annual report, no grantees resident in China have exercised their options.

 

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.

 

85


Table of Contents

 

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.

 

The following table summarizes, as of March 31, 2020, 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:

 

Name

 

Ordinary Shares Underlying 
Options and 
Restricted Shares

 

Exercise Price (US$/Share)

 

Date of Grant

 

Date of Expiration

 

David Cui

 

*

 

 

July 31, 2017

 

July 30, 2027

 

Mike Yan Yeung

 

*(1

)

 

October 21, 2015

 

 

 

 

*

 

0.79

 

October 21, 2015

 

February 1, 2019

 

Hui Wang

 

*(1

)

 

October 21, 2015

 

October 20, 2025

 

Pengtao Yu

 

*(1

)

 

October 21, 2015

 

 

Total

 

4,798,468

 

 

 

 

 

 

 

 


Notes:

* Less than one percent of our total outstanding shares.

 

(1)         Restricted shares

 

As of March 31, 2020, other employees as a group held outstanding options to purchase 10,862,312 Class A ordinary shares of our company, at a weighted average exercise price of US$0.26 per share, 2,076,217 restricted shares, and 1,124,081 restricted share units.

 

C.                                    Board Practices

 

Our board of directors consists of six 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.

 

86


Table of Contents

 

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.

 

Audit Committee. Our audit committee consists of Mr. Jimmy Lai and Dr. Hongjiang Zhang. Mr. Lai is the chairman of our audit committee. We have determined that Mr. Jimmy Lai and Dr. Hongjiang Zhang satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-3 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.

 

Compensation Committee. Our compensation committee consists of Mr. Wang Huang, Mr. Jimmy Lai and Dr. Hongjiang Zhang. Dr. Zhang is the chairman of our compensation committee. We have determined that Mr. Jimmy Lai and Dr. Hongjiang Zhang 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;

 

·                  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.

 

Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Mr. Wang Huang, Mr. Jimmy Lai and Dr. Hongjiang Zhang. Mr. Huang is the chairperson of our nominating and corporate governance committee. Mr. Jimmy Lai and Dr. Hongjiang Zhang 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:

 

87


Table of Contents

 

·                  selecting and recommending to the board nominees for election by the shareholders or appointment by the board;

 

·                  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.

 

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 and diligence 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

 

·                  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.

 

D.                                    Employees

 

We had 416, 694 and 1,132 employees as of December 31, 2017, 2018 and 2019, respectively. The following table sets forth the numbers of our employees categorized by function as of December 31, 2019:

 

 

 

As of
December 31,
2019

 

Function:

 

 

 

Research and development

 

679

 

Selling and marketing

 

190

 

Administrative

 

183

 

Supply chain management

 

80

 

Total

 

1,132

 

 

88


Table of Contents

 

As of December 31, 2019, we had 387 employees in Shenzhen, 364 employees in Hefei, 301 employees in Beijing, 48 employees in Nanjing, 16 employees in Xi’an, 11 employees in Cupertino and 5 employees in Vancouver.

 

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 Doing Business in China—Our failure to fully comply with PRC labor-related laws may expose us to potential penalties.”

 

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, 2020 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.

 

The calculations in the table below are based on 105,111,496 Class A ordinary shares and 142,686,699 Class B ordinary shares outstanding as of March 31, 2020, 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.

 

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.

 

89


Table of Contents

 

 

 

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)

 

 

85,547,127

 

85,547,127

 

34.5

%

55.8

%

De Liu

 

 

 

 

 

 

Yunfen Lu(2)

 

 

3,450,746

 

3,450,746

 

1.4

%

2.3

%

Xiaojun Zhang(3)

 

 

2,107,463

 

2,107,463

 

*

 

1.4

%

Jimmy Lai(4)

 

*

 

 

*

 

*

 

*

 

Hongjiang Zhang(5)

 

*

 

 

*

 

*

 

*

 

David Cui(6)

 

*

 

 

*

 

*

 

*

 

Mike Yan Yeung

 

*

 

 

*

 

*

 

*

 

Hui Wang(7)

 

*

 

 

*

 

*

 

*

 

Pengtao Yu(8)

 

*

 

 

*

 

*

 

*

 

All Directors and Executive Officers as a Group

 

2,771,880

 

85,547,127

 

88,319,007

 

35.4

%

56.0

%

Principal Shareholders:

 

 

 

 

 

 

 

 

 

 

 

HHtech Holdings Limited(9)

 

 

85,547,127

 

85,547,127

 

34.5

%

55.8

%

Wells Fargo & Company(10)

 

24,756,024

 

 

24,756,024

 

10.0

%

1.6

%

People Better Limited(11)

 

 

35,861,112

 

35,861,112

 

14.5

%

23.4

%

Shunwei High Tech Limited(12)

 

 

16,598,560

 

16,598,560

 

6.7

%

10.8

%

 


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.

 

**          Each of Mr. Wang Huang, Yunfen Lu, Xiaojun Zhang, David Cui, Mike Yan Yeung and Hui Wang’s business address is Building H8, No. 2800, Chuangxin Road, Hefei, 230088, People’s Republic of China. Pengtao Yu’s business address is 2485 Old Middlefield Way, Suite 30, Mountain View, CA 94043. Mr. Tian Cheng’s business address is Room 801, Building D1, Liangmaqiao DRC Office Building, Chaoyang District, Beijing, 100600, People’s Republic of China. 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 1258 Yosemite, Houshayu, Shunyi District, Beijing, 101302, People’s Republic of China.

 

(1)         Represents 69,636,680 Class B ordinary shares held by HHtech Holdings Limited, a British Virgin Islands company, and 15,910,447 Class B ordinary shares beneficially owned by HHtech Holdings Limited as the result of the voting agreement dated January 12, 2018 by and among. HHtech Holdings Limited, Fandler Holding Limited, Forest Mountain Holding Limited, Haiyu Holding Limited, Shu Hill Holding Limited and Wenshui Holding Limited. HHtech Holdings Limited is wholly owned by Wayne Holding Limited, which in turn is wholly owned by a trust established for the benefit of Mr. Wang Huang and his family members. Mr. Huang is the sole director of HHtech Holdings Limited, and also the settlor and investment decision maker of the abovementioned trust. Therefore, Mr. Huang is entitled to exercise voting and dispositive power over the shares held by HHtech Holdings Limited. The registered address of HHtech Holdings Limited is the office of NovaSage Chambers, P.O. Box 4389, Road Town, Tortola, British Virgin Islands.

 

(2)         Represents 3,450,746 Class B ordinary shares held by Haiyu Holding Limited, a British Virgin Islands company. Haiyu Holding Limited is wholly owned by Hong An Holding Limited, which in turn is wholly owned by a trust established for the benefit of Ms. Yufen Lu and her family members. Ms. Lu is the sole director of Haiyu Holding Limited, and also the settlor and investment decision maker of the abovementioned trust. Therefore, Ms. Lu is entitled to exercise voting and dispositive power over the shares held by Haiyu Holding Limited. The registered address of Haiyu Holding Limited is the office of NovaSage Chambers, P.O. Box 4389, Road Town, Tortola, British Virgin Islands.

 

(3)         Represents 2,107,463 Class B ordinary shares held by Shu Hill Holding Limited, a British Virgin Islands company. Shu Hill Holding Limited is wholly owned by Sunflower International Limited, which in turn is wholly owned by a trust established for the benefit of Mr. Xiaojun Zhang and his family members. Mr. Zhang is the sole director of Shu Hill Holding Limited, and also the settlor and investment decision maker of the abovementioned trust. Therefore, Mr. Zhang is entitled to exercise voting and dispositive power over the shares held by Shu Hill Holding Limited. The registered address of Shu Hill Holding Limited is the office of NovaSage Chambers, P.O. Box 4389, Road Town, Tortola, British Virgin Islands.

 

(4)         Represents the restricted share units Mr. Jimmy Lai has the right to acquire within 60 days after the date of this annual report.

 

(5)         Represents the restricted share units Mr. Hongjiang Zhang has the right to acquire within 60 days after the date of this annual report.

 

(6)         Represents the Class A ordinary shares Mr. David Cui has the right to acquire upon exercise of option within 60 days after the date of this annual report.

 

(7)         Represents the Class A ordinary shares Mr. Hui Wang has the right to acquire upon exercise of option within 60 days after the date of this annual report.

 

(8)         Represents the restricted shares held by Mr. Pengtao Yu.

 

90


Table of Contents

 

(9)         Based on the statement on Schedule 13G/A filed on February 13, 2020 jointly by (i) HHtech Holdings Limited, a British Virgin Islands company, (ii) Wayne Holding Limited, a Samoa company and (iii) Mr. Wang Huang, pursuant to which 69,636,680 Class B ordinary shares are held by HHtech Holdings Limited, and 15,910,447 Class B ordinary shares are beneficially owned by HHtech Holdings Limited as the result of the voting agreement dated January 12, 2018 by and among HHtech Holdings Limited, Fandler Holding Limited, Forest Mountain Holding Limited, Haiyu Holding Limited, Shu Hill Holding Limited and Wenshui Holding Limited. HHtech Holdings Limited is wholly-owned by Wayne Holding Limited, which in turn is wholly-owned by a trust established for the benefit of Mr. Wang Huang and his family members. Mr. Huang is the sole director of HHtech Holdings Limited, and also the settlor and investment decision maker of the abovementioned trust. Therefore, Mr. Huang is entitled to exercise voting and dispositive power over the shares held by HHtech Holdings Limited. The registered address of HHtech Holdings Limited is the office of NovaSage Chambers, P.O. Box 4389, Road Town, Tortola, British Virgin Islands.

 

(10)  Based on information provided by Wells Fargo & Company, a Delaware corporation, 24,756,024 Class A ordinary shares are held by Wells Fargo & Company, a Delaware corporation, on its own behalf and on behalf its subsidiaries Wells Capital Management Incorporated and Wells Fargo Funds Management, LLC.

 

(11)  Based on the statement on Schedule 13G filed on February 1, 2019 jointly by (i) People Better Limited, a British Virgin Islands company, (ii) Fast Pace Limited, a British Virgin Island company and (iii) Xiaomi, pursuant to which 35,861,112 Class B ordinary shares are held by People Better Limited. Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands. People Better Limited is a wholly-owned subsidiary of Fast Pace Limited, which is a wholly-owned subsidiary of Xiaomi.

 

(12)  Based on the statement on Schedule 13G/A filed on February 12, 2020 jointly by (i) Shunwei High Tech Limited, (ii) Shunwei China Internet Fund II, L.P., (iii) Shunwei Capital Partners II GP, L.P. and (iv) Mr. Koh Tuck Lye, pursuant to which 16,598,560 Class B ordinary shares are held by Shunwei High Tech Limited, a British Virgin Islands company. The registered address of Shunwei High Tech Limited is Vistra Corporate Services Center, Wickhams Cay II, Road Town, Tortola, VG 1110, British Virgin Islands. Shunwei High Tech Limited is wholly owned by Shunwei China Internet Fund II, L.P. The general partner of Shunwei China Internet Fund II, L.P. is Shunwei Capital Partners II GP, L.P., and the general partner of Shunwei Capital Partners II GP, L.P. is Shunwei Capital Partners II GP Limited. Based on information provided by Shunwei High Tech Limited, the shareholders of Shunwei Capital Partners II GP Limited are Grand Energy Ventures Limited, a British Virgin Islands company wholly owned by Mr. Lei Jun, and Silver Unicorn Ventures Limited, a British Virgin Islands company wholly-owned by Mr. Koh Tuck Lye.

 

To our knowledge, as of March 31, 2020, 108,079,368 of our Class A ordinary shares were held by one record holder in the United States, which was Deutsche Bank Trust Company Americas, the depositary of our ADS program. The number of beneficial owners of our ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States. We are not aware of any arrangement that may, at a subsequent date, result in a change of control of our company.

 

ITEM 7.                                                MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

 

A.                                    Major Shareholders

 

Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”

 

B.                                    Related Party Transactions

 

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.

 

91


Table of Contents

 

Form F-3 Registration Rights. Our shareholders may request us in writing to file an unlimited number of registration statements on Form F-3. We shall effect the registration of the securities on Form F-3 as soon as practicable, except in certain circumstances.

 

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.”

 

Share Incentive Plan

 

See “Item 6. Directors, Senior Management and Employees—B. Compensation of Directors and Executive Officers—2015 Share Incentive Plan” and “2018 Share Incentive Plan.”

 

Our Relationship with Xiaomi

 

As of March 31, 2020, Xiaomi held 14.5% of our total outstanding shares, and has appointed one director to our board pursuant to the Shareholders Agreement among all our shareholders and us. We have been a major partner of Xiaomi to design and manufacture Xiaomi Wearable Products. In October 2017, we entered into a business cooperation agreement and a strategic cooperation agreement with Xiaomi, which grants us the most-preferred-partner status globally to develop future Xiaomi Wearable Products.

 

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 strategic cooperation agreement will expire in October 2020, and can be terminated earlier by Xiaomi if (i) we fail to deliver products to the market within the period mutually agreed by Xiaomi and us, or if the products do not meet Xiaomi’s requirements (ii) return rates of our products are 2% or higher for more than three consecutive months, or a material quality issue causes a massive product recall, and (iii) sales of Xiaomi Wearable Products decrease by 20% or more year-over-year for any year, or fail to increase by at least 20% year-over-year for two consecutive years.

 

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.

 

92


Table of Contents

 

With respect to intellectual properties, we and Xiaomi will have joint ownership over all patents generated from the process of design, development, manufacturing and sales of Xiaomi Wearable Products as well as intellectual properties relating to certain industrial design of Xiaomi Wearable Products. We by ourselves own all other intellectual properties generated from the design, development, manufacturing and sales of Xiaomi Wearable Products.

 

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.

 

Transactions with Xiaomi

 

In the year ended December 31, 2019, we recorded RMB4,281.0 million (US$614.9 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, 2019, the amount due from Xiaomi and its affiliates was RMB1,418.6 million (US$203.8 million).

 

In the year ended December 31, 2018, we recorded RMB2,816.7 million (US$409.7 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, 2018, the amount due from Xiaomi and its affiliates was RMB648.4 million (US$94.3 million). In addition, as part of our investment strategy, we lent to Xi’an Haidao Information Technology Co., Ltd., an affiliate of Xiaomi and one of our investee companies. As of December 31, 2018, the outstanding loan amount to such company was nil.

 

In the year ended December 31, 2017, we recorded RMB1,777.9 million in revenues from Xiaomi and its affiliates primarily for the sales of Xiaomi Wearable Products and self-branded products services. As of December 31, 2017, the amount due from Xiaomi and its affiliates was RMB567.6 million. In addition, as part of our investment strategy, we lent to Xi’an Haidao Information Technology Co., Ltd., an affiliate of Xiaomi and one of our investee companies. As of December 31, 2017, the outstanding loan amount to such company was RMB2.5 million.

 

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. We have provided loans to Hefei LianRui Microelectronics Technology Co., Ltd., or Hefei LianRui, Hangzhou Aqi Vision Technology Co., Ltd., or Hangzhou Aqi, Xi’an Haidao information Technology Co., Ltd., or Xi’an Haidao, Hefei Huaying Xingzhi Fund Partnership, or Hefei Huaying, and Hangzhou Yunyou Technology Co. Ltd., or Hangzhou Yunyou. The status of the loans we extended to the five investee companies are as follows: (i) RMB8.0 million loan provided to Hefei LianRui was converted to its equity interests by us in July 2017. (ii) In 2019, we evaluated the loan extended to Hangzhou Yunyou and concluded that it would not be collected. We recognized an impairment loss of RMB5.6 million therefrom. (iii) For Hangzhou Aqi and Xi’an Haidao, in 2018, we had written off all the outstanding balance of the loans made to them. (iv) For Hefei Huaying, we disposed five long-term investments to it for an aggregate consideration of RMB22.0 million during the year ended December 31, 2017, and disposed of a long-term investment in Hefei Huaying and recorded a gain of RMB31 thousand in 2018.

 

Hefei Huaheng Electronic Technology Co., Ltd., a company controlled by Mr. Wang Huang, our chairman and chief executive officer, acts as our distributor of self-branded products. We recorded sales revenue of RMB730 thousands and RMB308 thousands from it for the years ended December 31, 2017 and 2018, respectively. In 2019, we purchased certain intangible assets from Hefei Huaheng, which amounted to RMB11.3 million.

 

93


Table of Contents

 

Shunwei Hitech Limited, or Shunwei, used a PRC company affiliate to make an initial investment in Anhui Huami in 2014, and it was replaced by an investment in us in 2015 after we incorporated Huami Corporation as our offshore holding entity. As we have not returned the original investment to such PRC affiliate of Shunwei, we recorded US$1.2 million as amount due to Shunwei for capital return, which had been settled in December 2017.

 

C.                                    Interests of Experts and Counsel

 

Not applicable.

 

ITEM 8.                                                FINANCIAL INFORMATION

 

A.                                    Consolidated Statements and Other 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.

 

Dividend Policy

 

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 do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain most, if not all, of our available funds and any future earnings to operate and expand our business.

 

We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our PRC subsidiaries to pay dividends to us. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Dividend Distributions.”

 

If we pay any dividends on our Class A ordinary shares, we will pay those dividends which are payable in respect of the Class A ordinary shares underlying our ADSs to the depositary, as the registered holder of such Class A ordinary shares, and the depositary then will pay such amounts to our ADS holders in proportion to Class A ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and expenses payable thereunder. Cash dividends on our ordinary shares, if any, will be paid in U.S. dollars.

 

B.                                    Significant Changes

 

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

 

A.                                    Offering and Listing Details

 

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.”

 

94


Table of Contents

 

B.                                    Plan of Distribution

 

Not applicable.

 

C.                                    Markets

 

Our ADSs, each representing four Class A ordinary shares of ours, have been listed on the NYSE since February 8, 2018 under the symbol “HMI.”

 

D.                                    Selling Shareholders

 

Not applicable.

 

E.                                    Dilution

 

Not applicable.

 

F.                                     Expenses of the Issue

 

Not applicable.

 

ITEM 10.                                         ADDITIONAL INFORMATION

 

A.                                    Share Capital

 

Not applicable.

 

B.                                    Memorandum and Articles of Association

 

The following are summaries of material provisions of our Memorandum and Articles and of the Companies Law (2020 Revision), insofar as they relate to the material terms of our ordinary shares.

 

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 Law. Under the laws of the Cayman Islands, our company may pay a dividend out of either profit or share premium account, provided 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.

 

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.

 

95


Table of Contents

 

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 Law to call shareholders’ annual general meetings. Our Memorandum and Articles provide that we may (but are not obliged to) in each year hold a general meeting as our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the annual general meeting shall be held at such time and place as may be determined by our directors.

 

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 Law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our Memorandum and Articles provide that upon the requisition of shareholders representing in aggregate not less than one-third of the votes attaching to the issued and outstanding shares of our company entitled to vote at general meetings, our board will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at such meeting. However, our Memorandum and Articles do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general meetings not called by such shareholders.

 

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:

 

·                  the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer;

 

·                  the instrument of transfer is in respect of only one class of ordinary shares;

 

·                  the instrument of transfer is properly stamped, if required; and

 

·                  in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four.

 

·                  a fee of such maximum sum as the New York Stock Exchange may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof.

 

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.

 

96


Table of Contents

 

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.

 

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 Shares. We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders of these shares, on such terms and in such manner as may be determined by our board of directors. Our Company may also repurchase any of our shares on such terms and in such manner as have been approved by our board of directors or by an ordinary resolution of our shareholders. Under the Companies Law, the redemption or repurchase of any share may be paid out of our Company’s profits or out of the proceeds of a new issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if our company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Law no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares outstanding or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.

 

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 authorizes our board of directors to issue additional ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.

 

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:

 

·                  the designation of the series;

 

·                  the number of shares of the series;

 

·                  the dividend rights, dividend rates, conversion rights, voting rights; and

 

·                  the rights and terms of redemption and liquidation preferences.

 

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 records. However, we will provide our shareholders with annual audited financial statements. See “Where You Can Find Additional Information.”

 

97


Table of Contents

 

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:

 

·                  authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders; and

 

·                  limit the ability of shareholders to requisition and convene general meetings of shareholders.

 

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 Law. The Companies Law distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except that an exempted company:

 

·                  does not have to file an annual return of its shareholders with the Registrar of Companies;

 

·                  is not required to open its register of members for inspection;

 

·                  does not have to hold an annual general meeting;

 

·                  may issue negotiable or bearer shares or shares with no par value;

 

·                  may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance);

 

·                  may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;

 

·                  may register as a limited duration company; and

 

·                  may register as a segregated portfolio company.

 

“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 Law 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 Law and the current Companies Act of England. In addition, the Companies Law 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 Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.

 

Mergers and Similar Arrangements. The Companies Law 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.

 

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 Law. 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.

 

98


Table of Contents

 

Separate from the statutory provisions relating to mergers and consolidations, the Companies Law 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 statutory provisions as to the required majority vote have been met;

 

·      the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class;

 

·      the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and

 

·      the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.

 

The Companies Law 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:

 

99


Table of Contents

 

·      a company acts or proposes to act illegally or ultra vires;

 

·      the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and

 

·      those who control the company are perpetrating a “fraud on the minority.”

 

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 to 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.

 

100


Table of Contents

 

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.

 

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.

 

We believe that Huami Corporation is not a PRC resident enterprise for PRC tax purposes. Huami Corporation is not controlled by a PRC enterprise or PRC enterprise group and we do not believe that Huami Corporation meets all of the conditions above. Huami 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.

 

101


Table of Contents

 

If the PRC tax authorities determine that Huami 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 Huami 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 Huami Corporation is treated as a PRC resident enterprise. Pursuant to the EIT Law and its implementation rules, if a non-resident 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 HK 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.

 

Provided that our Cayman Islands holding company, Huami 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 from the Internal Revenue Service, the IRS, with respect to any U.S. federal income tax consequences described below, and there can be no assurance that 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;

 

102


Table of Contents

 

·                  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 Class A 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;

 

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.

 

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.

 

103


Table of Contents

 

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 (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.

 

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 we were a PFIC for the taxable year ended December 31, 2019 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, no assurance can be given in this regard because the determination of whether we 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).

 

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 our ADSs (but not our Class A ordinary shares) will be 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.

 

104


Table of Contents

 

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.

 

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. 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.

 

105


Table of Contents

 

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.

 

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 on a national securities exchange that is registered with the SEC. For those purposes, our ADSs, but not our Class A ordinary shares, are listed on the New York Stock 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.

 

Because a mark-to-market election technically cannot 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.

 

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.

 

106


Table of Contents

 

I.                                        Subsidiary Information

 

Not applicable.

 

ITEM 11.              QUANTITATIVE AND QUALITATIVE 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 1.9% for December 2018 and 4.5% for December 2019. 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 all of our revenues and expenses are denominated in RMB. We do not believe that we currently have any significant direct foreign exchange risk, and have not used any derivative financial instruments to hedge exposure to such risk. Although our exposure to foreign exchange risks should be limited in general, the value of your investment in our ADSs will be affected by the exchange rate between U.S. dollar 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, 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. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between 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.

 

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.

 

ITEM 12.              DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

 

A.                                    Debt Securities

 

Not applicable.

 

B.                                    Warrants and Rights

 

Not applicable.

 

C.                                    Other Securities

 

Not applicable.

 

107


Table of Contents

 

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.

 

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;

 

108


Table of Contents

 

·                  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, 2019, we did not receive such reimbursement from the depositary.

 

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 “Use of Proceeds” information relates to: (i) the registration statement on Form F-1, as amended (File No. 333-222528 ), or 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. (ii) The registration statement on Form F-3, as amended (File No. 333-230844), or the F-3 Registration Statement, in relation to our offering of 7,936,500 ADSs representing 31,746,000 Class A ordinary shares, at an offering price of US$9.75 per ADS. Our 2019 ADS offering closed in April 2019. Morgan Stanley & Co. LLC, Credit Suisse Securities (USA) LLC and Citigroup Global Markets Inc. were the representatives of the underwriters for our 2019 ADS offering.

 

For our initial public offering, counting in the ADSs sold upon the exercise of the over-allotment option by our underwriters, 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. For our 2019 ADS offering, counting in the ADSs sold upon the exercise of the over-allotment option by our underwriters, we offered and sold 793,650 ADSs, and received total purchase price of US$7.7 million.

 

The F-1 Registration Statement was declared effective by the SEC on February 7, 2018. Counting in the ADSs sold upon the exercise of the over-allotment option by our underwriters, we received net proceeds of US$103.9 million from our initial public offering, after deducting underwriting discounts and commissions of US$8.0 million and the offering expenses of US$2.5 million 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.

 

109


Table of Contents

 

The F-3 Registration Statement was declared effective by the SEC on April 24, 2019. counting in the ADSs sold upon the exercise of the over-allotment option by our underwriters, we received net proceeds of US$6.6 million from our 2019 ADS offering, after deducting underwriting discounts and commissions of US$0.3 million and the offering expenses of US$0.8 million 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.

 

For the period from February 7, 2018 to December 31, 2019, we applied all the net proceeds from our initial public offering as follows:

 

·                  US$22.8 million for research and development of products, services and technologies;

 

·                  US$7.6 million for selling and marketing;

 

·                  US$14.4 million for general corporate purposes and working capital; and

 

·                  US$59.1 million for strategic investments and acquisitions.

 

As of December 31, 2019, we had applied all the net proceeds from our registered offering on the F-3 Registration Statement for general corporate and research and development purpose.

 

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, 2019, our disclosure controls and procedures were effective in ensuring that the information required to be disclosed by us in the reports that we file and furnish under the Exchange Act was recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and that the information 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 officer, to allow timely decisions regarding required disclosure.

 

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.

 

As 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 internal control over financial reporting as of December 31, 2019 using the criteria set forth in the report “Internal Control—Integrated Framework (2013)” published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was effective as of December 31, 2019.

 

110


Table of Contents

 

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

 

As disclosed in our 2018 Annual Report, we identified one material weakness in our internal control over financial reporting as of December 31, 2018. 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.

 

To remedy the identified material weakness, we designed and implemented certain remedial measures during 2019, which included but not limited to the below measures: we have recruited several personnel with appropriate knowledge and experience on U.S. GAAP and SEC financial reporting; we redesigned and implemented controls over complex transactions and ensured that those are reviewed by appropriate authority level personnel. As of December 31, 2019, we determined that the above-mentioned material weakness had been remediated.

 

Other than as described above, there 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.

 

ITEM 16C.                                PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

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,

 

 

 

2018

 

2019

 

 

 

(in thousands of RMB)

 

Audit fees(1) 

 

5,662

 

8,400

 

Tax fees(2)

 

 

300

 

 


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 statements, including audit fees relating to our initial public offering in 2018.

 

(2)         “Tax fees” represents the aggregated fees for professional services rendered by our independent registered public accounting firm for tax declaration service.

 

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

 

None.

 

ITEM 16F.                                 CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT

 

Not applicable.

 

111


Table of Contents

 

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.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, a compensation committee composed entirely of independent directors and an audit committee with a minimum of three members. 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 are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to United States domestic public companies.”

 

ITEM 16H.                               MINE SAFETY DISCLOSURE

 

Not applicable.

 

PART III.

 

ITEM 17.                                         FINANCIAL STATEMENTS

 

We have elected to provide financial statements pursuant to Item 18.

 

ITEM 18.                                         FINANCIAL STATEMENTS

 

The consolidated financial statements of Huami Corporation are included at the end of this annual report.

 

ITEM 19.                                         EXHIBITS

 

Exhibit
Number

 

Description of Document

1.1

 

Second Amended and Restated Memorandum and Articles of Association of the Registrant, effective February 7, 2018 (incorporated herein by reference to Exhibit 3.2 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

2.1

 

Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3)

2.2

 

Registrant’s Specimen Certificate for Class A Ordinary Shares (incorporated herein by reference to Exhibit 4.2 to the registration statement on Form F-1/A filed with the Securities and Exchange Commission January 26, 2018 (File No. 333-222528))

2.3

 

Deposit Agreement, dated as of February 7, 2018, among the Registrant, Deutsche Bank Trust Company Americas, as depositary, and all holders from time to time of American Depositary Receipts issued thereunder (incorporated herein by reference to Exhibit 4.3 to the registration statement on Form S-8 (File No. 333-226665), filed with the Securities and Exchange Commission on August 8, 2018)

2.4

 

Shareholders Agreement between the Registrant and other parties thereto dated April 29, 2015 (incorporated herein by reference to Exhibit 4.4 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

2.5*

 

Description of Securities

4.1

 

2015 Share Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

4.2

 

2018 Share Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

4.3

 

Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein by reference to Exhibit 10.3 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

 

112


Table of Contents

 

4.4

 

Form of Employment Agreement between the Registrant and its executive officers (incorporated herein by reference to Exhibit 10.4 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

4.5*

 

English translation of the second amended and restated Shareholder Voting Proxy Agreement and Power of Attorney among our WFOE, Anhui Huami and shareholders of Anhui Huami dated March 20, 2020

4.6*

 

English translation of the second amended and restated Shareholder Voting Proxy Agreement and Power of Attorney among our WFOE, Beijing Huami and shareholders of Beijing Huami dated March 20, 2020

4.7*

 

English translation of the second amended and restated Equity Pledge Agreement among our WFOE, Anhui Huami and shareholders of Anhui Huami dated March 20, 2020

4.8*

 

English translation of the second amended and restated Equity Pledge Agreement among our WFOE, Beijing Huami and shareholders of Beijing Huami dated March 20, 2020

4.9*

 

English translation of the second amended and restated Exclusive Consultation and Services Agreement among our WFOE, Anhui Huami dated March 20, 2020

4.10*

 

English translation of the second amended and restated Exclusive Consultation and Services Agreement among our WFOE, Beijing Huami dated March 20, 2020

4.11*

 

English translation of the second amended and restated Exclusive Option Agreement among our WFOE, Anhui Huami and shareholders of Anhui Huami dated March 20, 2020

4.12*

 

English translation of the second amended and restated Exclusive Option Agreement among our WFOE, Beijing Huami and shareholders of Beijing Huami dated March 20, 2020

4.13

 

English translation of Loan Agreement between our WFOE and Mr. Wang Huang dated November 3, 2017 (incorporated herein by reference to Exhibit 10.13 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

4.14

 

English translation of Business Cooperation Agreement between Anhui Huami and Xiaomi dated October 23, 2017 (incorporated herein by reference to Exhibit 10.14 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

4.15

 

English translation of Strategic Cooperation Agreement between Anhui Huami and Xiaomi dated October 23, 2017 (incorporated herein by reference to Exhibit 10.15 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

4.16

 

English translation of Intellectual Property Application Right Assignment Agreement between Xiaomi and Anhui Huami dated April 29, 2015 (incorporated herein by reference to Exhibit 10.16 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

4.17

 

English translation of Trademark Licensing Agreement between Xiaomi and Anhui Huami dated October 23, 2017 (incorporated herein by reference to Exhibit 10.17 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

8.1*

 

List of Principal Subsidiaries and Consolidated Variable Interest Entities of the Registrant

11.1

 

Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registration statement on Form F-1 filed with the Securities and Exchange Commission January 12, 2018 (File No. 333-222528))

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**

 

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*

 

Consent of Zhong Lun Law Firm

101.INS*

 

XBRL Instance Document

 

113


Table of Contents

 

101.SCH*

 

XBRL Taxonomy Extension Scheme Document

101.CAL*

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF*

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB*

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE*

 

XBRL Taxonomy Extension Presentation Linkbase Document

 


*           Filed with this Annual Report on Form 20-F.

**    Furnished with this Annual Report on Form 20-F.

 

114


Table of Contents

 

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.

 

 

 

Huami Corporation

 

 

 

 

By:

/s/ Wang Huang

 

Name:

Wang Huang

 

Title:

Chairman of the Board of Directors and Chief Executive Officer

 

 

 

Date: April 23, 2020

 

 

 

115


Table of Contents

 

HUAMI CORPORATION

 

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

 

CONTENTS

 

PAGE(S)

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

F-2

 

 

 

CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 2018 AND 2019

 

F-3

 

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

 

F-5

 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

 

F-6

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

 

F-7

 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2017, 2018 AND 2019

 

F-8

 

 

 

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

F-9

 

 

 

ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I

 

F-52

 

F-1


Table of Contents

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the shareholders and the Board of Directors of Huami Corporation

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated balance sheets of Huami Corporation and its subsidiaries (the “Company”) as of December 31, 2019 and 2018, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the three years in the period ended December 31, 2019, and the related notes and the financial statement schedule I listed in the Index (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, 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’s management. Our responsibility is to express an opinion on the 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’s Republic of China

April 23, 2020

 

We have served as the Company’s auditor since 2016.

 

F-2


Table of Contents

 

HUAMI CORPORATION

CONSOLIDATED BALANCE SHEETS

(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

 

2019

 

2019

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

(Note2)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

1,441,802

 

1,803,117

 

259,002

 

Restricted cash

 

10,010

 

874

 

126

 

Term deposit

 

96,969

 

 

 

Accounts receivable (net of allowance of nil and nil as of December 31, 2018 and 2019, respectively)

 

58,925

 

188,940

 

27,140

 

Amounts due from related parties (net of allowance of nil and nil as of December 31, 2018 and 2019, respectively)

 

656,399

 

1,421,170

 

204,138

 

Inventories, net

 

484,622

 

893,806

 

128,387

 

Short-term investments

 

50,482

 

17,187

 

2,469

 

Prepaid expenses and other current assets

 

58,247

 

67,358

 

9,675

 

Total current assets

 

2,857,456

 

4,392,452

 

630,937

 

Property, plant and equipment, net

 

40,042

 

64,350

 

9,243

 

Intangible assets, net

 

63,722

 

85,753

 

12,318

 

Long-term investments

 

208,949

 

406,099

 

58,332

 

Deferred tax assets

 

75,032

 

102,649

 

14,745

 

Operating lease right-of-use assets

 

 

108,682

 

15,611

 

Goodwill

 

5,930

 

5,930

 

852

 

Other non-current assets

 

7,350

 

8,828

 

1,268

 

Total assets

 

3,258,481

 

5,174,743

 

743,306

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable (including accounts payable of the consolidated VIEs without recourse to the Group of RMB1,059,676 and RMB1,996,010 as of December 31, 2018 and 2019, respectively)

 

1,064,106

 

1,999,951

 

287,275

 

Advance from customers (including advance from customers of the consolidated VIEs without recourse to the Group of RMB5,930 and RMB44,380 as of December 31, 2018 and 2019, respectively)

 

5,943

 

44,793

 

6,434

 

Amount due to related parties of the consolidated VIEs without recourse to the Group

 

10,695

 

14,769

 

2,121

 

Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Group of RMB159,736 and RMB236,708 as of December 31, 2018 and 2019, respectively)

 

213,975

 

352,249

 

50,598

 

Income tax payables of the consolidated VIEs without recourse to the Group

 

54,037

 

67,854

 

9,747

 

Notes payable of the consolidated VIEs without recourse to the Group

 

18,936

 

2,184

 

314

 

Bank borrowings of the consolidated VIEs without recourse to the Group

 

20,000

 

 

 

Total current liabilities

 

1,387,692

 

2,481,800

 

356,489

 

Deferred tax liabilities of the consolidated VIEs without recourse to the Group

 

4,962

 

5,399

 

776

 

Other non-current liabilities of the consolidated VIEs without recourse to the Group

 

56,249

 

113,596

 

16,317

 

Noncurrent operating lease liabilities (including Noncurrent operating lease liabilities of the consolidated VIEs without recourse to the Group of RMB nil and RMB64,300 as of December 31, 2018 and 2019, respectively)

 

 

76,360

 

10,968

 

Total liabilities

 

1,448,903

 

2,677,155

 

384,550

 

 

F-3


Table of Contents

 

HUAMI CORPORATION

CONSOLIDATED BALANCE SHEETS - CONTINUED

(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

 

2019

 

2019

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

(Note2)

 

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, 2018 and 2019; 57,303,093 and 91,459,708 shares issued and outstanding as of December 31, 2018 and 2019, respectively)

 

36

 

57

 

8

 

Class B Ordinary shares(US$0.0001 par value; 200,000,000 and 200,000,000 shares authorized as of December 31, 2018 and 2019; 184,376,679 and 156,060,279 shares issued and outstanding as of December 31, 2018 and 2019, respectively)

 

115

 

98

 

14

 

Additional paid-in capital

 

1,373,577

 

1,478,902

 

212,431

 

Accumulated retained earnings

 

340,046

 

910,612

 

130,801

 

Accumulated other comprehensive income

 

97,141

 

111,081

 

15,956

 

Total Huami Corporation shareholders’ equity

 

1,810,915

 

2,500,750

 

359,210

 

Noncontrolling interest

 

(1,337

)

(3,162

)

(454

)

Total equity

 

1,809,578

 

2,497,588

 

358,756

 

Total liabilities and equity

 

3,258,481

 

5,174,743

 

743,306

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-4


Table of Contents

 

HUAMI CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(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

 

2019

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

(Note2)

 

Revenues (including RMB1,778,640, RMB2,816,995 and RMB4,281,005 with related parties for the years ended December 31, 2017, 2018 and 2019, respectively)

 

2,048,896

 

3,645,335

 

5,812,255

 

834,878

 

Cost of revenues (including RMB1,355,493, RMB2,141,123 and RMB3,342,084 with related parties for the years ended December 31, 2017, 2018 and 2019, respectively)

 

1,554,194

 

2,705,885

 

4,344,512

 

624,050

 

Gross profit

 

494,702

 

939,450

 

1,467,743

 

210,828

 

Operating expenses

 

 

 

 

 

 

 

 

 

Selling and marketing

 

44,026

 

96,538

 

181,975

 

26,139

 

General and administrative

 

114,880

 

213,973

 

248,462

 

35,689

 

Research and development

 

153,827

 

263,220

 

430,822

 

61,884

 

Total operating expenses

 

312,733

 

573,731

 

861,259

 

123,712

 

Operating income

 

181,969

 

365,719

 

606,484

 

87,116

 

Other income and expenses

 

 

 

 

 

 

 

 

 

Interest income

 

3,003

 

11,595

 

33,478

 

4,809

 

Realized gain from investments

 

2,373

 

261

 

1,822

 

262

 

Gain from fair value change of long-term investments

 

 

7,860

 

 

 

Impairment loss from long-term investments

 

 

(7,590

)

(2,600

)

(373

)

Other income, net

 

4,555

 

8,768

 

13,186

 

1,894

 

Income before income tax and income/(loss) from equity method investments

 

191,900

 

386,613

 

652,370

 

93,708

 

Provision for income taxes

 

(27,611

)

(52,036

)

(77,887

)

(11,188

)

Income before income/(loss) from equity method investments

 

164,289

 

334,577

 

574,483

 

82,520

 

Income/(loss) from equity method investments

 

2,806

 

1,743

 

(1,112

)

(160

)

Net income

 

167,095

 

336,320

 

573,371

 

82,360

 

Less: Net loss attributable to noncontrolling interest

 

(587

)

(3,726

)

(1,825

)

(262

)

Net income attributable to Huami Corporation

 

167,682

 

340,046

 

575,196

 

82,622

 

Less: Accretion of Series A Preferred Shares

 

3,762

 

177

 

 

 

Less: Accretion of Series B-1 Preferred Shares

 

3,127

 

368

 

 

 

Less: Accretion of Series B-2 Preferred Shares

 

34,382

 

4,049

 

 

 

Less: Deemed dividend to preferred shareholders

 

 

209,752

 

 

 

Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares

 

80,291

 

12,210

 

2,450

 

352

 

Net income attributable to ordinary shareholders of Huami Corporation

 

46,120

 

113,490

 

572,746

 

82,270

 

Net income per share attributable to ordinary shareholders of Huami Corporation

 

 

 

 

 

 

 

 

 

Basic income per ordinary share

 

0.68

 

0.54

 

2.35

 

0.34

 

Diluted income per ordinary share

 

0.65

 

0.51

 

2.24

 

0.32

 

Weighted average number of shares used in computing net income per share

 

 

 

 

 

 

 

 

 

Ordinary share - basic

 

67,777,592

 

211,873,704

 

243,648,186

 

243,648,186

 

Ordinary share - diluted

 

76,291,901

 

225,034,650

 

255,959,172

 

255,959,172

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-5


Table of Contents

 

HUAMI CORPORATION

CONSOLIDATED 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,

 

 

 

2017

 

2018

 

2019

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

(Note2)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

167,095

 

336,320

 

573,371

 

82,360

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(3,175

)

60,357

 

11,274

 

1,619

 

Unrealized gain on available-for-sale investments and others, (net of tax effect of 1,554, RMB2,250 and RMB620 for years ended December 31, 2017, 2018 and 2019, respectively)

 

9,484

 

14,684

 

2,666

 

383

 

Comprehensive income

 

173,404

 

411,361

 

587,311

 

84,362

 

Less: Net loss attributable to noncontrolling interest

 

(587

)

(3,726

)

(1,825

)

(262

)

Comprehensive income attributable to Huami Corporation

 

173,991

 

415,087

 

589,136

 

84,624

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-6


Table of Contents

 

HUAMI CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN 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

 

 

 

 

 

 

 

Shareholders’
Shares

 

Amount

 

Additional
Paid-in
Capital

 

Other
Comprehensive
Income

 

Deficit)/
Retained
Earnings

 

Shareholders’
(Deficit)/
Equity

 

Noncontrolling
Interest

 

Total 
Shareholders’
Equity

 

 

 

 

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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(“IPO”), 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

 

Exercise of option and restricted shares

 

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

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-7


Table of Contents

 

HUAMI CORPORATION

CONSOLIDATED STATEMENTS 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,

 

 

 

2017

 

2018

 

2019

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

(Note2)

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

 

 

Net income

 

167,095

 

336,320

 

573,371

 

82,360

 

Adjustment to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

 

Non-cash lease expense

 

 

 

27,683

 

3,976

 

Depreciation of property, plant and equipment

 

3,542

 

5,773

 

9,409

 

1,352

 

Amortization of intangible assets

 

175

 

443

 

7,806

 

1,121

 

Write-off of short-term loans

 

 

5,500

 

5,640

 

810

 

Impairment loss from long-term investments

 

 

7,590

 

2,600

 

373

 

Provision for excess and obsolete inventories

 

2,449

 

 

23,799

 

3,419

 

Share-based compensation

 

62,787

 

134,709

 

55,128

 

7,918

 

Loss / (gain) from equity method investment

 

(2,806

)

(1,743

)

1,112

 

160

 

Realized gain from investments

 

(2,373

)

(261

)

(1,822

)

(262

)

Loss on disposal of property, plant and equipment

 

192

 

26

 

767

 

110

 

Gain from fair value change of long-term investments

 

 

(7,860

)

 

 

Deferred income taxes

 

(18,962

)

(32,895

)

(27,800

)

(3,993

)

Others

 

 

295

 

 

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

Accounts receivable

 

(13,158

)

(26,058

)

(130,015

)

(18,675

)

Inventories

 

(57,609

)

(234,887

)

(432,983

)

(62,194

)

Prepaid expenses and other current assets

 

(32,985

)

(5,748

)

(32,444

)

(4,660

)

Amount due from related parties

 

(109,756

)

(45,116

)

(770,976

)

(110,744

)

Other non-current assets

 

 

(3,150

)

(2,678

)

(385

)

Amount due to related parties

 

(281

)

5,757

 

4,074

 

585

 

Accounts payable

 

181,628

 

356,324

 

935,845

 

134,426

 

Notes payable

 

2,581

 

13,693

 

(16,752

)

(2,406

)

Advance from customers

 

4,333

 

(4,740

)

38,850

 

5,580

 

Income tax payable

 

972

 

32,437

 

13,817

 

1,985

 

Accrued expense and other current liabilities

 

45,572

 

119,887

 

86,221

 

12,386

 

Other non-current liability

 

4,940

 

51,309

 

57,347

 

8,237

 

Net Cash provided by Operating Activities

 

238,336

 

707,605

 

427,999

 

61,479

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment

 

(21,454

)

(17,136

)

(34,276

)

(4,924

)

Prepayment for other non-current assets

 

(3,000

)

 

 

 

Purchase of intangible assets

 

(88

)

(52,017

)

(11,845

)

(1,701

)

Cash received from the disposal of property, plant and equipment

 

164

 

65

 

143

 

20

 

Purchase of term deposits

 

 

(385,028

)

 

 

Proceeds from maturity of term deposits

 

 

288,771

 

96,969

 

13,929

 

Purchase of business, net of cash acquired of RMB3,475

 

2,323

 

 

 

 

Loans provided to related parties

 

 

(5,000

)

 

 

Loans provided to third-parties

 

(12,857

)

(8,920

)

 

 

Proceeds received from loans provided to third-parties

 

1,000

 

5,578

 

6,772

 

973

 

Purchase of short-term investments

 

(6,506

)

(41,300

)

 

 

Purchase of long-term investments

 

(23,610

)

(109,854

)

(180,927

)

(25,988

)

Disposal of short-term investments

 

2,062

 

 

10,461

 

1,503

 

Disposal of long-term investments

 

23,085

 

 

 

 

Net Cash Used in Investing Activities

 

(38,881

)

(324,841

)

(112,703

)

(16,188

)

Cash Flows from Financing Activities

 

 

 

 

 

 

 

 

 

Loans repaid to related party

 

 

(3,221

)

 

 

Exercise of share options and restricted shares

 

89

 

3,486

 

933

 

134

 

Bank borrowings

 

30,000

 

20,000

 

 

 

Repayment of bank borrowing

 

(10,000

)

(30,000

)

(20,000

)

(2,873

)

Net proceeds from initial public offering

 

 

657,062

 

 

 

Repurchase of ordinary shares

 

 

(8,157

)

 

 

Net proceeds from the secondary offering

 

 

 

49,214

 

7,069

 

Deemed dividend to shareholders

 

 

 

(4,538

)

(652

)

Net Cash Provided by Financing Activities

 

20,089

 

639,170

 

25,609

 

3,678

 

Net increase in cash and cash equivalents and restricted cash

 

219,544

 

1,021,934

 

340,905

 

48,969

 

Effect of exchange rate changes

 

(3,175

)

60,357

 

11,274

 

1,619

 

Cash and cash equivalents and restricted cash at beginning of year

 

153,152

 

369,521

 

1,451,812

 

208,540

 

Cash and cash equivalents and restricted cash at end of the year

 

369,521

 

1,451,812

 

1,803,991

 

259,128

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

 

Income tax paid

 

35,892

 

52,063

 

91,732

 

13,176

 

Interest paid

 

1,997

 

1,310

 

286

 

41

 

Non-cash investing and financing activity

 

 

 

 

 

 

 

 

 

Payable for long-term investment

 

 

275

 

 

 

Payable for Intangible asset

 

 

 

16

 

2

 

Conversion from loan to long-term investment

 

8,000

 

 

 

 

Conversion from convertible bond to long-term investment

 

 

 

15,800

 

2,270

 

Non-monetary exchange of convertible bond to intangible assets

 

 

7,104

 

8,019

 

1,152

 

Non-monetary transaction of exchanging loan for Intangible assets

 

 

 

9,957

 

1,430

 

Payable for property, plant and equipment

 

264

 

15

 

351

 

50

 

Conversion of preferred shares to ordinary shares

 

 

354,212

 

 

 

Deemed dividend related to issuance of ordinary shares to preferred shareholders

 

 

209,752

 

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

F-8


Table of Contents

 

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)

 

1. ORGANAZATION AND PRINCIPAL ACTIVITIES

 

Huami 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, 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 years ended December 31, 2017, 2018 and 2019, the Group derived 78.8%, 66.9% and 72.2% of its revenue from sales of exclusively designed and manufactured smart wearable devices to one customer who is controlled by one of its shareholders.

 

As of December 31, 2019, details of the Company’s subsidiaries and VIEs were as follows:

 

 

 

Place of incorporation

 

Date of
incorporation/acquisition

 

Percentage
of ownership

Subsidiaries of the Company:

 

 

 

 

 

 

Huami HK Limited (“Huami HK”)

 

Hong Kong (“HK”)

 

December 23, 2014

 

100%

Huami, Inc. (“Huami Inc”)

 

United States of America (“U.S.”)

 

January 15, 2015

 

100%

Beijing ShunYuan KaiHua Technology Co., Ltd. (“ShunYuan”)

 

PRC

 

February 25, 2015

 

100%

Huami (Shenzhen) Information Technology Co., Ltd. (“Huami SZ”)

 

PRC

 

December 7, 2015

 

100%

Anhui Huami Intelligent Technology Co., Ltd. (“Huami Intelligent”)

 

PRC

 

December 28, 2015

 

100%

Rill, Inc. (“Rill”)

 

U.S.

 

June 16, 2016

 

100%

DingShow

 

Cayman Islands

 

October 10, 2018

 

100%

Huami Inc. Canada branch (Huami Canada)

 

Canada

 

November 2, 2018

 

100%

Bitinno Technologies Inc. (“Bitinno”)

 

U.S.

 

November 26, 2018

 

100%

Huami Investment Platform I Ltd.

 

British Virgin Islands

 

December 14, 2018

 

100%

Galaxy Trading Platform Limited (“Galaxy”)

 

HK

 

May 8, 2019

 

100%

Variable interest entities of the Company:

 

 

 

 

 

 

Anhui Huami

 

PRC

 

December 27, 2013

 

Consolidated VIE

Beijing Huami

 

PRC

 

July 11, 2014

 

Consolidated VIE

Subsidiaries of Anhui Huami:

 

 

 

 

 

 

Anhui Huami Healthcare Co., Ltd. (“Huami Healthcare”)

 

PRC

 

December 5, 2016

 

VIE’s subsidiary

Shenzhen Yunding Information Technology Co., Ltd. (“Yunding”)

 

PRC

 

July 31, 2017

 

VIE’s subsidiary

Oclean Information Technology Co., Ltd. (“Yunding HK “)

 

HK

 

March 7, 2017

 

VIE’s subsidiary

Hefei Huami Micro-electronics Co.Ltd(“Huami Micro”)

 

PRC

 

January 17, 2019

 

VIE’s subsidiary

Huami (Nanjing) Information Technology Co., Ltd. (“Huami NJ”)

 

PRC

 

July 4, 2019

 

VIE’s subsidiary

Hefei Hi-Tech Huami Intelligence Polyclinic Co. Ltd(“Huami Intelligence Polyclinic”)

 

PRC

 

July 31, 2019

 

VIE’s subsidiary

Anhui Huami Medical System Co.Ltd(“Huami Medical System”)

 

PRC

 

August 26, 2019

 

VIE’s subsidiary

Subsidiary of Beijing Huami:

 

 

 

 

 

 

Huami Beijing Medical Health Technology Co. Ltd.(“Beijing Huami Health”)

 

PRC

 

March 29, 2019

 

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 Beijing Huami and the VIEs’ subsidiaries. Since the operations of the VIEs and the VIEs’ subsidiaries 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 the VIEs and the VIEs’ subsidiaries as disclosed. Therefore, the Company aggregates disclosures related to the VIEs and the VIEs’ subsidiaries 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-9


Table of Contents

 

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)

 

1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

 

VIE Arrangements between the VIEs and the Companys 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”) 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, Beijing 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.

 

On March 20, 2020, due to the change of the nominee shareholders in the VIEs, the equity pledge agreement for Anhui Huami and Beijing Huami was amended and restated with the same terms as before. The Group has completed the registration of the equity pledge for Anhui Huami and is in the process of registering the equity pledge with the local authority for Beijing Huami. The Group has completed the registration of the equity pledge for Anhui Huami and is in the process of registering the equity pledge with the local authority for Beijing Huami.

 

F-10


Table of Contents

 

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)

 

1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

 

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 product 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.

 

On March 20, 2020, due to the change of the nominee shareholders in the VIEs, the exclusive purchase option agreement of Anhui Huami and Beijing Huami was amended and restated with the same terms as before.

 

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.

 

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.

 

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.

 

F-11


Table of Contents

 

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)

 

1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

 

Risks in relation to VIE structure - continued

 

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 28.1% of the total common shares as of December 31, 2019. 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.

 

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 amounts and balances of the VIEs were included in the accompanying consolidated financial statements after the elimination of intercompany balances and transactions within the Group:

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Total current assets

 

2,202,009

 

3,828,544

 

Total non-current assets

 

191,522

 

466,774

 

Total assets

 

2,393,531

 

4,295,318

 

Total current liabilities

 

1,329,010

 

2,361,906

 

Total non-current liabilities

 

61,211

 

183,295

 

Total liabilities

 

1,390,221

 

2,545,201

 

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

Revenues

 

2,042,640

 

3,638,560

 

5,801,405

 

Net income

 

327,101

 

643,239

 

987,672

 

 

F-12


Table of Contents

 

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)

 

1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

 

Risks in relation to VIE structure - continued

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

248,642

 

712,210

 

478,806

 

Net cash used in investing activities

 

(19,643

)

(72,862

)

(126,887

)

Net cash provided by financing activities

 

20,000

 

(13,221

)

(20,000

)

 

The intercompany payable between Anhui Huami and Shunyuan were RMB68,713 and RMB43,971 as of December 31, 2018 and 2019, respectively. Those were eliminated by the Company upon consolidation.

 

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.

 

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.

 

F-13


Table of Contents

 

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

 

Fair value - continued

 

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.

 

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 securities at fair value on a recurring basis as of December 31, 2018 and 2019.

 

Measured fair value on a nonrecurring basis

 

The Group measured the fair value of the intangible assets acquired through non-monetary exchange at fair value. The fair values was 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% and 19% as of the valuation date during 2018 and 2019 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, 2017, 2018 and 2019.

 

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 goodwill 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. The Group did not recognize any impairment loss related to goodwill during the year ended December 31, 2017, 2018 and 2019.

 

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. During the years ended December 31, 2017, 2018 and 2019, the Group recognized impairment losses of nil, nil and RMB2,382 related to equity investments without readily determinable fair value.

 

F-14


Table of Contents

 

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

 

Fair value of financial instruments

 

The Group’s financial instruments consist primarily of cash and cash equivalents, restricted cash, term deposit, accounts receivable, amount due from related parties, available-for-sale securities investments, accounts payable, notes payable, short-term bank borrowing, amount due to related parties and noncurrent operating lease liabilities. 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, 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.

 

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 requires the Group to make a deposit for 40% or 60% of the face value of the bank acceptance notes issued as collateral. The deposits for unsettled bank acceptance notes are recorded as restricted cash in the consolidated balance sheet as of December 31, 2018 and 2019.

 

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. As of December 31, 2018 and 2019, the Company recorded nil allowance for doubtful account.

 

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, 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, 2017, 2018 and 2019, inventory provision amounted to RMB2,449, nil and RMB23,799, respectively.

 

F-15


Table of Contents

 

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

 

Short-term investments

 

Short-term investments are mainly consisting 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.

 

Prepaid expenses and other current assets

 

Prepaid expenses and other current assets primarily consist of advance to suppliers, prepaid expenses, other receivables and value-added tax receivables.

 

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

 

Intangible assets, net

 

Acquired intangible assets other than goodwill consist of the domain name for the Company’s 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 values of 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.

 

The 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 9 to10 years.

 

Leases

 

The Group leases administrative office spaces in different cities in the PRC and Overseas 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 initial direct costs it incurs under the lease. The Group begins recognizing operating lease expense when the lessor makes the underlying asset available to the Group. The Group’s leases have remaining lease terms of up to five 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.

 

F-16


Table of Contents

 

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

 

Leases - continued

 

For short-term leases, the Group records operating lease expense 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.

 

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’s business, estimation of the useful life over which cash flows will occur, and determination of the Group’s weighted average cost of capital. 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.

 

The Group performs 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 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 is recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

 

During the years ended December 31, 2017, 2018 and 2019, the Group recognized nil impairment loss on goodwill.

 

Long-term investments

 

The Group’s long-term investments consist of equity securities without readily determinable fair value, equity method investments and available-for-sale securities investments.

 

(a)         Equity securities without readily determinable fair value

 

On January 1, 2018, the Group adopted Accounting Standards Update (“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. Prior to 2018, for investee companies over which the Group does 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.

 

F-17


Table of Contents

 

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

 

Long-term investments - continued

 

(a)         Equity securities without readily determinable fair value - continued

 

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, the operating performance of the companies including current earning trends and other company specific information. During the years ended December 31, 2017, 2018 and 2019, the Group recorded nil, nil and RMB2,382 impairment losses on its equity securities without readily determinable fair values.

 

(b)         Equity Method Investments

 

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 “income/(loss) 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. 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’s business, the estimation of the useful life over which cash flows will occur, and the determination of the weighted average cost of capital. The Group recorded nil, RMB4,133 and RMB218 impairment losses on its equity method investments during the years ended December 31, 2017, 2018 and 2019.

 

(c)          Available-for-sale Investments

 

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, RMB3,457 and nil impairment losses on its available- for-sale investments during the years ended December 31, 2017, 2018 and 2019, respectively.

 

F-18


Table of Contents

 

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

 

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

 

(a)         Periods after January 1, 2018

 

On January 1, 2018, the Group adopted 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.  The Group recorded an increase to retained earnings and amount due from related parties of RMB33,329 as of January 1, 2018 due to the cumulative impact of adopting Topic 606.

 

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 year ended December 31, 2018 and 2019, the Group generated 66.9% and 72.2% of revenue from one customer for sales of exclusively designed and manufactured smart wearable devices, and generated 33.1% and 27.8% of revenue from sales of the Group’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”).

 

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.

 

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 behaviours 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 RMB1.77 to RMB5.68 per unit and RMB1.72 to RMB10.62 per unit for the year ended December 31, 2018 and 2019. The Group recognizes revenue for the amounts allocated to the connected smart and wearable devices when the customer obtains control of the Group’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 year ended December 31, 2018 and 2019, the Group generated 33.1% and 27.8% 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.

 

F-19


Table of Contents

 

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

 

Cooperation agreement with one customer

 

For the year ended December 31, 2018 and 2019, the Group generated 66.9% and 72.2% 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 controlled by one of our shareholders (see Note 20). 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 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’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.

 

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’s 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 the Group’s estimates. If actual results in the future vary from the Group’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, the Group 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.

 

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.

 

F-20


Table of Contents

 

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

 

(b)         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 RMB1.30 to RMB 5.69 per unit for the years ended December 31, 2017. 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, 2017, the Group generated 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, 2017, the Group generated 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 controlled by one of our shareholders (see Note 20). 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-21


Table of Contents

 

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” 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 taxpayers 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, 2017, 2018 and 2019, sales returns were insignificant.

 

Cost of revenues

 

Cost of revenues consists primarily of material costs, salaries and benefits for staff engaged in production activities and related expenses which 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 warranty to that customer and an additional 12 months warranty to end-users. For products sold directly to end users, the warranty period is 12 months. The Group has the obligation, at customers’ 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.

 

Research and development expenses

 

Research and development expenses primarily consist of salaries and benefits for research and development personnel, materials, office rental expense, general expenses and depreciation expenses associated with research and development activities.

 

Advertising expense

 

Advertising expense are expensed as incurred and included in selling and marketing expenses. Total advertising expenses were RMB7,586 , RMB25,362 and RMB72,269 for the years ended December 31, 2017, 2018 and 2019, respectively.

 

Government subsidies

 

Government subsidies represent government grants received from local government authorities to encourage the Group’s technology and innovation. The Group records such government subsidies as other income when it has fulfilled all of its obligation related to the subsidy.

 

During the years ended December 31, 2017, 2018 and 2019, the Group recognized RMB6,719, RMB9,679 and RMB14,723 as subsidy income, respectively. As of December 31, 2018 and 2019, subsidies of RMB8,888 and RMB26,098 were recorded as other current liabilities, RMB56,249 and RMB113,596 were recorded as other non-current liabilities as the Group has to meet certain performance conditions required by the government authorities.

 

F-22


Table of Contents

 

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

 

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.

 

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.

 

Share-based payment

 

Share-based payment transactions with employees, such as share options 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.

 

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 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, 2017, 2018 and 2019, the transaction gains/(losses) amounted to RMB779 , RMB(7,588) and RMB(14,231) and were recorded in general and administrative expenses.

 

F-23


Table of Contents

 

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

 

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 RMB513,526 and RMB717,576 as of December 31, 2018 and 2019, 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, 2019 is solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.9618, representing the rate as certified by the statistical release of the Federal Reserve Board of United States on December 31, 2019. 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, 2019, or at any other rate.

 

Net income per share

 

Basic net income per ordinary share is computed by dividing net income 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 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 which could potentially dilute basic income per ordinary share in the future. To calculate the number of shares for diluted income per ordinary shares, the effect of the convertible redeemable participating preferred shares is computed using the as-if-converted method; the effect of the share options, restricted shares and restricted stock units 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. 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-24


Table of Contents

 

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

 

Accounts receivable concentration of credit risk is as below:

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Company A

 

10,600(18.0

)%

13,495(7.1

)%

Company B

 

25,264(42.9

)%

50,567(26.8

)%

Company C

 

 

80,024(42.4

)%

Total

 

35,864(60.9

)%

144,086(76.3

)%

 

Amount due from related parties concentration of credit risk is as below:

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Company D

 

631,204(96.2

)%

1,401,015(98.6

)%

Total

 

631,204(96.2

)%

1,401,015(98.6

)%

 

Revenue generated from Company D accounted for 86.6%,76.8% and 73.5% of total revenue during the year ended December 31, 2017, 2018 and 2019, respectively. Company D is subsidiary of a company controlled by one of the Group’s shareholders (see note 20).

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

Company D

 

1,773,595(86.6

)%

2,798,824(76.8

)%

4,271,135(73.5

)%

Total

 

1,773,595(86.6

)%

2,798,824(76.8

)%

4,271,135(73.5

)%

 

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 year ended December 31, 2018, 38.6% of its raw materials were purchased through Company E and for the year ended December 31, 2019, 13.5% and 10.5% of its raw materials were purchased through Company F and G, respectively, but numerous alternate sources of supply are readily available on comparable terms.

 

F-25


Table of Contents

 

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

 

Newly adopted accounting pronouncements

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”), which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The FASB subsequently issued Accounting Standards Update No. 2018-10 and Accounting Standards Update No. 2018-11 in July 2018, which provide clarifications and improvements to ASU 2016-02 (collectively, the “new lease standard”). Accounting Standards Update No. 2018-11 also provides the optional transition method which allows companies to apply the new lease standard at the adoption date instead of at the earliest comparative period presented. The new lease standard requires lessees to present a right-of-use asset and a corresponding lease liability on the balance sheet.

 

The Group adopted the new lease standard as of the beginning of the 2019 fiscal year using the optional transition method. The Group did not have a cumulative effect adjustment to retained earnings as a result of adopting the new lease standard and did not have a material impact on the Group’s Consolidated Statements of Operations or Consolidated Statements of Cash Flows in future periods. The Group elected the package of transitional practical expedients upon adoption which, among other provisions, allowed the Group to carry forward historical lease classification. Refer to Note 22 for further information on leases.

 

Recent accounting pronouncements not yet adopted

 

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. This 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 15, 2018.  The Group is currently assessing the impact this guidance will have on its consolidated financial statements.

 

In January 2017, the FASB issued ASU 2017-04, addressing concerns regarding the cost and complexity of the two-step goodwill impairment test, 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 amendments are effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2019. For public entities, the ASU’s amendments are effective for annual and interim goodwill impairment tests in fiscal years beginning after December 15, 2020. For all other entities, including not-for-profit entities, the ASU’s amendments are effective for annual and interim 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 adoption of this standard is not expected to have a material impact on the Group’s 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 adoption of this standard is not expected to have a material impact on the Group’s consolidated financial statements.

 

In October 2018, the FASB issued ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to the Related Party Guidance for Variable Interest Entities. ASU 2018-17 changes how entities evaluate decision-making fees under the variable interest entity guidance. To determine whether decision-making fees represent a variable interest, an entity considers indirect interests held through related parties under common control on a proportional basis, rather than in their entirety. This guidance will be adopted using a retrospective approach and is effective for the Group on January 1, 2020. The Group is in the process of evaluating the impact of the adoption of this pronouncement on its consolidated financial statements.

 

F-26


Table of Contents

 

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)

 

3. INVENTORIES, NET

 

Inventories consisted of the following:

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Raw materials

 

191,242

 

275,583

 

Work in process

 

33,714

 

176,417

 

Finished goods

 

259,666

 

441,806

 

Inventories, net

 

484,622

 

893,806

 

 

During the years ended December 31, 2017, 2018 and 2019, the Group recorded a provision for the excess and obsolete inventories amounting to RMB2,449, nil and RMB23,799 and wrote off nil, nil and RMB17,739, respectively.

 

4. SHORT-TERM INVESTMENTS

 

Short-term investments included convertible bonds with maturities less than 1 year and consisted of the following:

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

Convertible bonds:

 

 

 

 

 

Shenzhen Snowball Technology Co., Ltd (“Snowball) (a)

 

16,243

 

 

Guangzhou Joyrun Technology Co., Ltd (“Joyrun) (b)

 

10,751

 

11,591

 

Abee Semi, Inc.(“Abee”) (c)

 

8,097

 

 

Others (d)

 

15,391

 

5,596

 

Total:

 

50,482

 

17,187

 

 


(a)                  In June 2018, the Group invested RMB20,000 to acquire a convertible bond from Snowball. The convertible bond includes a 4.35% interest rate and has one-year maturity. As part of the agreement, the Group also received two years of free services related to the connection to the city transportation system for the Amazfit NFC products from Snowball. The fair value of the service is insignificant and is amortized over the service period. Unrealized gains of RMB443 arise from fair value change of the investment was reported in other comprehensive income during the year ended December 31, 2018. During the year ended December 31, 2019, the Group converted the bond to equity interests in Snowball and recognized the investment as an equity security without readily determinable fair value.

(b)                  In September 2018, the Group invested RMB10,500 to acquire a convertible bond issued by Joyrun with a 8% interest rate and a one-year maturity. The investment was classified as an available-for-sale investment and measured at fair value. The Group recognized RMB251 and RMB840 unrealized holding gains in other comprehensive income from the fair value changes in the investment during the years ended December 31, 2018 and 2019.

(c)                   In June 2016, the Group invested RMB6,937 to acquire a convertible bond from Abee. The convertible bond includes a 7% interest rate and has one year maturity. In June 2017, the Group agreed to extend the maturity date for one additional year. The investment was classified as an available-for-sale investment and measured at fair value. During the year ended December 31, 2019, the Group exchanged its convertible bond amounting to RMB8,019 and a previously issued short-term loan issued to Abee amounting to RMB9,957 for certain patents used to facilitate its new product development. The patents were recorded at fair value in the Group’s consolidated balance sheet. The gain from this non-monetary exchange was immaterial.

(d)                  The others represent several insignificant short-term investments in convertible bonds which are classified as available-for-sales investments and measured at fair value. The Group recognized RMB391 and RMB400 unrealized gains from these investments in 2018 and 2019.

 

F-27


Table of Contents

 

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)

 

5. PREPAID EXPENSES AND OTHER CURRENT ASSETS

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Value-added tax

 

19,542

 

43,595

 

Other receivables

 

8,049

 

10,252

 

Prepaid expenses

 

3,264

 

9,595

 

Short-term loans

 

14,559

 

 

Advances to suppliers

 

8,359

 

2,129

 

Rental deposits

 

4,474

 

1,787

 

Total

 

58,247

 

67,358

 

 

6. PROPERTY, PLANT AND EQUIPMENT, NET

 

Property, plant and equipment, net consisted of the following:

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Software and electronic equipment

 

14,453

 

36,283

 

Buildings

 

19,342

 

19,342

 

Leasehold improvements

 

10,404

 

26,744

 

Total

 

44,199

 

82,369

 

Less: accumulated depreciation

 

(12,029

)

(21,438

)

Construction in progress

 

7,872

 

3,419

 

Property, plant and equipment, net

 

40,042

 

64,350

 

 

The Group has recorded depreciation expenses of RMB3,542, RMB5,773 and RMB9,409 during the years ended December 31, 2017, 2018 and 2019, respectively. No impairment was recorded during the years ended December 31, 2017, 2018 and 2019.

 

7. INTANGIBLE ASSETS, NET

 

Intangible assets, net, consisted of the following:

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

Intangible assets with indefinite lives:

 

 

 

 

 

Domain name

 

1,222

 

2,024

 

Intangible assets with finite lives:

 

 

 

 

 

Patents

 

63,130

 

92,165

 

Less: accumulated amortization

 

(630

)

(8,436

)

Intangible assets, net

 

63,722

 

85,753

 

 

During 2018, the Group purchased patents from Physical Enterprises Inc. (“PEI”) for a total cash consideration of RMB51,470. The Group acquired the patents for the purpose of facilitating their new product development.

 

During the year ended December 31, 2019, the Group exchanged its convertible bond and short-term loan to one of its investee and acquired certain patents to facilitate its new product development. Refer to Note 4(c).

 

Amortization expenses for the intangible assets for the years ended December 31, 2017, 2018 and 2019, were RMB175, RMB443 and RMB7,806, respectively. Future amortization expense relating to the existing intangible assets amounted to RMB9,304 per year for each of the next five years and thereafter.

 

F-28


Table of Contents

 

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)

 

8. LONG-TERM INVESTMENTS

 

Long-term investments consisted of the following:

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Equity securities without readily determinable fair value

 

 

 

 

 

Sifive, Inc. (“Sifive”) (a)

 

20,192

 

20,445

 

Greenwaves Technologies (“Greenwaves”) (b)

 

19,906

 

20,156

 

Morsel,Inc.(“Morsel”) (c)

 

 

20,885

 

Shenzhen Snowball Technology Co., Ltd (“Snowball) (d)

 

 

15,800

 

Other equity securities without readily determinable fair value (e)

 

16,501

 

14,292

 

Equity method investments:

 

 

 

 

 

Hefei Huaying Xingzhi Fund Partnership (limited partnership) (“Huaying Fund”) (f)

 

56,898

 

55,557

 

Anhui Huaying Zhihui Wulian Fund Parnership(limited partnership)(“Huaying Fund II”) (g)

 

 

102,336

 

Global Technology and Innovation Ltd. (“GTI) (h)

 

 

93,289

 

Other equity method investments (i)

 

11,283

 

14,165

 

Available-for-sale investments

 

 

 

 

 

Sunny Infinity Ltd. (“Sunny”) (h)

 

49,091

 

 

Other available-for-sale investments (j)

 

35,078

 

49,174

 

Total

 

208,949

 

406,099

 

 


(a)                  In 2018, the Group invested RMB12,332 to acquire 1.01% equity interests in Sifive. Sifive is a private company engaging in the business of semiconductor. The equity interest is not considered in-substance common shares due to substantial liquidation preference rights. Accordingly, the investment in Sifive was accounted for as equity securities without readily determinable fair value. The Group recognized a RMB7,860 and nil gain from the fair value change of this investment during the years ended December 31, 2018 and 2019.

(b)                  In 2018, the Group invested RMB19,906 to acquire 8.33% equity interests in Greenwaves. Greenwaves is a private company engaging in the business of semiconductor. The equity interest is not considered in-substance common shares due to substantial liquidation preference rights. Accordingly, the investment in Greenwaves was accounted for as equity securities without readily determinable fair value. For the years ended 2018 and 2019, no fair value change were observed and recognized.

(c)                   In 2019, the Group invested USD3,500 to acquire 13.4% equity interests in Morsels. Morsels is a private company engaging in the business of mobile fitness. The investment included 11.3% equity interests with liquidation preference rights and 2.1% equity interests without liquidation preference. The Group accounted for the 11.3% equity interests as equity securities without readily determinable fair value as the liquidation preference is substantial, and accounted for the other 2.1% equity interests under the equity method since Group enjoys a board seat in Morsel and concluded that it has significant influence over Morsel. The income from the equity method investment was immaterial for the year ended December 31, 2019.

(d)                  In 2019, the Group converted its convertible bond issued to Snowball to a 4.3% equity interests. The equity interest is not considered in-substance common shares due to substantial liquidation preference rights owned by the Group. Accordingly, the investment in Snowball was accounted for as equity securities without readily determinable fair value.

(e)                   The other investments represent certain insignificant investments in third-party private companies, which the Group has no significant influence over the investees and accounted for these investments using the measurement alternative method.

(f)                    In 2016, the Group invested RMB50,000 to acquire a 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 under the equity method because the investments are of common stock and the Group has significant influence through its board seat but does not control Huaying Fund I.

(g)                   In 2019, the Group invested RMB102,000 to acquire a 34% equity interests in a limited partnership, Huaying Fund II, a fund engaged in investing activities in small and middle scale High Tech private companies. The Group accounted for the investment under the equity method because the investments are of common stock and the Group has significant influence through its board seat but does not control Huaying Fund II.

(h)                  In 2018, the Group acquired a 23% equity interest in Sunny for a total consideration of RMB49,091. The Group accounted for its investment as an available-for-sale investment as it determined that the interests were debt security due to its redemption feature and subsequently measured its investment at fair value. In January 2019, the Group lost its redemption right and reclassified its investment to the equity method investment as it concluded that it was able to significantly influence the investee. The Group’s unrealized gain and loss at the time of transfer was immaterial. In 2019, the Group subscribed for additional equity interest for a total consideration of RMB43,302. Additionally, in November 2019, Sunny completed a restructuring and became an investment vehicle of GTI, a fund established for the sole purposes of making investments in certain start-up and early stage companies in the technology industry. The Group’s investment in Sunny was further transferred to GTI as part of this restructuring and continued to be accounted for as equity method investment.

(i)                      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 investees.

(j)                     The other available-for-sale investments represent the investments in debt securities and measured at fair value, which mainly include the investments in convertible bonds and the investments with redemption features.

 

F-29


Table of Contents

 

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)

 

9. FAIR-VALUE MEASUREMENT

 

As of December 31, 2018 and 2019, the financial assets and liabilities measured at fair value on a recurring basis mainly consist of the available-for-sale investments, which includes the 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, 2018 and 2019 are as follows:

 

 

 

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

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Convertible bonds

 

 

50,482

 

 

50,482

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Redeemable preferred shares

 

 

84,169

 

 

84,169

 

Total:

 

 

134,651

 

 

134,651

 

 

 

 

As of December 31, 2019

 

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

 

Short-term investments:

 

 

 

 

 

 

 

 

 

Convertible bonds

 

 

17,187

 

 

17,187

 

Long-term investments:

 

 

 

 

 

 

 

 

 

Convertible bonds

 

 

6,962

 

 

6,962

 

Redeemable preferred shares

 

 

42,212

 

 

42,212

 

Total:

 

 

66,361

 

 

66,361

 

 

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. Recent transactions include the purchase price agreed by an independent third party for an investment with similar terms. These investments are classified as level 2 measurement.

 

No transfers occurred between different level fair-value measurements during the years presented.

 

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 categorised as level 2 in the fair value hierarchy when directly or indirectly observable inputs in the market place was identified. When evaluating the impairment of these investments, inputs considered primarily include pricing of recent rounds of financing, future cash flow forecasts, liquidity factors, discount rate, and the selection of comparable companies operating in similar businesses and were categorized as Level 3 in the fair value hierarchy. During the years ended December 31, 2017, 2018 and 2019, the Group recognized an impairment loss of nil, nil and RMB2,382 for the equity securities without readily determinable fair value.

 

F-30


Table of Contents

 

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)

 

10. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Accrued payroll and welfare

 

83,925

 

120,256

 

Deferred revenue

 

41,863

 

59,585

 

Product warranty

 

55,599

 

49,527

 

Current operating lease liabilities

 

 

32,799

 

Accrued professional fee

 

3,945

 

19,194

 

Accrued expenses

 

6,107

 

17,688

 

Other tax payable

 

4,727

 

16,613

 

Other current liabilities

 

17,809

 

36,587

 

Total

 

213,975

 

352,249

 

 

Product warranty activities were as follows:

 

Product Warranty

 

RMB

 

 

 

 

 

Balance as of January 1, 2017

 

4,870

 

Provided during the year

 

23,093

 

Utilized during the year

 

(19,532

)

Balance at December 31, 2017

 

8,431

 

Provided during the year

 

68,866

 

Utilized during the year

 

(21,698

)

Balance at December 31, 2018

 

55,599

 

Provided during the year

 

80,048

 

Utilized during the year

 

(86,120

)

Balance at December 31, 2019

 

49,527

 

 

The warranty costs recorded in cost of revenue were RMB23,093, RMB68,866 and RMB80,048 during the years ended December 31, 2017, 2018 and 2019, respectively.

 

11. BANK BORROWING

 

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%. On April 3, 2019, the loan was fully repaid by the Group.

 

F-31


Table of Contents

 

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)

 

12. REVENUE AND DEFERRED REVENUES

 

Disaggregation of revenue

 

All the revenues for the period was recognized from contracts with customers. For the year ended December 31, 2019, the majority of the Group’s revenues result from sales of products which revenue is 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 segments

 

 

 

For the years ended December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

 

 

 

 

 

 

Xiaomi Wearable Products

 

2,439,534

 

4,193,665

 

Self-branded products and other

 

1,205,801

 

1,618,590

 

Total

 

3,645,335

 

5,812,255

 

 

During the years ended December 31, 2018 and 2019, the majority of the Group’s products are sold to resellers and distributors in the PRC. This includes our products that have international versions which are first sold to the Group’s domestic distributors who subsequently distribute those products internationally.

 

Contract balances

 

The following table provides information about receivables, deferred revenue and refund liability from contracts with customers

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

Accounts Receivables

 

58,925

 

188,940

 

Amounts due from related parties

 

656,399

 

1,421,170

 

Deferred revenue

 

41,863

 

59,585

 

Refund liability (sales return)

 

153

 

582

 

 

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 and unbilled due from related party under the cooperation agreement. As of December 31, 2018 and 2019, the amount due from related parties include the billed amount of RMB623,120 and RMB1,318,483, and unbilled amounted to RMB33,279 and RMB102,687, 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 no impairment charges related to contract assets in the periods. Contract liabilities, recorded in accrued expenses in the consolidated balance sheet, 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.

 

During the years ended December 31, 2018 and 2019, the Group recognized RMB17,876 and RMB41,863 of revenue previously included in deferred revenue as of January 1, 2018 and 2019, which mainly consist of revenue recognized related to its service subscription. Additionally, during the year ended December 31, 2018 and 2019, the Group billed RMB33,329 and RMB 33,279 to a related party, 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’s contract liabilities primarily results from the timing difference between the Group’s performance and the customer’s payment.

 

F-32


Table of Contents

 

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)

 

13. INCOME TAXES

 

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 Huami HK Limited, Yunding HK and Galaxy are located in HK and are subject to a two-tiered income tax rates for taxable income earned in HK with effect from April 1, 2018. The first HK$2 million of profits earned by Huami HK, HK Yunding and Galaxy will be taxed at 8.25%, while the remaining profits will continue to be taxed at the existing 16.5% tax rate.

 

The Company’s subsidiaries, Huami Inc, Rill and Bitinno 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 in income tax rate from 35% before January 1, 2018 to 21% after January 1, 2018 for tax and income earned as determined in accordance with the relevant tax rules and regulations.

 

The Company’s subsidiaries Huami Canada are subject to the Canada federal income tax and will be taxed at 15% for its taxable income.

 

The Company’s PRC subsidiaries, the VIEs and VIEs’ subsidiaries are subject to the 25% standard enterprise income tax rate except for Anhui Huami that qualify as a high and new technology enterprise (“HNTE”), which is subject to a tax rate of 15%. Anhui Huami began to qualify as HNTE in 2015 and renewed the HNTE certificate in July 2018. Accordingly Anhui Huami was subject to a tax rate of 15% during the years ended December 31, 2017, 2018 and 2019.

 

The current and deferred components of income taxes appearing in the consolidated statements of operation are as follows:

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

Current tax expenses

 

46,573

 

84,931

 

105,663

 

Deferred tax benefits

 

(18,962

)

(32,895

)

(27,776

)

Income tax expense

 

27,611

 

52,036

 

77,887

 

 

The significant components of the Group’s deferred tax assets were as follows:

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

Deferred tax assets

 

 

 

 

 

Accrued expenses

 

28,585

 

50,644

 

Net operating loss carry forwards

 

46,447

 

53,989

 

Total deferred tax assets

 

75,032

 

104,633

 

Less: valuation allowance

 

 

(1,984

)

Deferred tax assets, net

 

75,032

 

102,649

 

 

F-33


Table of Contents

 

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)

 

13. INCOME TAXES - CONTINUED

 

As of December 31, 2019, the Group had RMB229,660 operating losses deriving from entities in the PRC, HK, U.S. and Canada. The operating loss in PRC with amount of RMB164,694 can be carried forward for five years and if not utilized, some will begin to expire in 2020. The operating loss incurred in the U.S. before December 31, 2017 can be carried forward for 20 years to offset future taxable profit, while other losses incurred after December 31, 2017 may be carried forward indefinitely. The tax losses incurred in HK can be carried forward without an expiration date. The operating loss incurred in the Canada can be carried back 3 years and forward 20 years for deduction against any form of income.

 

Management assesses the available positive and negative evidence in certain entities in the PRC, HK, U.S. and Canada 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’s experience with tax attributes expiring unused and tax planning alternatives. The Group’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, 2018 and 2019, the Company recorded nil and RMB1,984 allowance for the deferred tax assets.

 

Reconciliation 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 were as follows:

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

Income before income tax

 

191,900

 

386,613

 

652,370

 

Tax expense at PRC enterprise income tax rate of 25%

 

47,975

 

96,653

 

163,093

 

Income tax on tax holidays

 

(30,740

)

(58,327

)

(72,396

)

Tax effect of permanence differences

 

(8,190

)

(22,733

)

(31,088

)

Effect of income tax rate differences in jurisdictions other than the PRC

 

14,364

 

36,443

 

16,270

 

Change in tax rate

 

4,202

 

 

 

Changes in valuation allowances

 

 

 

2,008

 

Income tax expense

 

27,611

 

52,036

 

77,887

 

 

If the tax holiday granted to Anhui Huami was not available, the Group’s income tax expense would have increased by RMB30,740, RMB58,327 and RMB72,396, the basic net income per share attributable to the ordinary shareholders of the Company would have decreased by RMB0.45, RMB0.28 and RMB0.30 during the years ended December 31, 2017, 2018 and 2019, respectively, and the diluted net income per share attributable to the ordinary shareholders of the Company would have decreased by RMB0.45, RMB0.26 and RMB0.28 during the years ended December 31, 2017, 2018 and 2019, respectively.

 

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’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

 

F-34


Table of Contents

 

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)

 

13. INCOME TAXES - CONTINUED

 

Aggregate undistributed earnings of the Company’s PRC subsidiaries and VIEs that are available for distribution amounted to RMB860,613 and RMB1,559,898 as of December 31, 2018 and 2019, 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, no 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, 2017, 2018 and 2019, 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.

 

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$14 (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.

 

14. ORDINARY SHARES

 

The Company’s Amended and Restated Certificate of Formation authorizes the Company to issue 405,462,685 ordinary shares with a par value of US$0.0001 per share approximately.

 

In February 2018, the Group completed its IPO upon which the Group’s ordinary shares were 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. The 41,600,000 shares issued through the IPO were classified as Class A ordinary shares and the ordinary shares before the IPO were converted to class B ordinary shares. All of the Group’s preferred shares were automatically converted into 94,537,315 Class B ordinary shares, in which 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. As of December 31, 2018, there were 57,303,093 Class A ordinary shares and 184,376,679 Class B ordinary shares issued and outstanding.

 

In April 2019, the Group completed its secondary offering upon which 3,174,600 class A ordinary shares were issued and 28,316,400 Class B ordinary shares were converted into Class A ordinary shares. As of December 31, 2019, there were 91,459,708 Class A and 156,060,279 Class B ordinary shares issued and outstanding.

 

F-35


Table of Contents

 

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)

 

15. SHARE-BASED PAYMENT

 

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, 2019 is presented below:

 

 

 

Number of shares

 

 

 

 

 

Outstanding at January 1, 2019

 

11,391,791

 

Granted

 

 

Forfeited

 

 

Vested

 

(11,391,791

)

Outstanding at December 31, 2019

 

 

 

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 21 for details.

 

During the years ended December 31, 2017, 2018 and 2019, the Group recorded share-based compensation expense of RMB51,463, RMB55,311 and RMB17,794 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, 2017, 2018 and 2019, the Group granted 1,545,688, nil 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, 40,449 and RMB1,194 share-based compensation expense for the years ended December 31, 2017, 2018 and 2019 related to such options, respectively.

 

F-36


Table of Contents

 

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)

 

15. SHARE-BASED PAYMENT - CONTINUED

 

Share options - continued

 

During the years ended December 31, 2017, 2018 and 2019, the Group granted 500,000, nil 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.

 

2018 Share Incentive Plan

 

In January 2018, The Company adopted the 2018 share incentive plan (“2018 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. 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.

 

During the year ended December 31, 2018 and 2019, the Group granted 6,988,469 and 651,000 share options to certain personnel under the 2018 Plan. The weighted average exercise price of options granted during the years ended December 31, 2018 and 2019 was US$0.35 per share and US$0 per share. During the year ended December 31, 2018 and 2019, the Group has recorded RMB9,523 and RMB32,424 share-based compensation expense for such options, 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, 2017, 2018 and 2019 are summarized in the following table:

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

2.2

%

2.04%-2.83

%

2.14

%

Expected volatility

 

49.0

%

36%-52.5

%

50.4

%

Expected life of option (years)

 

9.76-10

 

1-10

 

10

 

Expected dividend yield

 

0.0

%

0.0

%

0.0

%

Fair value per ordinary share

 

12.56

 

15.03-16.85

 

12.65

 

 

(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.

 

F-37


Table of Contents

 

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)

 

15. SHARE-BASED PAYMENT - CONTINUED

 

Share options - continued

 

(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 and 2019, 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, 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.

 

A summary of the stock option activity under the 2015 and 2018 Plan during the year ended December 31, 2019 is included in the table below.

 

 

 

Options granted
Share Number

 

Weighted average
exercise price
per option

 

 

 

 

 

US$

 

 

 

 

 

 

 

Outstanding at January 1, 2019

 

13,343,230

 

0.23

 

Granted

 

651,000

 

 

Exercised

 

(694,735

)

0.19

 

Cancelled and forfeited

 

(1,253,259

)

 

Outstanding at December 31, 2019

 

12,046,236

 

0.24

 

 

The following table summarizes information regarding the share options as of December 31, 2019:

 

 

 

December 31, 2019

 

 

 

Options Number

 

Weighted-
average exercise
price per option

 

Weighted-
average remaining
exercise
contractual
life (years)

 

Aggregate
intrinsic value

 

 

 

US$

 

US$

 

 

 

 

 

Options

 

 

 

 

 

 

 

 

 

Outstanding

 

12,046,236

 

0.24

 

7.45

 

33,279

 

Exercisable

 

6,580,899

 

0.19

 

6.55

 

18,536

 

Expected to vest

 

5,465,337

 

0.31

 

8.52

 

14,743

 

 

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.

 

The total intrinsic value of options exercised during the years ended December 31, 2017, 2018 and 2019 amounted RMB1,695, RMB6,858 and RMB13,608, respectively.

 

The weighted average grant date fair value of options granted during the year ended December 31, 2017, 2018 and 2019 was RMB11.22, RMB15.12 and RMB12.65 per share, respectively.

 

F-38


Table of Contents

 

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)

 

15. SHARE-BASED PAYMENT - CONTINUED

 

Share options - continued

 

During the years ended December 31, 2017, 2018 and 2019, the Group recorded share-based compensation expense of RMB4,713, RMB49,972 and RMB33,618 for the options granted under the 2015 Plan and 2018 Plan.

 

As of December 31, 2019, there was RMB50,041 of unrecognized compensation expenses related to the options.

 

Restricted Share

 

On October 21, 2015, the Company granted 4,740,777 restricted shares under the U.S. Plan to employees at 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 the 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 non-vested shares 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). The total fair value of the vested shares for the years ended December 31, 2017, 2018 and 2019 were RMB6,165, RMB6,165 and RMB2,758, respectively.

 

As of December 31, 2019, there was nil unrecognized compensation cost.

 

A summary of the restricted share activity for the year ended December 31, 2017, 2018 and 2019 is presented below:

 

 

 

Restricted Shares

 

 

 

 

 

Outstanding at January 1, 2017

 

3,228,278

 

Vested

 

1,150,718

 

Outstanding at December 31, 2017

 

2,077,560

 

Cancelled and forfeited

 

411,930

 

Vested

 

1,150,718

 

Outstanding at December 31, 2018

 

514,912

 

Cancelled and forfeited

 

 

Vested

 

514,912

 

Outstanding at December 31, 2019

 

 

 

During the years ended December 31, 2017, 2018 and 2019, the Group recorded compensation expense of RMB6,611, RMB3,992 and RMB118 for the restricted shares, respectively.

 

F-39


Table of Contents

 

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)

 

15. SHARE-BASED PAYMENT - CONTINUED

 

Restricted Stock Units

 

During the year ended December 31, 2017, 2018 and 2019, the Company granted 1,700,000, 658,056 and 30,000 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. The outstanding restricted stock units 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 stock units at grant dates was RMB42,092. The fair values of non-vested shares are measured at the fair value of the Company’s ordinary shares on the grant-date which were RMB11.38, RMB15.87 and RMB15.71 during the years ended December 31, 2017, 2018 and 2019.

 

During the years ended December 31, 2017, 2018 and 2019, the Group recorded compensation expense of nil, RMB25,434 and RMB3,598 for the restricted stock units, respectively.

 

As of December 31, 2019, there was RMB5,688 unrecognized compensation cost related to restricted stock units which is expected to be recognized over a weighted average vesting period of 2.47 years. The weighted average granted fair value of restricted stock units granted during the years ended December 31, 2017, 2018 and 2019 were RMB12.54 per RSU, RMB15.75 per RSU and RMB12.65 per RSU.

 

A summary of the restricted stock units activity during the year ended December 31, 2019 is presented below:

 

 

 

RSUs

 

 

 

 

 

Unvested balance at January 1, 2019

 

562,913

 

Granted

 

30,000

 

Cancelled and forfeited

 

 

Vested

 

5,229

 

Unvested balance at December 31, 2019

 

587,684

 

 

Total share-based compensation recognized was as follows:

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

General and administrative

 

55,804

 

87,857

 

40,684

 

Research and development

 

6,983

 

42,167

 

11,191

 

Selling and Marketing

 

 

4,271

 

3,198

 

Cost of revenues

 

 

414

 

55

 

Total stock-based compensation expense

 

62,787

 

134,709

 

55,128

 

 

F-40


Table of Contents

 

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. 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 RMB24,539, RMB39,495 and RMB63,799 during the years ended December 31, 2017, 2018 and 2019.

 

17. NONCONTROLLING INTERESTS

 

 

 

Yunding

 

 

 

RMB

 

 

 

 

 

Balance as of January 1, 2018

 

2,389

 

Loss attributed to noncontrolling interest shareholders

 

(3,726

)

Balance as of December 31, 2018

 

(1,337

)

Loss attributed to noncontrolling interest shareholders

 

(1,825

)

Balance as of December 31, 2019

 

(3,162

)

 

18. SEGMENT INFORMATION

 

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, 2017, 2018 and 2019, the Group identified two operating segments. Those segments include Xiaomi Wearable Products and Self-branded products and others. The 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 Product and Self-branded products and others have been identified as reportable segments. The Group primarily operates in the PRC 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, 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

 

 

F-41


Table of Contents

 

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)

 

18. 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

 

 

 

Xiaomi
Wearable
Products

 

Self-branded
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

 

 

The Group does not evaluate its segment on a fully allocated cost basis nor does the Group keeps track of segment assets separately.

 

19. 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 Group’s profit appropriation made to the reserve fund reached the maximum required amount of 50% of registered capital and amounted to RMB1,509. Accordingly, no additional profit appropriation during the years ended December 31, 2017 and 2018. During the year ended December 31, 2019, due to the new appropriable profit earned by certain PRC entities in the Group, the Group accrued an additional RMB92 statutory reserve.

 

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 balances of restricted net assets were RMB163,350, RMB153,851 and RMB153,943 as of December 31, 2017, 2018 and 2019, respectively.

 

20. RELATED PARTY BALANCES AND TRANSACTIONS

 

Name

 

Relationship with the Group

 

 

 

Xiaomi Communication Technology Co. Ltd.(“Xiaomi Communication”)

 

Controlled by one of the Company’s shareholders

Xiaomi Technology Co. Ltd. (“Xiaomi Technology”)

 

Controlled by one of the Company’s shareholders

Beijing Xiaomi Mobile Software Co. Ltd.(“Xiaomi Mobile”)

 

Controlled by one of the Company’s shareholders

Guangzhou Xiaomi Information Service Co. Ltd (“Xiaomi Information”)

 

Controlled by one of the Company’s shareholders

Youpin Information Technology Co. Ltd. (“Youpin Information”, together with Xiaomi Communication, Xiaomi Technology, Xiaomi Mobile, Xiaomi Information as “Xiaomi”)

 

Controlled by one of the Company’s shareholders

Hefei Huaheng Electronic Technology Co. Ltd. (“Hefei Huaheng”)

 

Controlled by one of the Company’s shareholders

Hangzhou Yunyou Technology Co. Ltd.(“Hanzhou Yunyou”)

 

Significant influence by one of the Company’s shareholders

 

F-42


Table of Contents

 

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)

 

20. RELATED PARTY BALANCES AND TRANSACTIONS - CONTINUED

 

(1)         Balances:

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

Amount due from related parties:

 

 

 

 

 

Xiaomi Communication (a)

 

631,204

 

1,401,015

 

Youpin Information (a)

 

 

9,845

 

Xiaomi Information (a)

 

9,727

 

7,669

 

Xiaomi Technology (a)

 

7,442

 

 

Hangzhou Yunyou (b)

 

5,143

 

 

Others

 

2,883

 

2,641

 

Total

 

656,399

 

1,421,170

 

 

 

 

As of December 31,

 

 

 

2018

 

2019

 

 

 

RMB

 

RMB

 

Amount due to related parties, current:

 

 

 

 

 

Xiaomi Technology(c)

 

 

(14,186

)

Xiaomi Mobile (c)

 

(10,350

)

 

Others

 

(345

)

(583

)

Total

 

(10,695

)

(14,769

)

 

(2)         Transactions:

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

Sales to related parties:

 

 

 

 

 

 

 

Xiaomi Communication

 

1,773,595

 

2,798,824

 

4,271,135

 

Xiaomi Information

 

1,318

 

17,859

 

9,870

 

Xiaomi Technology

 

2,072

 

 

 

Others

 

1,655

 

312

 

 

Total

 

1,778,640

 

2,816,995

 

4,281,005

 

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

Others:

 

 

 

 

 

 

 

Loan provided to related parties (b)

 

(8,000

)

5,143

 

 

Investments disposed to a related party (d)

 

22,047

 

3,061

 

 

Purchase from related parties (e)

 

 

 

12,183

 

 


(a)         The amount due from Xiaomi represents receivables from the sales of products and services, which includes an unbilled amount of RMB102,687.

(b)         In 2018, the group provided a RMB5,000 loan to Hangzhou Yunyou, with annual interest of 15% and maturing in April 2019. During 2019, the Group evaluated the loan would not be collected and recognized an impairment loss of RMB5,640.

(c)          The amounts due to Xiaomi Mobile and Xiaomi Technology represent the payable for the cloud service received by the Group.

(d)         The Group disposed five long-term investments and one long-term investment to Huaying Fund and recorded RMB284 and RMB31 gain during the years ended December 31, 2017 and 2018, respectively. During 2019, there was no investment disposed by the Group to related parties.

(e)          During 2019, the Group purchased certain intangible assets from Hefei Huaheng which amounted to RMB11,321.

 

F-43


Table of Contents

 

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. NET INCOME PER SHARE

 

During the years ended December 31, 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 loss per share, for ordinary shares, nonvested restricted shares and preferred shares according to the participation rights in undistributed earnings.

 

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,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

Basic net income per share calculation Numerator:

 

 

 

 

 

 

 

Net income for the year attributable to the Company:

 

167,682

 

340,046

 

575,196

 

Less: Accretion of Series A Shares

 

3,762

 

177

 

 

Less: Accretion of Series B-1 Shares

 

3,127

 

368

 

 

Less: Accretion of Series B-2 Shares

 

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

 

2,450

 

Net income attributed to ordinary shareholders for computing net income per ordinary shares—basic

 

46,120

 

113,490

 

572,746

 

Denominator:

 

 

 

 

 

 

 

Weighted average ordinary shares outstanding used in computing net income per ordinary shares — basic

 

67,777,592

 

211,873,704

 

243,648,186

 

Net income per ordinary share attributable to ordinary shareholders—basic

 

0.68

 

0.54

 

2.35

 

Diluted net income per share calculation

 

 

 

 

 

 

 

Net income attributable to ordinary shareholders for computing net income per ordinary shares—basic

 

46,120

 

113,490

 

572,746

 

Add: adjustments to undistributed earnings to participating securities

 

3,519

 

648

 

117

 

Net income attributed to ordinary shareholders for computing net income per ordinary shares—basic

 

49,639

 

114,138

 

572,863

 

Denominator:

 

 

 

 

 

 

 

Weighted average ordinary shares basic outstanding

 

67,777,592

 

211,873,704

 

243,648,186

 

Effect of potentially diluted stock options, restricted stocks and RSUs

 

8,514,309

 

13,160,946

 

12,310,986

 

Weighted average ordinary shares outstanding used in computing net income per ordinary shares—dilute

 

76,291,901

 

225,034,650

 

255,959,172

 

Net income per ordinary share attributable to ordinary shareholders—diluted

 

0.65

 

0.51

 

2.24

 

 

F-44


Table of Contents

 

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. NET INCOME PER SHARE - CONTINUED

 

For the year ended December 31, 2017, 2018 and 2019, the following shares outstanding were excluded from the calculation of diluted net income per ordinary shares, as their inclusion would have been anti-dilutive for the year presented:

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

 

 

 

 

 

 

 

 

Shares issuable upon exercise of share options, restricted stocks and RSUs

 

12,683,366

 

705,407

 

294,352

 

Shares issuable upon vesting of nonvested restricted shares

 

23,450,173

 

11,657,620

 

1,042,234

 

Shares issuable upon conversion of Series A shares

 

71,641,792

 

 

 

Shares issuable upon conversion of Series B-1 shares

 

2,000,000

 

 

 

Shares issuable upon conversion of Series B-2 shares

 

20,895,523

 

 

 

 

22. LEASES

 

The Group’s leases consist of operating leases for administrative office spaces in different cities in the PRC and Overseas. The Group determines if an arrangement is a lease at inception. Some lease agreements contain lease and non-lease components, which the Group choose to account for as separate components. The allocation of the consideration between the lease and the non-lease components is based on the relative stand-alone prices of lease components included in the lease contracts. As of December 31, 2019, the Group had no long-term leases that were classified as a financing lease. As of December 31, 2019, the Group has entered into a lease that have not yet commenced with future lease payments of RMB79,828. The lease will commence in fiscal year 2020 with lease term of 5 years.

 

The following table represents lease costs recognized in the Group’s Consolidated Statements of Operation for the year ended December 31, 2019. Lease costs are included in selling, general and administrative expense and research and development expense on the Group’s Consolidated Statements of Operations.

 

 

 

For the years ended
December 31,

 

 

 

2019

 

 

 

RMB

 

 

 

 

 

Operating lease cost(1)

 

30,788

 

Sublease income

 

(1,382

)

Total lease cost

 

29,406

 

 


(1)       Operating lease cost includes short-term lease costs, which was not material in the period presented.

 

Prior to the adoption of the new lease standard, lease expense for the years ended December 31, 2017 and 2018 were RMB6,741 and RMB11,423, respectively.

 

F-45


Table of Contents

 

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)

 

22. LEASES - CONTINUED

 

The following table represents the components of leases that are recognized on the Group’s Consolidated Balance Sheets as of December 31, 2019.

 

 

 

For the years ended
December 31,

 

 

 

2019

 

 

 

RMB

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

Operating cash flows from operating leases

 

26,733

 

Non-cash Right-of-use assets in exchange for new lease liabilities:

 

 

 

Operating leases

 

112,513

 

Weighted average remaining lease term

 

 

 

Operating leases

 

3.76 years

 

Weighted average discount rate

 

 

 

Operating leases

 

5.21

%

 

The following is a maturity analysis of the annual undiscounted cash flows for the year ending December 31:

 

Year ending December 31,

 

RMB

 

 

 

 

 

2020

 

33,928

 

2021

 

29,174

 

2022

 

23,545

 

2023

 

23,703

 

2024

 

11,893

 

Total lease payments

 

122,243

 

Less: imputed interest

 

13,084

 

Present value of lease liabilities

 

109,159

 

 

Future minimum payments under non-cancellable operating leases related to offices consisted of the following at December 31, 2018:

 

 

 

RMB

 

 

 

 

 

2019

 

16,333

 

2020

 

6,648

 

2021 and after

 

3,171

 

Total

 

26,152

 

 

F-46


Table of Contents

 

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)

 

23. SUBSEQUENT EVENT

 

New Bank Borrowing loans

 

Subsequent to 2019 year-end, the Group borrowed approximately RMB882 million in different currencies from several commercial banks. These bank loans are with one year maturity and weighted average interest rate of 3.33%, and will be used for the daily operations of the Group.

 

Outbreak of 2019 Novel Coronavirus (“COVID-19”)

 

Started in late January 2020, COVID-19 was rapidly evolving in China and later globally. Reacting to the outbreak, counter-measures were put in place by the authorities which include travel restrictions. The Group made temporary closures of its offices and most employees worked remotely away from the office. The suppliers of the Group experienced low manufacturing capacity in January and February 2020, and the manufacturing facilities have still been in ramp-up to its full capacity since March 2020. Considering the future developments of the outbreak, both in China and globally, are highly uncertain and cannot be predicted at the current stage, the Group estimates a decrease in demand for smart wearable products, both in China and overseas.  The decrease, may adversely affect business and financial performance of 2020 and beyond, the extent of which will depend on future developments both in China and globally, which are highly uncertain and cannot be predicted at this stage.

 

F-47


Table of Contents

 

HUAMI CORPORATION

ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

 

BALANCE SHEETS

(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,

 

 

 

2018

 

2019

 

2019

 

 

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

(Note2)

 

Assets

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

 

458,371

 

398,604

 

57,256

 

Term deposit

 

96,969

 

 

 

Prepaid expenses and other current assets

 

3,782

 

402

 

58

 

Amount due from related parties

 

314,658

 

533,449

 

76,625

 

Total current assets

 

873,780

 

932,455

 

133,939

 

Investments in subsidiaries

 

963,064

 

1,594,844

 

229,085

 

Total assets

 

1,836,844

 

2,527,299

 

363,024

 

Liabilities

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accrued expense and other current liabilities

 

4,564

 

166

 

24

 

Amount due to related parties

 

21,365

 

26,383

 

3,790

 

Total current liabilities

 

25,929

 

26,549

 

3,814

 

Total liabilities

 

25,929

 

26,549

 

3,814

 

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, 2018 and 2019; 57,303,093 and 91,459,708 shares issued and outstanding as of December 31, 2018 and 2019, respectively)

 

36

 

57

 

8

 

Class B Ordinary shares(US$0.0001 par value; 200,000,000 and 200,000,000 shares authorized as of December 31, 2018 and 2019; 184,376,679 and 156,060,279 shares issued and outstanding as of December 31, 2018 and 2019, respectively)

 

115

 

98

 

14

 

Additional paid-in capital

 

1,373,577

 

1,478,902

 

212,431

 

Accumulated retained earnings

 

340,046

 

910,612

 

130,801

 

Accumulated other comprehensive income

 

97,141

 

111,081

 

15,956

 

Total equity

 

1,810,915

 

2,500,750

 

359,210

 

Total liabilities and equity

 

1,836,844

 

2,527,299

 

363,024

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-48


Table of Contents

 

HUAMI CORPORATION

ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

 

STATEMENTS OF OPERATIONS

(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

 

2018

 

2019

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

(Note2)

 

 

 

 

 

 

 

 

 

 

 

Cost

 

 

414

 

55

 

8

 

Gross profit

 

 

414

 

55

 

8

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling and marketing

 

 

4,271

 

3,198

 

459

 

General and administrative expenses

 

57,898

 

99,881

 

50,572

 

7,264

 

Research and development

 

6,984

 

42,167

 

11,191

 

1,607

 

Total operating expenses

 

64,882

 

146,319

 

64,961

 

9,330

 

Operating loss

 

(64,882

)

(146,733

)

(65,016

)

(9,338

)

Interest Income

 

 

2,185

 

6,868

 

987

 

Other loss

 

 

 

(699

)

(100

)

Equity in earnings of subsidiaries and VIEs

 

232,564

 

484,594

 

634,043

 

91,073

 

Net income

 

167,682

 

340,046

 

575,196

 

82,622

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-49


Table of Contents

 

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,

 

 

 

2017

 

2018

 

2019

 

2018

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

(Note2)

 

 

 

 

 

 

 

 

 

 

 

Net income

 

167,682

 

340,046

 

575,196

 

82,622

 

Other comprehensive income, net of tax

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(3,175

)

75,041

 

13,940

 

2,002

 

Unrealized gain on available-for-sale investments and others, (net of tax effect of 1,554, RMB nil and nil for years ended December 31, 2017, 2018 and 2019, respectively)

 

9,484

 

 

 

 

Comprehensive income attributable to Huami Corporation

 

173,991

 

415,087

 

589,136

 

84,624

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

F-50


Table of Contents

 

HUAMI CORPORATION

ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I

CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

 

STATEMENTS OF CASH FLOW

(Amounts in thousands of Renminbi (RMB) and U.S. dollars (US$),

except share and share related data, or otherwise noted)

 

 

 

For the years ended December 31,

 

 

 

2017

 

2018

 

2019

 

2019

 

 

 

RMB

 

RMB

 

RMB

 

US$

 

 

 

 

 

 

 

 

 

(Note2)

 

Cash Flow from Operating Activities

 

 

 

 

 

 

 

 

 

Net income

 

167,682

 

340,046

 

575,196

 

82,622

 

Equity in earnings of subsidiaries

 

(232,564

)

(484,594

)

(634,043

)

(91,073

)

Share-based compensation

 

62,787

 

134,709

 

55,128

 

7,918

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

(14,284

)

8,625

 

2,373

 

341

 

Accrued expense and other current liabilities

 

10,043

 

(5,507

)

(4,436

)

(637

)

Amount due to a related party

 

(8,500

)

4,489

 

5,018

 

721

 

Net Cash used in Operating Activities

 

(14,836

)

(2,232

)

(764

)

(108

)

Cash Flow from Investing Activities

 

 

 

 

 

 

 

 

 

Amount due from related parties

 

21,646

 

(196,158

)

(218,791

)

(31,427

)

Investment in subsidiaries

 

(9,772

)

(10,056

)

2,263

 

325

 

Purchase of term deposits

 

 

(385,028

)

 

 

Maturity of term deposits

 

 

288,771

 

96,969

 

13,929

 

Proceed received from loan to third parties

 

 

3,578

 

1,007

 

145

 

Loans provided to third party

 

 

(2,406

)

 

 

Net Cash provided (used in) by Investing Activities

 

11,874

 

(301,299

)

(118,552

)

(17,028

)

Cash Flow from Financing Activities

 

 

 

 

 

 

 

 

 

Net proceeds from initial public offering

 

 

657,062

 

 

 

Exercise of share options

 

89

 

3,486

 

933

 

134

 

Payment for repurchase of ordinary shares

 

 

(8,157

)

 

 

Net proceeds from the second offering

 

 

 

49,214

 

7,069

 

Deemed Dividend to shareholders

 

 

 

(4,538

)

(652

)

Net Cash provided by Financing Activities

 

89

 

652,391

 

45,609

 

6,551

 

Net increase/(decrease) in cash and cash equivalent

 

(2,873

)

348,860

 

(73,707

)

(10,585

)

Effect of exchange rate changes

 

(3,175

)

75,041

 

13,940

 

2,002

 

Cash and cash equivalents at beginning of the year

 

40,518

 

34,470

 

458,371

 

65,839

 

Cash and cash equivalents at end of the year

 

34,470

 

458,371

 

398,604

 

57,256

 

 

The accompanying notes are an integral part of these condensed consolidated financial statement.

 

F-51


Table of Contents

 

HUAMI CORPORATION

ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I

 

FINANCIAL INFORMATION OF PARENT COMPANY

NOTES OF THE CONDENSED FINANCIAL STATEMENT

 

1. BASIS FOR PREPARATION

 

The condensed financial information of the Company has been prepared using the same accounting policies as set out in 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, statements of operations statements of comprehensive income and statements of cash flows from RMB into US$ as of and during the year ended December 31, 2019 is solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.9618, representing the rate as certified by the statistical release of the Federal Reserve Board of United States on December 31, 2019. 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, 2019, or at any other rate

 

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.

 

4. INCOME TAXES

 

The Company is a Cayman Islands company, therefore, is not subjected to income taxes for all years presented.

 

F-52


Exhibit 2.5

 

Description of rights of each class of securities
registered under Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”)

 

American Depositary Shares (“ADSs”) each representing four Class A ordinary shares of Huami Corporation, (the “we,” “us,” “our company” or “our”) are listed and traded on the New York Stock Exchange and, in connection with this listing (but not for trading), the Class A ordinary shares are registered under Section 12(b) of the Exchange Act. This exhibit contains a description of the rights of (i) the holders of Class A ordinary shares and (ii) the holders of ADSs. Underlying Class A ordinary shares represented by the ADSs are held by Deutsche Bank Trust Company Americas, as depositary, and holders of ADSs will not be treated as holders of the Class A ordinary shares.

 

Description of Class A Ordinary Shares

 

The following is a summary of material provisions of our currently effective second amended and restated memorandum and articles of association (the “Memorandum and Articles of Association”), as well as the Companies Law (as amended) of the Cayman Islands (the “Companies Law”) insofar as they relate to the material terms of our ordinary shares. Notwithstanding this, because it is a summary, it may not contain all the information that you may otherwise deem important. For more complete information, you should read the entire Memorandum and Articles of Association, which has been filed with the SEC as an exhibit to our Registration Statement on Form F-1 (File No. 333-222528).

 

Type and Class of Securities (Item 9.A.5 of Form 20-F)

 

Each Class A ordinary share has US$0.0001 par value. The number of Class A ordinary shares that have been issued as of the last day of the financial year ended December 31, 2019 is provided on the cover of the annual report for fiscal year 2019 on Form 20-F filed in April 2020 (the “2019 Form 20-F”). Our Class A ordinary shares may be held in either certificated or uncertificated form.

 

Preemptive Rights (Item 9.A.3 of Form 20-F)

 

Our shareholders do not have preemptive rights.

 

Limitations or Qualifications (Item 9.A.6 of Form 20-F)

 

We have a dual-class voting structure such that our ordinary shares consist of Class A ordinary shares and Class B ordinary shares. Each Class A ordinary share shall entitle the holder thereof to one vote on all matters subject to the vote at general meetings of our company, and each Class B ordinary share shall entitle the holder thereof to ten votes on all matters subject to vote at general meetings of our company. Due to the super voting powers granted to holders of Class B ordinary shares, the voting power of holders of Class A ordinary shares may be materially limited.

 


 

Rights of Other Types of Securities (Item 9.A.7 of Form 20-F)

 

Not applicable.

 

Rights of Class A Ordinary Shares (Item 10.B.3 of Form 20-F)

 

Classes of 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 non-residents 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 to any person or entity, 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 of Association 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 Law. Under the laws of the Cayman Islands, our company may pay a dividend out of either profit or share premium account, provided 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.

 

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.

 

2


 

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 issued and 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 of Association. Holders of the ordinary shares may, among other things, divide or combine their shares by ordinary resolution.

 

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:

 

·                  the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer;

 

·                  the instrument of transfer is in respect of only one class of ordinary shares;

 

·                  the instrument of transfer is properly stamped, if required;

 

·                  in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four; and

 

·                  a fee of such maximum sum as the New York Stock Exchange may determine to be payable or such lesser sum as our directors may from time to time require is paid to us in respect thereof.

 

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 Rights

 

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.

 

3


 

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 Ordinary Shares

 

We may issue shares on terms that such shares are subject to redemption, at our option or at the option of the holders of these shares, on such terms and in such manner as may be determined by our board of directors. Our Company may also repurchase any of our shares on such terms and in such manner as have been approved by our board of directors or by an ordinary resolution of our shareholders. Under the Companies Law, the redemption or repurchase of any share may be paid out of our Company’s profits or out of the proceeds of a new issue of shares made for the purpose of such redemption or repurchase, or out of capital (including share premium account and capital redemption reserve) if our company can, immediately following such payment, pay its debts as they fall due in the ordinary course of business. In addition, under the Companies Law no such share may be redeemed or repurchased (a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares outstanding or (c) if the company has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.

 

Requirements to Change the Rights of Holders of Class A Ordinary Shares (Item 10.B.4 of Form 20-F)

 

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.

 

Limitations on the Rights to Own Class A Ordinary Shares (Item 10.B.6 of Form 20-F)

 

There are no limitations under the laws of the Cayman Islands or under the Memorandum and Articles of Association that limit the right of non-resident or foreign owners to hold or vote Class A ordinary shares, other than anti-takeover provisions contained in the Memorandum and Articles of Association which may discourage, delay or prevent a change in control of our company or cause our company to engage in change-of-control transactions.

 

4


 

Provisions Affecting Any Change of Control (Item 10.B.7 of Form 20-F)

 

Anti-Takeover Provisions in the Memorandum and Articles of Association. Some provisions of our Memorandum and Articles of Association may discourage, delay or prevent a change of control of our company or management that shareholders may consider favorable, including provisions that:

 

·                  authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges and restrictions of such preference shares without any further vote or action by our shareholders; and

 

·                  limit the ability of shareholders to requisition and convene general meetings of shareholders.

 

However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our Memorandum and Articles of Association for a proper purpose and for what they believe in good faith to be in the best interests of our company.

 

Ownership Threshold (Item 10.B.8 of Form 20-F)

 

There are no provisions under the laws of the Cayman Islands or under the Memorandum and Articles of Association that govern the ownership threshold above which shareholder ownership must be disclosed.

 

Differences Between the Law of Different Jurisdictions (Item 10.B.9 of Form 20-F)

 

The Companies Law 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 Law and the current Companies Act of England. In addition, the Companies Law 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 Law applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.

 

Mergers and Similar Arrangements. The Companies Law 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.

 

5


 

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 Law. 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 Law 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 statutory provisions as to the required majority vote have been met;

 

·                  the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion of the minority to promote interests adverse to those of the class;

 

·                  the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest; and

 

6


 

·                  the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.

 

The Companies Law 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:

 

·                  a company acts or proposes to act illegally or ultra vires;

 

·                  the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not been obtained; and

 

·                  those who control the company are perpetrating a “fraud on the minority.”

 

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.

 

7


 

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.

 

Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of, and disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director acts in a manner he reasonably believes to be in the best interests of the corporation. He must not use his corporate position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, the director must prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.

 

As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and therefore it is considered that he owes the following duties to the company—a duty to act bona fide in the best interests of the company, a duty not to make a profit based on his position as director (unless the company permits him to do so), a duty not to put himself in a position where the interests of the company conflict with his personal interest or his duty to a third party, and a duty to exercise powers for the purpose for which such powers were intended. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance of his duties a greater degree of skill than may reasonably be expected from a person of his knowledge and experience. However, English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.

 

Shareholder Action by Written Consent. Under the Delaware General Corporation Law, a corporation may eliminate the right of shareholders to act by written consent by amendment to its certificate of incorporation. Cayman Islands law and our Memorandum and Articles of Association provide that our shareholders may approve corporate matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.

 

8


 

Shareholder Proposals. Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing documents. A special meeting may be called by the board of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.

 

The Companies Law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our Memorandum and Articles of Association allow our shareholders holding in aggregate not less than one-third of all votes attaching to all the issued and outstanding shares of our company entitled to vote at general meetings to requisition an extraordinary general meeting of our shareholders, in which case our board is obliged to convene an extraordinary general meeting and to put the resolutions so requisitioned to a vote at such meeting. Other than this right to requisition a shareholders’ meeting, our Memorandum and Articles of Association do not provide our shareholders with any other right to put proposals before annual general meetings or extraordinary general meetings. As an exempted Cayman Islands company, we are not obliged by law to call shareholders’ annual general meetings.

 

Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. There are no prohibitions in relation to cumulative voting under the laws of the Cayman Islands but our Memorandum and Articles of Association do not provide for cumulative voting. As a result, our shareholders are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.

 

Appointment of Directors. So long as HHtech Holdings Limited, Haiyu Holding Limited, Fandler Holding Limited, Forest Mountain Holding Limited, Wenshui Holding Limited and Shu Hill Holdings (collectively, “Co-Founder Entities”) continue to beneficially own no less than 54,680,596 shares (subject to subsequent adjustment for share splits, share dividends, reverse share splits, re-capitalizations and the like), representing approximately 60% of the shares the Co-Founder Entities beneficially own as of the date of our Memorandum and Articles of Association, the Co-Founder Entities shall be exclusively entitled to designate, appoint, remove, replace and reappoint at any time or from time to time three directors; (ii) so long as it continues to beneficially own no less than 10% of the issued and outstanding shares, People Better Limited shall be exclusively entitled to designate, appoint, remove, replace and reappoint at any time or from time to time one director; (iii) so long as it continues to beneficially own no less than 10% of the issued and outstanding shares, Shunwei High Tech Limited shall be exclusively entitled to designate, appoint, remove, replace and reappoint at any time or from time to time one director.

 

The board of directors may, by the affirmative vote of a simple majority of the remaining directors present and voting at a meeting of the board of directors, appoint any person as a director, to fill a casual vacancy on the board of directors or as an addition to the existing board of directors. A vacancy on the board of directors created by the removal of a director may be filled by way of an ordinary resolution of the Company’s shareholders or by the affirmative vote of a simple majority of the remaining directors present and voting at a meeting of the board of directors.

 

9


 

Each director whose term of office expires shall be eligible for re-election at a meeting of the Company’s shareholders or re-appointment by the board of directors.

 

Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under our Memorandum and Articles of Association, directors may be removed with or without cause, by an ordinary resolution of our shareholders. An appointment of a director may be on terms that the director shall automatically retire from office (unless he has sooner vacated office) at the next or a subsequent annual general meeting or upon any specified event or after any specified period in a written agreement between the company and the director, if any; but no such term shall be implied in the absence of express provision. In addition, a director’s office shall be vacated if the director (i) becomes bankrupt or makes any arrangement or composition with his creditors; (ii) dies or is found to be or becomes of unsound mind; (iii) resigns his office by notice in writing to the company; (iv) without special leave of absence from our board of directors, is absent from three consecutive meetings of the board and the board resolves that his office be vacated or; (v) is removed from office pursuant to any other provisions of our Memorandum and Articles of Association.

 

Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to Delaware corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its certificate of incorporation, it is prohibited from engaging in certain business combinations with an “interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting share within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.

 

Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and for a proper corporate purpose and not with the effect of constituting a fraud on the minority shareholders.

 

Dissolution; Winding Up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board.

 

10


 

Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so.

 

Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under Cayman Islands law and our Memorandum and Articles of Association, if our share capital is divided into more than one class of shares, we may materially adversely vary the rights attached to any class with the written consent of the holders of two-thirds of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class.

 

Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s governing documents may be amended with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under the Companies Law and our Memorandum and Articles of Association, our Memorandum and Articles of Association may only be amended by a special resolution of our shareholders.

 

Rights of Non-Resident or Foreign Shareholders. There are no limitations imposed by our Memorandum and Articles of Association on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our Memorandum and Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed.

 

Exempted Company. The Companies Law in the Cayman Islands distinguishes between ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed below:

 

·                  an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies;

 

·                  an exempted company’s register of members is not required to be open for inspection;

 

·                  an exempted company does not have to hold an annual general meeting;

 

·                  an exempted company may issue no par value shares;

 

·                  an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first instance);

 

11


 

·                  an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;

 

·                  an exempted company may register as a limited duration company; and

 

·                  an exempted company may register as a segregated portfolio company.

 

“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on that shareholder’s 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).

 

Changes in Capital (Item 10.B.10 of Form 20-F)

 

Our shareholders may from time to time by ordinary resolution:

 

·                  increase our share capital by such sum, to be divided into shares of such classes and amount, as the resolution shall prescribe;

 

·                  consolidate and divide all or any of our share capital into shares of a larger amount than our existing shares;

 

·                  sub-divide our existing shares, or any of them into shares of a smaller amount, provided that in the subdivision the proportion between the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in case of the share from which the reduced share is derived; or

 

·                  cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the amount of our share capital by the amount of the shares so canceled.

 

Our shareholders may by special resolution, subject to confirmation by the Grand Court of the Cayman Islands on an application by our company for an order confirming such reduction, reduce our share capital or any capital redemption reserve in any manner permitted by law.

 

Debt Securities (Item 12.A of Form 20-F)

 

Not applicable.

 

Warrants and Rights (Item 12.B of Form 20-F)

 

Not applicable.

 

Other Securities (Item 12.C of Form 20-F)

 

Not applicable.

 

12


 

Description of American Depositary Shares (Items 12.D.1 and 12.D.2 of Form 20-F)

 

Deutsche Bank Trust Company Americas, as depositary, registers and delivers the ADSs. Each ADS represents ownership of four class A ordinary shares, deposited with Deutsche Bank AG, Hong Kong Branch, as custodian for the depositary. Each ADS also represents ownership of any other securities, cash or other property which may be held by the depositary. The depositary’s corporate trust office at which the ADSs are administered is located at 60 Wall Street, New York, NY 10005, USA. The principal executive office of the depositary is located at 60 Wall Street, New York, NY 10005, USA.

 

The Direct Registration System, or DRS, is a system administered by The Depository Trust Company, or DTC, pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to the ADS holders entitled thereto.

 

We will not treat ADS holders as our shareholders and accordingly, you, as an ADS holder, will not have shareholder rights. Cayman Islands law governs shareholder rights. The depositary will be the holder of the class A ordinary shares underlying your ADSs. Holder of our ADSs have ADS holder rights. A deposit agreement among our company, the depositary and the holders of our ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. The laws of the State of New York govern the deposit agreement and the ADSs.

 

The following is a summary of the material provisions of the deposit agreement. For more complete information, you should read the entire deposit agreement and the form of American Depositary Receipt.

 

Holding the ADSs

 

How will you hold your ADSs?

 

You may hold ADSs either (1) directly (a) by having an American Depositary Receipt, or ADR, which is a certificate evidencing a specific number of ADSs, registered in your name, or (b) by holding ADSs in DRS, or (2) indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADS holder. This description assumes you hold your ADSs directly. ADSs will be issued through DRS, unless you specifically request certificated ADRs. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders described in this section. You should consult with your broker or financial institution to find out what those procedures are.

 

Dividends and Other Distributions

 

How will you receive dividends and other distributions on the shares?

 

The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on class A ordinary shares or other deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of class A ordinary shares your ADSs represent as of the record date (which will be as close as practicable to the record date for our class A ordinary shares) set by the depositary with respect to the ADSs.

 

13


 

·                  Cash.  The depositary will convert or cause to be converted any cash dividend or other cash distribution we pay on the class A ordinary shares or any net proceeds from the sale of any class A ordinary shares, rights, securities or other entitlements under the terms of the deposit agreement into U.S. dollars if it can do so on a practicable basis, and can transfer the U.S. dollars to the United States and will distribute promptly the amount thus received. If the depositary shall determine in its judgment that such conversions or transfers are not practical or lawful or if any government approval or license is needed and cannot be obtained at a reasonable cost within a reasonable period or otherwise sought, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold or cause the custodian to hold the foreign currency it cannot convert for the account of the ADS holders who have not been paid and such funds will be held for the respective accounts of the ADS holders. It will not invest the foreign currency and it will not be liable for any interest for the respective accounts of the ADS holders.

 

Before making a distribution, any taxes or other governmental charges, together with fees and expenses of the depositary, that must be paid, will be deducted. It will distribute only whole U.S. dollars and cents and will round down fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the distribution.

 

·                  Shares. For any class A ordinary shares we distribute as a dividend or free distribution, either (1) the depositary will distribute additional ADSs representing such class A ordinary shares or (2) existing ADSs as of the applicable record date will represent rights and interests in the additional class A ordinary shares distributed, to the extent reasonably practicable and permissible under law, in either case, net of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmental charges. The depositary will only distribute whole ADSs. It will try to sell class A ordinary shares which would require it to deliver a fractional ADS and distribute the net proceeds in the same way as it does with cash. The depositary may sell a portion of the distributed class A ordinary shares sufficient to pay its fees and expenses, and any taxes and governmental charges, in connection with that distribution.

 

·                  Elective Distributions in Cash or Shares. If we offer holders of our class A ordinary shares the option to receive dividends in either cash or shares, the depositary, after consultation with us and having received timely notice as described in the deposit agreement of such elective distribution by us, has discretion to determine to what extent such elective distribution will be made available to you as a holder of the ADSs. We must timely first instruct the depositary to make such elective distribution available to you and furnish it with satisfactory evidence that it is legal to do so. The depositary could decide it is not legal or reasonably practicable to make such elective distribution available to you. In such case, the depositary shall, on the basis of the same determination as is made in respect of the class A ordinary shares for which no election is made, distribute either cash in the same way as it does in a cash distribution, or additional ADSs representing class A ordinary shares in the same way as it does in a share distribution. The depositary is not obligated to make available to you a method to receive the elective dividend in shares rather than in ADSs. There can be no assurance that you will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of class A ordinary shares.

 

14


 

·                  Rights to Purchase Additional Shares. If we offer holders of our class A ordinary shares any rights to subscribe for additional shares, the depositary shall having received timely notice as described in the deposit agreement of such distribution by us, consult with us, and we must determine whether it is lawful and reasonably practicable to make these rights available to you. We must first instruct the depositary to make such rights available to you and furnish the depositary with satisfactory evidence that it is legal to do so. If the depositary decides it is not legal or reasonably practicable to make the rights available but that it is lawful and reasonably practicable to sell the rights, the depositary will endeavor to sell the rights and in a riskless principal capacity or otherwise, at such place and upon such terms (including public or private sale) as it may deem proper distribute the net proceeds in the same way as it does with cash. The depositary will allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them.

 

If the depositary makes rights available to you, it will establish procedures to distribute such rights and enable you to exercise the rights upon your payment of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmental charges. The depositary shall not be obliged to make available to you a method to exercise such rights to subscribe for class A ordinary shares (rather than ADSs).

 

U.S. securities laws may restrict transfers and cancellation of the ADSs represented by shares purchased upon exercise of rights. For example, you may not be able to trade these ADSs freely in the United States. In this case, the depositary may deliver restricted depositary shares that have the same terms as the ADSs described in this section except for changes needed to put the necessary restrictions in place.

 

There can be no assurance that you will be given the opportunity to exercise rights on the same terms and conditions as the holders of class A ordinary shares or be able to exercise such rights.

 

·                  Other Distributions. Subject to receipt of timely notice, as described in the deposit agreement, from us with the request to make any such distribution available to you, and provided the depositary has determined such distribution is lawful and reasonably practicable and feasible and in accordance with the terms of the deposit agreement, the depositary will distribute to you anything else we distribute on deposited securities by any means it may deem practicable, upon your payment of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmental charges. If any of the conditions above are not met, the depositary will endeavor to sell, or cause to be sold, what we distributed and distribute the net proceeds in the same way as it does with cash; or, if it is unable to sell such property, the depositary may dispose of such property in any way it deems reasonably practicable under the circumstances for nominal or no consideration, such that you may have no rights to or arising from such property.

 

The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, shares, rights or anything else to ADS holders. This means that you may not receive the distributions we make on our shares or any value for them if we and/or the depositary determines that it is illegal or not practicable for us or the depositary to make them available to you.

 

15


 

Deposit, Withdrawal and Cancellation

 

How are ADS issued?

 

The depositary will deliver ADSs if you or your broker deposit class A ordinary shares or evidence of rights to receive class A ordinary shares with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names you request and will deliver the ADSs to or upon the order of the person or persons entitled thereto.

 

How do ADR holders cancel an American Depositary Share?

 

You may turn in your ADSs at the depositary’s corporate trust office or by providing appropriate instructions to your broker. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will deliver the class A ordinary shares and any other deposited securities underlying the ADSs to you or a person you designate at the office of the custodian. Or, at your request, risk and expense, the depositary will deliver the deposited securities at its corporate trust office, to the extent permitted by law.

 

How do ADS holders interchange between Certificated ADSs and Uncertificated ADSs?

 

You may surrender your ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary will cancel that ADR and will send you a statement confirming that you are the owner of uncertificated ADSs. Alternatively, upon receipt by the depositary of a proper instruction from a holder of uncertificated ADSs requesting the exchange of uncertificated ADSs for certificated ADSs, the depositary will execute and deliver to you an ADR evidencing those ADSs.

 

Voting Rights

 

How do you vote?

 

You may instruct the depositary to vote the class A ordinary shares or other deposited securities underlying your ADSs at any meeting at which you are entitled to vote pursuant to any applicable law, the provisions of our memorandum and articles of association, and the provisions of or governing the deposited securities. Otherwise, you could exercise your right to vote directly if you withdraw the class A ordinary shares. However, you may not know about the meeting sufficiently enough in advance to withdraw the class A ordinary shares.

 

16


 

If we ask for your instructions and upon timely notice from us by regular, ordinary mail delivery, or by electronic transmission, as described in the deposit agreement, the depositary will notify you of the upcoming meeting at which you are entitled to vote pursuant to any applicable law, the provisions of our memorandum and articles of association, and the provisions of or governing the deposited securities, and arrange to deliver our voting materials to you. The materials will include or reproduce (a) such notice of meeting or solicitation of consents or proxies; (b) a statement that the ADS holders at the close of business on the ADS record date will be entitled, subject to any applicable law, the provisions of our memorandum and articles of association, and the provisions of or governing the deposited securities, to instruct the depositary as to the exercise of the voting rights, if any, pertaining to the class A ordinary shares or other deposited securities represented by such holder’s ADSs; and (c) a brief statement as to the manner in which such instructions may be given or deemed given in accordance with the second to last sentence of this paragraph if no instruction is received, to the depositary to give a discretionary proxy to a person designated by us. Voting instructions may be given only in respect of a number of ADSs representing an integral number of class A ordinary shares or other deposited securities. For instructions to be valid, the depositary must receive them in writing on or before the date specified. The depositary will try, as far as practical, subject to applicable law and the provisions of our memorandum and articles of association, to vote or to have its agents vote the class A ordinary shares or other deposited securities (in person or by proxy) as you instruct. The depositary will only vote or attempt to vote as you instruct. If we timely requested the depositary to solicit your instructions but no instructions are received by the depositary from an owner with respect to any of the deposited securities represented by the ADSs of that owner on or before the date established by the depositary for such purpose, the depositary shall deem that owner to have instructed the depositary to give a discretionary proxy to a person designated by us with respect to such deposited securities, and the depositary shall give a discretionary proxy to a person designated by us to vote such deposited securities. However, no such instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter if we inform the depositary we do not wish such proxy given, substantial opposition exists or the matter materially and adversely affects the rights of holders of the ordinary shares.

 

We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the class A ordinary shares underlying your ADSs. In addition, there can be no assurance that ADS holders and beneficial owners generally, or any holder or beneficial owner in particular, will be given the opportunity to vote or cause the custodian to vote on the same terms and conditions as the holders of our class A ordinary shares.

 

The depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and you may have no recourse if the class A ordinary shares underlying your ADSs are not voted as you requested.

 

In order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to deposited securities, if we request the depositary to act, we will give the depositary notice of any such meeting and details concerning the matters to be voted at least 30 days in advance of the meeting date.

 

17


 

Compliance with Regulations

 

Information Requests

 

Each ADS holder and beneficial owner shall (a) provide such information as we or the depositary may request pursuant to law, including, without limitation, relevant Cayman Islands law, any applicable law of the United States of America, our memorandum and articles of association, any resolutions of our Board of Directors adopted pursuant to such memorandum and articles of association, the requirements of any markets or exchanges upon which the class A ordinary shares, ADSs or ADRs are listed or traded, or to any requirements of any electronic book-entry system by which the ADSs or ADRs may be transferred, regarding the capacity in which they own or owned ADRs, the identity of any other persons then or previously interested in such ADRs and the nature of such interest, and any other applicable matters, and (b) be bound by and subject to applicable provisions of the laws of the Cayman Islands, our memorandum and articles of association, and the requirements of any markets or exchanges upon which the ADSs, ADRs or class A ordinary shares are listed or traded, or pursuant to any requirements of any electronic book-entry system by which the ADSs, ADRs or class A ordinary shares may be transferred, to the same extent as if such ADS holder or beneficial owner held class A ordinary shares directly, in each case irrespective of whether or not they are ADS holders or beneficial owners at the time such request is made.

 

Disclosure of Interests

 

Each ADS holder and beneficial owner shall comply with our requests pursuant to Cayman Islands law, the rules and requirements of the New York Stock Exchange and any other stock exchange on which the class A ordinary shares are, or will be, registered, traded or listed or our memorandum and articles of association, which requests are made to provide information, inter alia, as to the capacity in which such ADS holder or beneficial owner owns ADS and regarding the identity of any other person interested in such ADS and the nature of such interest and various other matters, whether or not they are ADS holders or beneficial owners at the time of such requests.

 

Payment of Taxes

 

You will be responsible for any taxes or other governmental charges payable, or which become payable, on your ADSs or on the deposited securities represented by any of your ADSs. The depositary may refuse to register or transfer your ADSs or allow you to withdraw the deposited securities represented by your ADSs until such taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your ADSs to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any net proceeds, or send to you any property, remaining after it has paid the taxes. You agree to indemnify us, the depositary, the custodian and each of our and their respective agents, directors, employees and affiliates for, and hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any refund of taxes, reduced rate of withholding at source or other tax benefit obtained for you. Your obligations under this paragraph shall survive any transfer of ADRs, any surrender of ADRs and withdrawal of deposited securities or the termination of the deposit agreement.

 

18


 

Reclassifications, Recapitalizations and Mergers

 

If we:

 

Then:

Change the nominal or par value of our class A ordinary shares

 

The cash, shares or other securities received by the depositary will become deposited securities.

 

 

 

Reclassify, split up or consolidate any of the deposited securities

 

Each ADS will automatically represent its equal share of the new deposited securities.

 

 

 

Distribute securities on the class A ordinary shares that are not distributed to you, or Recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or take any similar action

 

The depositary may distribute some or all of the cash, shares or other securities it received. It may also deliver new ADSs or ask you to surrender your outstanding ADRs in exchange for new ADRs identifying the new deposited securities.

 

Amendment and Termination

 

How may the deposit agreement be amended?

 

We may agree with the depositary to amend the deposit agreement and the form of ADR without your consent for any reason. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or similar items, including expenses incurred in connection with foreign exchange control regulations and other charges specifically payable by ADS holders under the deposit agreement, or materially prejudices a substantial existing right of ADS holders, it will not become effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended. If any new laws are adopted which would require the deposit agreement to be amended in order to comply therewith, we and the depositary may amend the deposit agreement in accordance with such laws and such amendment may become effective before notice thereof is given to ADS holders.

 

How may the deposit agreement be terminated?

 

The depositary will terminate the deposit agreement if we ask it to do so, in which case the depositary will give notice to you at least 90 days prior to termination. The depositary may also terminate the deposit agreement if the depositary has told us that it would like to resign, or if we have removed the depositary, and in either case we have not appointed a new depositary within 90 days. In either such case, the depositary must notify you at least 30 days before termination.

 

After termination, the depositary and its agents will do the following under the deposit agreement but nothing else: collect distributions on the deposited securities, sell rights and other property and deliver class A ordinary shares and other deposited securities upon cancellation of ADSs after payment of any fees, charges, taxes or other governmental charges. Six months or more after the date of termination, the depositary may sell any remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the deposit agreement, for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and has no liability for interest. After such sale, the depositary’s only obligations will be to account for the money and other cash. After termination, we shall be discharged from all obligations under the deposit agreement except for our obligations to the depositary thereunder.

 

19


 

Books of Depositary

 

The depositary will maintain ADS holder records at its depositary office. You may inspect such records at such office during regular business hours but solely for the purpose of communicating with other holders in the interest of business matters relating to the Company, the ADRs and the deposit agreement.

 

The depositary will maintain facilities in the Borough of Manhattan, The City of New York to record and process the issuance, cancellation, combination, split-up and transfer of ADRs.

 

These facilities may be closed at any time or from time to time when such action is deemed necessary or advisable by the depositary in connection with the performance of its duties under the deposit agreement or at our reasonable written request.

 

Limitations on Obligations and Liability to ADR Holders

 

Limits on our Obligations and the Obligations of the Depositary and the Custodian; Limits on Liability to Holders of ADSs

 

The deposit agreement expressly limits our obligations and the obligations of the depositary and the custodian. It also limits our liability and the liability of the depositary. The depositary and the custodian:

 

·                  are only obligated to take the actions specifically set forth in the deposit agreement without gross negligence or willful misconduct;

 

·                  are not liable if any of us or our respective controlling persons or agents are prevented or forbidden from, or subjected to any civil or criminal penalty or restraint on account of, or delayed in, doing or performing any act or thing required by the terms of the deposit agreement and any ADR, by reason of any provision of any present or future law or regulation of the United States or any state thereof, the Cayman Islands or any other country, or of any other governmental authority or regulatory authority or stock exchange, or on account of the possible criminal or civil penalties or restraint, or by reason of any provision, present or future, of our memorandum and articles of association or any provision of or governing any deposited securities, or by reason of any act of God or war or other circumstances beyond its control (including, without limitation, nationalization, expropriation, currency restrictions, work stoppage, strikes, civil unrest, revolutions, rebellions, explosions and computer failure);

 

20


 

·                  are not liable by reason of any exercise of, or failure to exercise, any discretion provided for in the deposit agreement or in our memorandum and articles of association or provisions of or governing deposited securities;

 

·                  are not liable for any action or inaction of the depositary, the custodian or us or their or our respective controlling persons or agents in reliance upon the advice of or information from legal counsel, any person presenting class A ordinary shares for deposit or any other person believed by it in good faith to be competent to give such advice or information;

 

·                  are not liable for the inability of any holder of ADSs to benefit from any distribution on deposited securities that is not made available to holders of ADSs under the terms of the deposit agreement;

 

·                  are not liable for any special, consequential, indirect or punitive damages for any breach of the terms of the deposit agreement, or otherwise;

 

·                  may rely upon any documents we believe in good faith to be genuine and to have been signed or presented by the proper party;

 

·                  disclaim any liability for any action or inaction or inaction of any of us or our respective controlling persons or agents in reliance upon the advice of or information from legal counsel, accountants, any person presenting class A ordinary shares for deposit, holders and beneficial owners (or authorized representatives) of ADSs, or any person believed in good faith to be competent to give such advice or information; and

 

·                  disclaim any liability for inability of any holder to benefit from any distribution, offering, right or other benefit made available to holders of deposited securities but not made available to holders of ADS.

 

The depositary and any of its agents also disclaim any liability (i) for any failure to carry out any instructions to vote, the manner in which any vote is cast or the effect of any vote or failure to determine that any distribution or action may be lawful or reasonably practicable or for allowing any rights to lapse in accordance with the provisions of the deposit agreement, (ii) the failure or timeliness of any notice from us, the content of any information submitted to it by us for distribution to you or for any inaccuracy of any translation thereof, (iii) any investment risk associated with the acquisition of an interest in the deposited securities, the validity or worth of the deposited securities, the credit-worthiness of any third party, (iv) for any tax consequences that may result from ownership of ADSs, class A ordinary shares or deposited securities, or (v) for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the depositary or in connection with any matter arising wholly after the removal or resignation of the depositary, provided that in connection with the issue out of which such potential liability arises the depositary performed its obligations without gross negligence or willful misconduct while it acted as depositary.

 

In addition, the deposit agreement provides that each party to the deposit agreement (including each holder, beneficial owner and holder of interests in the ADRs) irrevocably waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any lawsuit or proceeding against the depositary or our company related to our shares, the ADSs or the deposit agreement.

 

21


 

In the deposit agreement, we and the depositary agree to indemnify each other under certain circumstances.

 

Requirements for Depositary Actions

 

Before the depositary will issue, deliver or register a transfer of an ADS, split-up, subdivide or combine ADSs, make a distribution on an ADS, or permit withdrawal of class A ordinary shares, the depositary may require:

 

·                  payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any class A ordinary shares or other deposited securities and payment of the applicable fees, expenses and charges of the depositary;

 

·                  satisfactory proof of the identity and genuineness of any signature or any other matters contemplated in the deposit agreement; and

 

·                  compliance with (A) any laws or governmental regulations relating to the execution and delivery of ADRs or ADSs or to the withdrawal or delivery of deposited securities and (B) such reasonable regulations and procedures as the depositary may establish, from time to time, consistent with the deposit agreement and applicable laws, including presentation of transfer documents.

 

The depositary may refuse to issue and deliver ADSs or register transfers of ADSs generally when the register of the depositary or our transfer books are closed or at any time if the depositary or we determine that it is necessary or advisable to do so.

 

Your Rights to Receive the Shares Underlying Your ADSs

 

You have the right to cancel your ADSs and withdraw the underlying class A ordinary shares at any time except:

 

·                  when temporary delays arise because: (1) the depositary has closed its transfer books or we have closed our transfer books; (2) the transfer of class A ordinary shares is blocked to permit voting at a shareholders’ meeting; or (3) we are paying a dividend on our class A ordinary shares;

 

·                  when you owe money to pay fees, taxes and similar charges;

 

·                  when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of class A ordinary shares or other deposited securities, or

 

22


 

·                  other circumstances specifically contemplated by Section I.A.(l) of the General Instructions to Form F-6 (as such General Instructions may be amended from time to time); or

 

·                  for any other reason if the depositary or we determine, in good faith, that it is necessary or advisable to prohibit withdrawals.

 

The depositary shall not knowingly accept for deposit under the deposit agreement any class A ordinary shares or other deposited securities required to be registered under the provisions of the Securities Act, unless a registration statement is in effect as to such class A ordinary shares.

 

This right of withdrawal may not be limited by any other provision of the deposit agreement.

 

Direct Registration System

 

In the deposit agreement, all parties to the deposit agreement acknowledge that the DRS and Profile Modification System, or Profile, will apply to uncertificated ADSs upon acceptance thereof to DRS by DTC. DRS is the system administered by DTC pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to the ADS holders entitled thereto. Profile is a required feature of DRS which allows a DTC participant, claiming to act on behalf of an ADS holder, to direct the depositary to register a transfer of those ADSs to DTC or its nominee and to deliver those ADSs to the DTC account of that DTC participant without receipt by the depositary of prior authorization from the ADS holder to register such transfer.

 

In connection with and in accordance with the arrangements and procedures relating to DRS/Profile, the parties to the deposit agreement understand that the depositary will not verify, determine or otherwise ascertain that the DTC participant claiming to be acting on behalf of an ADS holder in requesting registration of transfer and delivery described in the paragraph above has the actual authority to act on behalf of the ADS holder (notwithstanding any requirements under the Uniform Commercial Code).

 

23


Exhibit 4.5

 

SECOND AMENDED AND RESTATED

SHAREHOLDER VOTING PROXY AGREEMENT

 

This SECOND AMENDED AND RESTATED SHAREHOLDER VOTING PROXY AGREEMENT (this “Agreement”) is entered into on March 20, 2020 by and among:

 

1.                  THE SHAREHOLDERS WHOSE NAMES ARE SET OUT IN APPENDIX I (each an “Shareholder” and collectively the “Shareholders”)

 

2.                  SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD. (the “WFOE”)

 

Registered address: Unit 206-2, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing

 

Legal representative: Huang Wang

 

3.                  ANHUI HUAMI INFORMATION TECHNOLOGY CO., LTD. (the “Company”)

 

Registered address: Room 1201, Block A4, National Cartoon and Animation Industry Base, No. 800 Wang Jiang West Road, Hi-Tech Industry Development Zone, Hefei

 

Legal representative: Huang Wang

 

(in this Agreement, each of the above individually being referred to as a “Party”, collectively the “Parties”.)

 

WHEREAS:

 

1.                  The original shareholders of the Company, including Huang Wang, Lu Yunfen, Liu De, Cao Liping, Yue Bin and Lhasa Heye Investment Management Co., Ltd., the WFOE and the Company entered into an Amended and Restated Shareholder Voting Proxy Agreement on November 3, 2017 (hereinafter referred to as the “Original Shareholder Voting Proxy Agreement”). After the Company reduced its registered capital in 2020, Liu De, Cao Liping, Yue Bin and Lhasa Heye Investment Management Co., Ltd. are no longer registered shareholders of the Company. In order to reflect the above shareholding change, all Parties now agree to enter into this Agreement to amend and restate the Original Shareholder Voting Proxy Agreement.

 

2.                  The Shareholders are the registered shareholders of the Company, holding in aggregate 100% of the shares of the Company; and

 

3.                  Each of the Shareholders is in desirous of appointing the individual designated by the WFOE as its proxy to exercise all the voting rights it is entitled to as a shareholder of the Company, and the WFOE is in desirous of nominating such individual to accept such appointment.

 

THEREFORE, upon consultations, the Parties hereby agree as follows:

 


 

ARTICLE 1 VOTING RIGHT DELEGATION

 

1.1                              Each of the Shareholders hereby irrevocably undertakes to execute a power of attorney in substance and form as set forth in Annex II of this Agreement subsequent to the execution of this Agreement, to authorize the individual then designated by the WFOE (the “Proxy”) to exercise, on its behalf, the following rights it is entitled to as a shareholder of the Company pursuant to the articles of association of the Company then in effect (collectively, the “Proxy Rights”):

 

(1)         to propose the convening of and to attend shareholders’ meetings of the Company as the proxy of the Shareholders in accordance with the articles of association of the Company;

 

(2)         to exercise, on behalf of the Shareholders, the rights to vote on all matters which are required to be discussed and resolved at shareholders’ meetings of the Company, including without limitation, the appointment and election of the Company’s directors and other senior management to be appointed and removed by the Shareholders, and sale, transfer or otherwise disposal of all or part of the shares held by the Shareholders in the Company;

 

(3)         other voting rights of the Shareholders provided under the articles of association of the Company, as amended from time to time.

 

The authorization and appointment are subject to the condition that the Proxy shall be a national of the PRC and that the WFOE shall approve such authorization and appointment. No appointment or authorization of the Proxy(ies) shall be revoked by any Shareholder unless the WFOE gives written notice to the Shareholders of the removal and replacement of the Proxy(ies) upon which the Shareholders shall immediately appoint such other PRC national(s) then designated by the WFOE to exercise the above Proxy Rights, and such new authorization and appointment so made shall supersede the previous authorization and appointment.

 

1.2                              The Proxy will, with due care and diligence and in compliance with laws, perform its obligations in respect of the appointment within the scope of authorization, and the Shareholders hereby acknowledge and agree to be responsible for any legal consequences arising from the exercise of the abovementioned Proxy Rights by the Proxy.

 

1.3                              The Shareholders hereby acknowledge that the Proxy is not required to consult with the Shareholders in exercising the abovementioned Proxy Rights, provided that the Proxy shall promptly inform the Shareholders once a resolution has been passed or proposal for convening an interim shareholders’ meeting has been made.

 

ARTICLE 2 RIGHT TO INFORMATION

 

2.1                              For the purpose of exercising the Proxy Rights under this Agreement, the Proxy shall be informed on the operation, business, customers, finance and employees and other affairs of the Company, and to inspect the relevant materials and records of the Company. The Company shall fully cooperate with the Proxy in this regard.

 


 

ARTICLE 3 EXERCISE OF THE PROXY RIGHTS

 

3.1                              The Shareholders shall provide full assistance to the Proxy in its exercise of the Proxy Rights, including where necessary to promptly execute any resolution of shareholders’ meeting adopted by the Proxy or such other ancillary legal documents (such as to satisfy the requirement of necessary documents to be submitted for governmental approvals, registrations or filings).

 

3.2                              At any time during the term of this Agreement, in the event that it is impossible to achieve the authorization or exercise of the Proxy Rights hereunder for any reason whatsoever (other than the breach of the Shareholders or the Company), the Parties shall immediately seek a substituted solution as close as possible to that of the unachievable provision and, when necessary, enter into a supplementary agreement to amend or modify the provisions of this Agreement such that the purpose of this Agreement shall continue to be achieved.

 

ARTICLE 4 DISCLAIMER AND INDEMNITY

 

4.1                              The Parties acknowledge that under no circumstances shall the WFOE be held liable to the other Parties or any third party or to provide any indemnity, economic or otherwise, for the exercise of the Proxy Rights hereunder by the individual(s) designated by it.

 

4.2                              The Shareholders and the Company agree to indemnify and hold the WFOE harmless against any and all losses suffered or likely to be suffered by it as a result of the exercise of the Proxy Rights by the Proxy designated by the WFOE, including, without limitation, any losses arising from any lawsuit, recourse, arbitration or claims brought by any third party against it or of any administrative investigation or sanction of any governmental authorities, provided that such losses are not caused by the willful misconduct or gross negligence of the Proxy.

 

ARTICLE 5 REPRESENTATIONS AND WARRANTIES

 

5.1                              Each of the Shareholders hereby severally represents and warrants that:

 

5.1.1                    it has full and independent legal status and legal capacity, and is duly authorized to execute, deliver and perform this Agreement and is capable of being an independent party to a lawsuit.

 

5.1.2                    it has full power and authority to execute and deliver this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and to consummate the transactions contemplated hereunder. This Agreement is lawfully and duly executed and delivered by it and constitutes its legal and binding obligations, enforceable against it pursuant to the terms hereof.

 


 

5.1.3                    it is the lawfully registered shareholder of the Company as of the effective date of this Agreement, and the Proxy Rights are free from any third party right, except for those created under this Agreement, the Second Amended and Restated Equity Pledge Agreement and the Second Amended and Restated Exclusive Option Agreement executed by and among the Shareholders, the Company, and the WFOE. Pursuant to this Agreement, the Proxy is able to exercise the Proxy Rights completely and fully in accordance with the articles of association of the Company then in effect.

 

5.2                              Each of the WFOE and the Company hereby severally represents and warrants that:

 

5.2.1                    it is a limited liability company duly registered and validly existing under the laws of the place of its incorporation with independent legal person status. It has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit.

 

5.2.2                    it has full corporate power and authority to execute and deliver this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions contemplated hereunder.

 

5.3                              The Company further represents and warrants that:

 

5.3.1                    Each of the Shareholders is the lawfully registered shareholder of the Company as of the effective date of this Agreement. The Proxy Rights are free from any third party right, except for those created under this Agreement, the Second Amended and Restated Equity Pledge Agreement and the Second Amended and Restated Exclusive Option Agreement executed by and among the Shareholders, the Company, and the WFOE. Pursuant to this Agreement, the Proxy is able to exercise the Proxy Rights completely and fully in accordance with the articles of association of the Company then in effect.

 

ARTICLE 6 TERM

 

6.1                              This Agreement shall become effective upon duly execution by the Parties hereto, and shall remain valid until it is terminated by written agreement of the Parties hereto. The Original Shareholder Voting Proxy Agreement shall be replaced by this Agreement from the effective date of this Agreement.

 

6.2                              In the event that any Shareholder, with the WFOE’s prior consent, transfers all shares held by it in the Company, such Shareholder shall no longer be a Party to this Agreement and the obligations and undertakings of the other Parties under this Agreement shall not be affected or impaired in any way.

 


 

ARTICLE 7 NOTICES

 

7.1                              Any notice, request, demand and other correspondence required to be given or made pursuant to this Agreement shall be made in writing and delivered to relevant Parties.

 

7.2                              Such notices or other correspondence shall be deemed to be duly served upon transmission if sent by fax or telex, or upon delivery if sent by hand, or five (5) days after posting if sent by mail.

 

ARTICLE 8 CONFIDENTIALITY OBLIGATIONS

 

8.1                              Notwithstanding the termination of this Agreement, each Party shall be obliged to keep in strict confidence the trade secrets, proprietary and customer information, and all other information which are confidential in nature (collectively, the “Confidential Information”) of other Parties acquired during the entering into and performance of this Agreement. The receiving party of the Confidential Information shall not disclose any Confidential Information to any third parties unless it has obtained the prior written consent of the Party disclosing the Confidential Information, or required by relevant laws and regulations or the requirements of the place where a Party’s affiliate is listed. The receiving party of the Confidential Information shall not use, directly or indirectly, such Confidential Information for purposes other than performing its obligations under this Agreement.

 

8.2                              The Confidential Information shall not include any information which:

 

(a) as shown by written evidence, was rightfully known to the receiving party previously;

 

(b) enters the public domain through no fault of the receiving party; or

 

(c) is rightfully acquired by the receiving party from other sources subsequent to the receipt of the Confidential Information.

 

8.3                              The receiving party may disclose the Confidential Information to its relevant employees, agents or professionals it retains, provided that it shall ensure that such persons shall comply with the terms and conditions of this Agreement and the receiving party shall be liable for the breach of any relevant terms and conditions of this Agreement by any of such persons.

 

8.4                              Notwithstanding anything to the contrary in this Agreement, this Article shall survive the termination of this Agreement.

 

ARTICLE 9 LIABILITIES FOR BREACH OF CONTRACT

 

9.1                              The Parties agree and acknowledge that, if any Party (the “Defaulting Party”) is materially in breach of any provision of this Agreement, or materially fails to perform or delays in performing any of the obligations hereunder, such breach, failure or delay shall constitute a default hereunder (the “Default”), and the non-defaulting Party (the “Non-defaulting Party”) shall be entitled to demand the Defaulting Party to rectify such Default or take remedial actions within a reasonable period of time. If the Defaulting Party fails to rectify such Default or take remedial actions within such reasonable period of time or ten (10) days from the receipt of the written notice from the other Party requiring such rectification:

 


 

9.1.1                    the WFOE shall be entitled to terminate this Agreement and claim from the Defaulting Party for damages if the Defaulting Party is any Shareholder or the Company;

 

9.1.2                    the Non-defaulting Party shall be entitled to claim from the Defaulting Party for damages if the Defaulting party is the WFOE, provided that under no circumstances shall the non-defaulting Party be entitled to terminate or rescind this Agreement unless otherwise provided by laws.

 

9.2                              Notwithstanding any other provision herein, this Article shall survive the suspension or termination of this Agreement.

 

ARTICLE 10 MISCELLANEOUS

 

10.1                       This Agreement is made in Chinese in four (4) originals with each Party holding one (1) original.

 

10.2                       The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 

10.3                       Any dispute arising hereunder and in connection herewith shall be settled through consultations between the Parties, and if the Parties are unable to reach an agreement within thirty (30) days from the occurrence of the dispute, such dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration in accordance with the arbitration rules thereof then in effect. The place of arbitration shall be in Beijing, and the language to be used in arbitration shall be Chinese. The award of arbitration shall be final and equally binding on the Parties of this Agreement.

 

10.4                       No right, power or remedy of a Party under any provision of this Agreement shall preclude such Party from any other right, power or remedy of it under the laws and other provisions of this Agreement, nor shall any exercise of any right, power or remedy by a Party preclude such Party from exercising any other right, power or remedy.

 

10.5                       No failure or delay by any Party in exercising any right, power and remedy (the “Rights”) pursuant to this Agreement or laws shall be deemed as a waiver of such Rights, and no single or partial waiver of such Rights shall preclude any other exercise of it or the exercise of any other Rights.

 

10.6                       The headings of the Articles in this Agreement are inserted for the convenience of reference only, and under no circumstances shall be used in or otherwise affect the construction of this Agreement.

 


 

10.7                       Each provision contained in this Agreement shall be severable and independent from other provisions, and in the event that any one or more provisions of this Agreement are held invalid, illegal or unenforceable at any time, the validity, legality or enforceability of the remaining provisions shall not be affected or impaired in any way.

 

10.8                       Any amendments or supplements to this Agreement shall be made in writing and come into effect upon due execution by the Parties hereto.

 

10.9                       No Party shall transfer any of its rights and/or obligations hereunder to any third parties without prior written consent of the other Parties.

 

10.10                This Agreement shall be binding on the legal assigns or successors of the Parties.

 

[The remainder of this page is intentionally left blank]

 


 

[Signature page to the Second Amended and Restated Shareholder Voting Proxy Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Shareholder Voting Proxy Agreement has been executed by the following Parties on the date first above written.

 

HUANG WANG

 

 

 

By:

/s/ Huang Wang

 

 

LU YUNFEN

 

 

 

By:

/s/ Lu Yunfen

 

 

Signature page to the Second Amended and Restated Shareholder Voting Proxy Agreement

 


 

[Signature page to the Second Amended and Restated Shareholder Voting Proxy Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Shareholder Voting Proxy Agreement has been executed by the following Parties on the date first above written.

 

SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD.

(Company seal: /s/ Shunyuan Kaihua (Beijing) Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

ANHUI HUAMI INFORMATION TECHNOLOGY CO., LTD.

(Company seal: /s/ Anhui Huami Information Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

Signature page to the Second Amended and Restated Shareholder Voting Proxy Agreement

 


 

Appendix I:

 

General Information of the Company

 

Company Name: Anhui Huami Information Technology Co., Ltd.

 

Registered Address: Room 1201, Block A4, National Cartoon and Animation Industry Base, No. 800 Wang Jiang West Road, Hi-Tech Industry Development Zone, Hefei

 

Registered Capital: RMB 1,666,667

 

Legal Representative: Huang Wang

 

Shareholding Structure:

 

Name of Shareholder

 

Amount of Contribution
in the Registered Capital
(in RMB 10,000)

 

Percentage of
Contribution

 

Identity Card Number /
Unified Social Credit
Number

 

Huang Wang

 

165.6667

 

99.4000

%

***

 

Lu Yunfen

 

1.0000

 

0.6000

%

***

 

 

 

 

 

 

 

 

 

Total

 

166.6667

 

100

%

 

 

Appendix I

 


 

Appendix II:

 

Form of Power of Attorney

 

This Power of Attorney (the “Power of Attorney”), executed by                     (Identity Card No.:                     ) on March 20, 2020, is issued to and in favor of Shunyuan Kaihua (Beijing) Technology Co., Ltd. (with its registered address at Unit 206-2, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing) (the “Proxy”).

 

I,                             , hereby grant to the Proxy a general authorization within the validity of the Power of Attorney to exercise, as my/our proxy and on my/our behalf, the following rights I am/we are entitled to as shareholder of Anhui Huami Information Technology Co., Ltd. (the “Company”):

 

 

(1)

to propose the convening of and to attend shareholders’ meetings of the Company as my/our proxy in accordance with the articles of association of the Company;

 

 

(2)

to exercise, as my/our proxy, the rights to vote on all matters discussed and resolved at shareholders’ meetings of the Company, including without limitation, the appointment and election of the Company’s directors and other senior management to be appointed and removed by the shareholders;

 

 

(3)

to exercise, as my/our proxy, other voting rights of the shareholders provided under the articles of association of the Company, as amended from time to time.

 

I hereby irrevocably acknowledge(s) that unless with instruction from Shunyuan Kaihua (Beijing) Technology Co., Ltd. (the “WFOE”) to replace the Proxy, this Power of Attorney shall remain valid until the expiry or early termination of the Second Amended and Restated Shareholder Voting Proxy Agreement dated March 20, 2020 by and among the WFOE, the Company and the shareholders of the Company.

 

The authorization is hereby granted.

 

 

Name:

 

 

 

 

 

By:

 

 

Date:

 

 

Appendix II

 


               

Exhibit 4.6

 

SECOND AMENDED AND RESTATED

SHAREHOLDER VOTING PROXY AGREEMENT

 

This SECOND AMENDED AND RESTATED SHAREHOLDER VOTING PROXY AGREEMENT (this “Agreement”) is entered into on March 20, 2020 by and among:

 

1.                    THE SHAREHOLDERS WHOSE NAMES ARE SET OUT IN APPENDIX I (each an “Shareholder” and collectively the “Shareholders”)

 

2.                    SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD. (the “WFOE”)

 

Registered address: Unit 206-2, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing
Legal representative: Huang Wang

 

3.                    HUAMI (BEIJING) INFORMATION TECHNOLOGY CO., LTD. (the “Company”)

 

Registered address: Unit 206-1, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing
Legal representative: Huang Wang

 

(in this Agreement, each of the above individually being referred to as a “Party”, collectively the “Parties”.)

 

WHEREAS:

 

1.                The original shareholders of the Company, including Huang Wang, Lu Yunfen, Fan Meihui, Fan Bin, Zhang Yi, Zhang Xiaojun, Liu De, Cao Lipin, Yue Bin and Lhasa Heye Investment Management Co., Ltd., the WFOE and the Company entered into an Amended and Restated Shareholder Voting Proxy Agreement on November 3, 2017 (hereinafter referred to as the “Original Shareholder Voting Proxy Agreement”). After the share transfer of the Company in 2020, Liu De, Cao Liping, Yue Bin and Lhasa Heye Investment Management Co., Ltd. are no longer registered shareholders of the Company. In order to reflect the above shareholding change, all Parties now agree to enter into this Agreement to amend and restate the Original Shareholder Voting Proxy Agreement.

 

2.                The Shareholders are the registered shareholders of the Company, holding in aggregate 100% of the shares of the Company; and

 

3.                Each of the Shareholders is in desirous of appointing the individual designated by the WFOE as its proxy to exercise all the voting rights it is entitled to as a shareholder of the Company, and the WFOE is in desirous of nominating such individual to accept such appointment.

 

THEREFORE, upon consultations, the Parties hereby agree as follows:

 


 

ARTICLE 1
VOTING RIGHT DELEGATION

 

1.1                   Each of the Shareholders hereby irrevocably undertakes to execute a power of attorney in substance and form as set forth in Annex II of this Agreement subsequent to the execution of this Agreement, to authorize the individual then designated by the WFOE (the “Proxy”) to exercise, on its behalf, the following rights it is entitled to as a shareholder of the Company pursuant to the articles of association of the Company then in effect (collectively, the “Proxy Rights”):

 

(1)                           to propose the convening of and to attend shareholders’ meetings of the Company as the proxy of the Shareholders in accordance with the articles of association of the Company;

 

(2)                           to exercise, on behalf of the Shareholders, the rights to vote on all matters which are required to be discussed and resolved at shareholders’ meetings of the Company, including without limitation, the appointment and election of the Company’s directors and other senior management to be appointed and removed by the Shareholders, and sale, transfer or otherwise disposal of all or part of the shares held by the Shareholders in the Company;

 

(3)                           other voting rights of the Shareholders provided under the articles of association of the Company, as amended from time to time.

 

The authorization and appointment are subject to the condition that the Proxy shall be a national of the PRC and that the WFOE shall approve such authorization and appointment. No appointment or authorization of the Proxy(ies) shall be revoked by any Shareholder unless the WFOE gives written notice to the Shareholders of the removal and replacement of the Proxy(ies) upon which the Shareholders shall immediately appoint such other PRC national(s) then designated by the WFOE to exercise the above Proxy Rights, and such new authorization and appointment so made shall supersede the previous authorization and appointment.

 

1.2                   The Proxy will, with due care and diligence and in compliance with laws, perform its obligations in respect of the appointment within the scope of authorization, and the Shareholders hereby acknowledge and agree to be responsible for any legal consequences arising from the exercise of the abovementioned Proxy Rights by the Proxy.

 

1.3                   The Shareholders hereby acknowledge that the Proxy is not required to consult with the Shareholders in exercising the abovementioned Proxy Rights, provided that the Proxy shall promptly inform the Shareholders once a resolution has been passed or proposal for convening an interim shareholders’ meeting has been made.

 

2


 

ARTICLE 2
RIGHT TO INFORMATION

 

2.1                   For the purpose of exercising the Proxy Rights under this Agreement, the Proxy shall be informed on the operation, business, customers, finance and employees and other affairs of the Company, and to inspect the relevant materials and records of the Company. The Company shall fully cooperate with the Proxy in this regard.

 

ARTICLE 3
EXERCISE OF THE PROXY RIGHTS

 

3.1                   Shareholders shall provide full assistance to the Proxy in its exercise of the Proxy Rights, including where necessary to promptly execute any resolution of shareholders’ meeting adopted by the Proxy or such other ancillary legal documents (such as to satisfy the requirement of necessary documents to be submitted for governmental approvals, registrations or filings).

 

3.2                   At any time during the term of this Agreement, in the event that it is impossible to achieve the authorization or exercise of the Proxy Rights hereunder for any reason whatsoever (other than the breach of the Shareholders or the Company), the Parties shall immediately seek a substituted solution as close as possible to that of the unachievable provision and, when necessary, enter into a supplementary agreement to amend or modify the provisions of this Agreement such that the purpose of this Agreement shall continue to be achieved.

 

ARTICLE 4
DISCLAIMER AND INDEMNITY

 

4.1                   The Parties acknowledge that under no circumstances shall the WFOE be held liable to the other Parties or any third party or to provide any indemnity, economic or otherwise, for the exercise of the Proxy Rights hereunder by the individual(s) designated by it.

 

4.2                   The Shareholders and the Company agree to indemnify and hold the WFOE harmless against any and all losses suffered or likely to be suffered by it as a result of the exercise of the Proxy Rights by the Proxy designated by the WFOE, including, without limitation, any losses arising from any lawsuit, recourse, arbitration or claims brought by any third party against it or of any administrative investigation or sanction of any governmental authorities, provided that such losses are not caused by the willful misconduct or gross negligence of the Proxy.

 

ARTICLE 5
REPRESENTATIONS AND WARRANTIES

 

5.1                   Each of the Shareholders hereby severally represents and warrants that:

 

5.1.1       it has full and independent legal status and legal capacity, and is duly authorized to execute, deliver and perform this Agreement and is capable of being an independent party to a lawsuit.

 

3


 

5.1.2       it has full power and authority to execute and deliver this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and to consummate the transactions contemplated hereunder. This Agreement is lawfully and duly executed and delivered by it and constitutes its legal and binding obligations, enforceable against it pursuant to the terms hereof.

 

5.1.3       it is the lawfully registered shareholder of the Company as of the effective date of this Agreement, and the Second Proxy Rights are free from any third party right, except for those created under this Agreement, the Second Amended and Restated Equity Pledge Agreement and the Second Amended and Restated Exclusive Option Agreement executed by and among the Shareholders, the Company, and the WFOE. Pursuant to this Agreement, the

 

Proxy is able to exercise the Proxy Rights completely and fully in accordance with the articles of association of the Company then in effect.

 

5.2                   Each of the WFOE and the Company hereby severally represents and warrants that:

 

5.2.1       it is a limited liability company duly registered and validly existing under the laws of the place of its incorporation with independent legal person status. It has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit.

 

5.2.2       it has full corporate power and authority to execute and deliver this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions contemplated hereunder.

 

5.3                   The Company further represents and warrants that:

 

5.3.1       Each of the Shareholders is the lawfully registered shareholder of the Company as of the effective date of this Agreement. The Proxy Rights are free from any third party right, except for those created under this Agreement, the Second Amended and Restated Equity Pledge Agreement and the Second Amended and Restated Exclusive Option Agreement executed by and among the Shareholders, the Company, and the WFOE. Pursuant to this Agreement, the Proxy is able to exercise the Proxy Rights completely and fully in accordance with the articles of association of the Company then in effect.

 

ARTICLE 6
TERM

 

6.1                   This Agreement shall become effective upon duly execution by the Parties hereto, and shall remain valid until it is terminated by written agreement of the Parties hereto. The Original Shareholder Voting Proxy Agreement shall be replaced by this Agreement from the effective date of this Agreement.

 

4


 

6.2                   In the event that any Shareholder, with the WFOE’s prior consent, transfers all shares held by it in the Company, such Shareholder shall no longer be a Party to this Agreement and the obligations and undertakings of the other Parties under this Agreement shall not be affected or impaired in any way.

 

ARTICLE 7
NOTICES

 

7.1                   Any notice, request, demand and other correspondence required to be given or made pursuant to this Agreement shall be made in writing and delivered to relevant Parties.

 

7.2                   Such notices or other correspondence shall be deemed to be duly served upon transmission if sent by fax or telex, or upon delivery if sent by hand, or five (5) days after posting if sent by mail.

 

ARTICLE 8
CONFIDENTIALITY OBLIGATIONS

 

8.1                   Notwithstanding the termination of this Agreement, each Party shall be obliged to keep in strict confidence the trade secrets, proprietary and customer information, and all other information which are confidential in nature (collectively, the “Confidential Information”) of other Parties acquired during the entering into and performance of this Agreement. The receiving party of the Confidential Information shall not disclose any Confidential Information to any third parties unless it has obtained the prior written consent of the Party disclosing the Confidential Information, or required by relevant laws and regulations or the requirements of the place where a Party’s affiliate is listed. The receiving party of the Confidential Information shall not use, directly or indirectly, such Confidential Information for purposes other than performing its obligations under this Agreement.

 

8.2                   The Confidential Information shall not include any information which:

 

(a)     as shown by written evidence, was rightfully known to the receiving party previously;

 

(b)     enters the public domain through no fault of the receiving party; or

 

(c)     is rightfully acquired by the receiving party from other sources subsequent to the receipt of the Confidential Information.

 

8.3                   The receiving party may disclose the Confidential Information to its relevant employees, agents or professionals it retains, provided that it shall ensure that such persons shall comply with the terms and conditions of this Agreement and the receiving party shall be liable for the breach of any relevant terms and conditions of this Agreement by any of such persons.

 

8.4                   Notwithstanding anything to the contrary in this Agreement, this Article shall survive the termination of this Agreement.

 

5


 

ARTICLE 9
LIABILITIES FOR BREACH OF CONTRACT

 

9.1                   The Parties agree and acknowledge that, if any Party (the “Defaulting Party”) is materially in breach of any provision of this Agreement, or materially fails to perform or delays in performing any of the obligations hereunder, such breach, failure or delay shall constitute a default hereunder (the “Default”), and the non-defaulting Party (the “Non-defaulting Party”) shall be entitled to demand the Defaulting Party to rectify such Default or take remedial actions within a reasonable period of time. If the Defaulting Party fails to rectify such Default or take remedial actions within such reasonable period of time or ten (10) days from the receipt of the written notice from the other Party requiring such rectification:

 

9.1.1         the WFOE shall be entitled to terminate this Agreement and claim from the Defaulting Party for damages if the Defaulting Party is any Shareholder or the Company;

 

9.1.2         the Non-defaulting Party shall be entitled to claim from the Defaulting Party for damages if the Defaulting party is the WFOE, provided that under no circumstances shall the non-defaulting Party be entitled to terminate or rescind this Agreement unless otherwise provided by laws.

 

9.2                   Notwithstanding any other provision herein, this Article shall survive the suspension or termination of this Agreement.

 

ARTICLE 10
MISCELLANEOUS

 

10.1            This Agreement is made in Chinese in eight (8) originals with each Party holding one (1) original.

 

10.2            The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 

10.3            Any dispute arising hereunder and in connection herewith shall be settled through consultations between the Parties, and if the Parties are unable to reach an agreement within thirty (30) days from the occurrence of the dispute, such dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration in accordance with the arbitration rules thereof then in effect. The place of arbitration shall be in Beijing, and the language to be used in arbitration shall be Chinese. The award of arbitration shall be final and equally binding on the Parties of this Agreement.

 

10.4            No right, power or remedy of a Party under any provision of this Agreement shall preclude such Party from any other right, power or remedy of it under the laws and other provisions of this Agreement, nor shall any exercise of any right, power or remedy by a Party preclude such Party from exercising any other right, power or remedy.

 

6


 

10.5            No failure or delay by any Party in exercising any right, power and remedy (the “Rights”) pursuant to this Agreement or laws shall be deemed as a waiver of such Rights, and no single or partial waiver of such Rights of a Party shall preclude any other exercise of it or the exercise of any other Rights.

 

10.6            The headings of the Articles in this Agreement are inserted for the convenience of reference only, and under no circumstances shall be used in or otherwise affect the construction of this Agreement.

 

10.7            Each provision contained in this Agreement shall be severable and independent from other provisions, and in the event that any one or more provisions of this Agreement are held invalid, illegal or unenforceable at any time, the validity, legality or enforceability of the remaining provisions shall not be affected or impaired in any way.

 

10.8            Any amendments or supplements to this Agreement shall be made in writing and come into effect upon due execution by the Parties hereto.

 

10.9            No Party shall transfer any of its rights and/or obligations hereunder to any third parties without prior written consent of the other Parties.

 

10.10     This Agreement shall be binding on the legal assigns or successors of the Parties.

 

[The remainder of this page is intentionally left blank]

 

7


 

[Signature page to the Second Amended and Restated Shareholder Voting Proxy Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Shareholder Voting Proxy Agreement has been executed by the following Parties on the date first above written.

 

HUANG WANG

 

 

 

 

By:

/s/ Huang Wang

 

 

LU YUNFEN

 

 

 

 

By:

/s/ Lu Yunfen

 

 

FAN MEIHUI

 

 

 

 

By:

/s/ Fan Meihui

 

 

FAN BIN

 

 

 

 

By:

/s/ Fan Bin

 

 

ZHANG YI

 

 

 

 

By:

/s/ Zhang Yi

 

 

ZHANG XIAOJUN

 

 

 

 

By:

/s/ Zhang Xiaojun

 

 

Signature page to the Second Amended and Restated Shareholder Voting Proxy Agreement

 


 

[Signature page to the Second Amended and Restated Shareholder Voting Proxy Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Shareholder Voting Proxy Agreement has been executed by the following Parties on the date first above written.

 

SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD.

(Company seal: /s/ Shunyuan Kaihua (Beijing) Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

HUAMI (BEIJING) INFORMATION TECHNOLOGY CO., LTD.

(Company seal: /s/ Huami (Beijing) Information Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

Signature page to the Second Amended and Restated Shareholder Voting Proxy Agreement

 


 

Appendix I:

 

General Information of the Company

 

Company Name: Huami (Beijing) Information Technology Co., Ltd.

 

Registered Address: Unit 206-1, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing

 

Registered Capital: RMB 2,020,200

 

Legal Representative: Huang Wang

 

Shareholding Structure:

 

Name of Shareholder

 

Amount of Contribution
in the Registered Capital
(in RMB 10,000)

 

Percentage of
Contribution

 

Identity Card Number /
Unified Social Credit
Number

 

Huang Wang

 

182.02

 

90.1000

%

***

 

Lu Yunfen

 

4.3

 

2.1285

%

***

 

Fan Meihui

 

4.3

 

2.1285

%

***

 

Fan Bin

 

4.3

 

2.1285

%

***

 

Zhang Yi

 

4.3

 

2.1285

%

***

 

Zhang Xiaojun

 

2.8

 

1.3860

%

***

 

 

 

 

 

 

 

 

 

Total

 

202.02

 

100

%

 

 

Appendix I

 


 

Appendix II:

 

Form of Power of Attorney

 

This Power of Attorney (the “Power of Attorney”), executed by                     (Identity Card No.:                     ) on             2020, is issued to and in favor of                     (Identity Card No.:                     ) (the “Proxy”).

 

I/We,                     , hereby grant to the Proxy a general authorization within the validity of the Power of Attorney to exercise, as my/our proxy and on my/our behalf, the following rights I am/we are entitled to as shareholder of Huami (Beijing) Information Technology Co., Ltd. (the “Company”):

 

 

(1)

to propose the convening of and to attend shareholders’ meetings of the Company as my/our proxy in accordance with the articles of association of the Company;

 

 

(2)

to exercise, as my/our proxy, the rights to vote on all matters discussed and resolved at shareholders’ meetings of the Company, including without limitation, the appointment and election of the Company’s directors and other senior management to be appointed and removed by the shareholders;

 

 

(3)

to exercise, as my/our proxy, other voting rights of the shareholders provided under the articles of association of the Company, as amended from time to time.

 

I/We hereby irrevocably acknowledge(s) that unless with instruction from Shunyuan Kaihua (Beijing) Technology Co., Ltd. (the “WFOE”) to replace the Proxy, this Power of Attorney shall remain valid until the expiry or early termination of the Second Amended and Restated Shareholder Voting Proxy Agreement dated             , 2020 by and among the WFOE, the Company and the shareholders of the Company.

 

The authorization is hereby granted.

 

 

Name:

 

 

 

 

 

By:

 

 

Date:

2020

 

Appendix II

 


Exhibit 4.7

 

SECOND AMENDED AND RESTATED

EQUITY PLEDGE AGREEMENT

 

This SECOND AMENDED AND RESTATED EQUITY PLEDGE AGREEMENT (this “Agreement”) is entered into on March 20, 2020 by and among:

 

1.                  THE SHAREHOLDERS WHOSE NAMES ARE SET OUT IN APPENDIX I (each a “Pledgor” and collectively the “Pledgors”)

 

2.                  SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD. (the “Pledgee”)

 

Registered address: Unit 206-2, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing

 

Legal representative: Huang Wang

 

3.                  ANHUI HUAMI INFORMATION TECHNOLOGY CO., LTD. (the “Company”)

 

Registered address: Room 1201, Block A4, National Cartoon and Animation Industry Base, No. 800 Wang Jiang West Road, Hi-Tech Industry Development Zone, Hefei

 

Legal representative: Huang Wang

 

(in this Agreement, each of the above individually being referred to as a “Party”, collectively the “Parties”.)

 

WHEREAS:

 

(1)               The original shareholders of the Company, including Huang Wang, Lu Yunfen, Liu De, Cao Liping, Yue Bin and Lhasa Heye Investment Management Co., Ltd., the Pledgee and the Company entered into an Amended and Restated Equity Pledge Agreement on November 3, 2017 (hereinafter referred to as the “Original Equity Pledge Agreement”). After the Company reduced its registered capital in 2020, Liu De, Cao Liping, Yue Bin and Lhasa Heye Investment Management Co., Ltd. are no longer registered shareholders of the Company. In order to reflect the above shareholding change, all Parties now agree to conclude this Agreement to amend and restate the Original Equity Pledge Agreement.

 

(2)               The Pledgors are the registered shareholders of the Company, holding in aggregate all equity interests of the Company (the “Equity Interests”), and as at the date of this Agreement, their respective contribution amount and shareholding percentage in the Company’s registered capital are set out in Appendix I hereof.

 

(3)               Pursuant to the Second Amended and Restated Exclusive Option Agreement entered into by and among the Parties on March 20, 2020 (the “Option Agreement”), each of the Pledgors or the Company shall, to the extent permitted by the PRC laws and at the request of the Pledgee, transfer all or part of the Equity Interests held by it or the assets in the Company to the Pledgee and/or any other entity or individual designated by the Pledgee.

 

(4)               Pursuant to the Second Amended and Restated Shareholder Voting Proxy Agreement entered into by and among the Parties on March 20, 2020 (the “Voting Proxy Agreement”), each of the Pledgors has irrevocably appointed the person then designated by the Pledgee as its proxy to exercise all the voting rights it is entitled to as a shareholder of the Company.

 


 

(5)               Pursuant to the Second Amended and Restated Exclusive Consultation and Service Agreement entered into by and among the Parties on March 20, 2020 (the “Consultation Service Agreement”), the Company has engaged the Pledgee to provide consulting services on an exclusive basis, and agreed to pay service fees to the Pledgee for its provision of such services.

 

(6)               For the purpose of securing the performance of the Contractual Obligations (as defined below) and repayment of the Secured Indebtedness (as defined below) by the Pledgors, each of the Pledgors agrees to pledge all Equity Interests held by it in favor of the Pledgee and grant a first ranking pledge in favor of the Pledgee, and the Company is agreeable to the arrangement of such equity pledge.

 

(7)               Pursuant to the Loan Agreement between Huang Wang, who is a Pledgor, and the Pledgee dated November 3, 2017 (the “Loan Agreement”), the Pledgee has provided a loan of RMB 15,000,000, to be applied by Huang Wang to pay to Tianjin Jinxing Venture Capital Co., Ltd. (previously known as Tianjin Jinxing Investment Co., Ltd.) the share transfer price for the restructuring of the Company. In the meantime, Huang Wang shall pledge all his Equity Interests representing RMB 666,667 in the registered capital of the Company to the Pledgee as security for the Loan Agreement and grant a first ranking pledge in favor of the Pledgee. The Parties are agreeable to the arrangement of such equity pledge.

 

THEREFORE, upon consultations, the Parties hereby agree as follows:

 

ARTICLE 1 DEFINITIONS

 

1.1                              Unless the context otherwise requires, in this Agreement, the following terms shall have the following meanings:

 

“Contractual Obligations”:

 

means all contractual obligations of the Pledgors under the Option Agreement and Voting Proxy Agreement; all contractual obligations of the Company under the Option Agreement, Voting Proxy Agreement and Consultation Service Agreement; all contractual obligations of the Pledgors and the Company under this Agreement; and all contractual obligations of Huang Wang under the Loan Agreement.

 

 

 

“Secured Indebtedness”:

 

means any and all direct, indirect and derivative loss and loss of anticipated profits incurred by the Pledgee as a result of any Event of Default (as defined below) of the Pledgors and/or the Company, the amount of which loss shall be calculated taking into account of factors including but not limited to the reasonable business plan and profit forecast of the Pledgee, and all expenses occurred in connection with enforcement by Pledgee of the Contractual Obligations of the Pledgors and/or the Company.

 

2


 

“Transaction Documents”:

 

mean the Option Agreement, Voting Proxy Agreement and Consultation Service Agreement.

 

 

 

“Event of Default”:

 

means breach by any Pledgor of any of its Contractual Obligations under the Option Agreement, Voting Proxy Agreement and/or this Agreement, and breach by the Company of any of its Contractual Obligations under Option Agreement, Voting Proxy Agreement, Consultation Service Agreement and/or this Agreement.

 

 

 

“Pledged Equity Interests”:

 

means all Equity Interests (details of the Equity Interests held by the Pledgors are set out in Schedule 1) in the Company as of the effective date of this Agreement and interests in the increased capital contribution and dividends pursuant to Articles 2.6 and 2.7 of this Agreement legally owned by the Pledgors, which are to be pledged in favor of the Plegee as security for the performance of the Contractual Obligations by the Pldgors and the Company pursuant to this Agreement.

 

 

 

“PRC Laws”:

 

mean the laws, administrative regulations, administrative rules, local decrees, judicial interpretations and regulatory documents with binding effects of the PRC then in effect.

 

1.2                              Any reference to the PRC Laws herein shall be deemed to include: (1) the reference to any revision, amendment, supplement and reenactment of such PRC Laws, irrespective of whether such revision, amendment, supplement and reenactment comes into force before or after the date of execution of this Agreement; and (2) the reference to other decisions, notices or regulations enacted in accordance, or effective as a result of, such PRC Laws.

 

1.3                              Unless otherwise specified in the context herein, any reference to an article, section, item or paragraph shall mean the corresponding article, section, item or paragraph in this Agreement.

 

ARTICLE 2 EQUITY PLEDGE

 

2.1                              Each of the Pledgors hereby agrees to pledge all the Pledged Equity Interests legally owned by it and of which it is entitled to dispose to the Pledgee as security for the repayment of the Secured Indebtedness pursuant to this Agreement. The Company hereby agrees that each of the Pledgor pledges the Equity Interest to the Pledgee pursuant to this Agreement. In particular, as of the date of this Agreement: Huang Wang shall pledge 99.4000% of the Equity Interests in the registered capital of the Company (representing a capital contribution of RMB 1,656,667) held by him to the Pledgee; Lu Yunfen shall pledge 0.6000% of the Equity Interests in the registered capital of the Company (representing a capital contribution of RMB 10,000) held by her to the Pledgee.

 

3


 

2.2                              Each of the Pledgors covenants to register the pledge of equity interests (the “Equity Pledge”) under this Agreement with the competent industrial and commercial registration authority for the Company on the date of this Agreement. The Company covenants to use its best efforts to cooperate with the Pledgors to complete the registration with the aforesaid industrial and commercial registration authority under this article. The Equity Pledge under this Agreement shall be created upon completion of the registration of the creation of equity pledge by the Company with the competent industrial and commercial authority.

 

2.3                              During the effective term of this Agreement, the Pledgee shall not be liable for any reduction in the value of the Pledged Equity Interests, nor the Pledgors shall have any right to make any claim or request against the Pledgee for any such reduction, provided that such reduction is not a direct result of any willful or gross negligence of the Pledgee.

 

2.4                              Subject to the above Article 2.3, in the event of occurrence of any circumstance which may cause a substantial reduction in the value of the Pledged Equity Interests and is detrimental to the interests of the Pledgee, the Pledgee may sell by auction or otherwise dispose of the Pledged Equity Interests on behalf of the Pledgors and, upon consultation with the Pledgors, apply the proceeds from such disposal for early repayment of the Secured Indebtedness or to be held by the local notary office where the Pledgee is located in escrow (any such costs in connection therewith shall be fully borne by the Pledgee). In addition, at the request of the Pledgee, the Pledgors shall provide other assets as security for the Secured Indebtedness.

 

2.5                              Upon occurrence of any Event of Default, the Pledgee shall be entitled to dispose of the Pledged Equity Interests in accordance with Article 4 under this Agreement.

 

2.6                              The Pledgors shall not increase the capital of the Company without prior written consent of the Pledgee. Any additional contribution made by the Pledgors as a result of the increase in the Company’s capital shall constitute part of the Pledged Equity Interests.

 

2.7                              The Pledgors shall not be entitled to receive any dividend or bonus in respect of the Pledged Equity Interests without prior written consent of the Pledgee.

 

2.8                              Upon occurrence of any Event of Default, the Pledgee shall be entitled to dispose of any Pledged Equity Interests held by any Pledgor in accordance with the terms of this Agreement.

 

ARTICLE 3 RELEASE OF PLEDGE

 

3.1                              Upon sufficient and complete discharge of the Contractual Obligations and repayment of the Secured Indebtedness by the Pledgors and the Company in full, the Pledgee shall, at the request of the Pledgors, release the Pledged Equity Interests and cooperate with the Pledgors to complete the filing of release of the Equity Pledge. The costs and expenses reasonably incurred in connection with such release shall be paid by the Pledgee.

 

4


 

ARTICLE 4 DISPOSAL OF THE PLEDGED EQUITY INTERESTS

 

4.1                              The Parties hereby agree that, upon occurrence of any Event of Default and with the written notice to the Plegors, the Pledgee shall be entitled to exercise all remedial rights and power available to it under the PRC Laws, the Transaction Documents and the terms of this Agreement, including without limitation to transfer, sell by auction or otherwise disposal of the Pledged Equity Interests agreed by both the Pledgee and the Pledgor so as to be compensated in priority. The Pledgee shall not be liable for any loss arising from its reasonable exercise of such rights or power.

 

4.2                              The Pledgee shall be entitled to appoint by written means its attorney or other agent to exercise any and all of the abovementioned rights and power, to which none of the Pledgors or the Company may raise any objection.

 

4.3                              The Pledgee shall be entitled to deduct from the proceeds received from its exercise of the rights and power any costs and expenses reasonably incurred by it in connection with such exercise on a reimbursement basis.

 

4.4                              The proceeds received by the Pledgee from exercise of its rights and power shall be applied in the following sequence:

 

Firstly, to pay all costs and expenses incurred by it in connection with the disposal of the Pledged Equity Interests and exercise of its rights and power, including payment of fees of attorney and agent;

 

Secondly, to pay all taxes arising from the disposal of the Pledged Equity Interests; and

 

Thirdly, to repay the Secured Indebtedness to the Pledgee.

 

Any balance amount of the proceeds shall be returned to the Pledgors or to be held by the local notary office where the Pledgee is located in escrow in accordance with the relevant laws and regulations (any such costs in connection therewith shall be fully borne by the Pledgee).

 

4.5                              The Pledgee shall be entitled to, at its sole discretion, exercise any of its remedial rights and power concurrently or separately. The Pledgee may exercise its right to sell by auction or otherwise dispose of the Pledged Equity Interests without first seeking any other remedies available for breach of contracts.

 

ARTICLE 5 COSTS AND EXPENSES

 

5.1                              Each Party shall be responsible for all of its own actual expenses in connection with creation of the Equity Pledge under this Agreement, including without limitation the stamp duty, or any other taxes and all legal fees.

 

5


 

ARTICLE 6 CONTINUITY AND NO WAIVER

 

6.1                              The Equity Pledge created under this Agreement constitutes a continual security and will survive until the Contractual Obligations are discharged or the Secured Indebtedness is repaid in full. No waiver or extension to any default by the Pledgors or delay in exercising any of its rights under the Transaction Documents or this Agreement by the Pledgee shall affect its rights under this Agreement, the PRC Laws and the Transaction Documents to demand for the Pldegors’ strict compliance with the Transaction Documents and this Agreement or any rights of the Pledgee which may arise as a result of the subsequent breach of the Transaction Documents and/or this Agreement by the Pledgors.

 

ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF PLEDGORS

 

Each of the Pledgors hereby represents and warrants to the Pledgee that:

 

7.1                              it has full legal capacity and the lawful right and capability to execute this Agreement and to be bound by the legal obligations under this Agreement.

 

7.2                              all reports, documents and information provided by it to the Pledgee with respect to the Pledgors and all matters required under this Agreement prior to the effective date of this Agreement are true and accurate in all material aspects as of the effective date of this Agreement.

 

7.3                              all reports, documents and information provided by it to the Pledgee with respect to the Pledgors and all matters required under this Agreement subsequent to the effective date of this Agreement will be true and valid in all material aspects as at the time of such provision.

 

7.4                              it is the sole and legal owner of the respective Pledged Equity Interests as of the effective date of this Agreement and there is no pending dispute with respect to the ownership over the Peldged Equity Interests. It is entitled to dispose of the Pledged Equity Interests or any part thereof.

 

7.5                              save for the encumbrances created pursuant this Agreement and the rights provided under the Transaction Documents, the Pledged Equity Interests are free from any other encumbrances, third party rights or restrictions.

 

7.6                              the Pledged Equity Interests are not prohibited from being pledged or transferred lawfully, and it has full rights and power to pledge the Pledged Equity Interests to the Pledgee.

 

7.7                              this Agreement, upon due execution by it, constitutes its legal and binding obligations, enforceable against it.

 

7.8                              all consents, approvals, waivers, authorizations from any third party or any permits, approvals, waivers of or any registration or filings (if required by laws) with any governmental authority required for the execution and performance of this Agreement and the Plegded Equity Interests under this Agreement have been obtained or completed and will remain valid in full during the effective term of this Agreement.

 

6


 

7.9                              the execution and performance of its obligations under this Agreement will not result in a breach of any agreement to which it is a party or by which it or its assets are bound, or result in a breach of any judgment of any court, any award of any arbitration body, or any decision of any administrative agency to which it is a party.

 

7.10                       the Equity Pledge constitutes a first ranking security over the Pledged Equity Interests.

 

7.11                       all taxes and charges payable for the creation of the Pledged Equity Interests have been fully paid by it.

 

7.12                       there is no pending or, to its knowledge, threatened suits, proceedings or claims against it, its assets or the Pledged Equity Interests before any court, arbitration authority, government department or administrative agency which may have material or adverse effect on its economic conditions or the Pledgors’ ability to perform this Agreement or to discharge its obligation of guarantee.

 

7.13                       it warrants hereby to the Pledgee that the above representations and warranties are and shall remain true and accurate and will be fully complied with at all times and under all circumstances until the discharge of the Contractual Obligations or repayment of the Secured Indebtedness in full.

 

7.14                       it agrees to give to the Pledgee or the entity/individual designated by the Pledgee immediately any dividends, bonus and interests received by it from the Company during the term of this Agreement as gift.

 

7.15                       to the extent permitted by the PRC Laws, it agrees to give to the Pledgee or the entity/individual designated by the Pledgee any interests distributed by the Company following the dissolution or winding up of the Company as gift, in the event that the Company is required to be dissolved or wound up as required by the compulsory provisions under the laws.

 

ARTICLE 8 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

The Company represents and warrants to the Pledgee that:

 

8.1                              it is a limited liability company duly registered and validly existing under the PRC Laws with independent legal person status. It has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit.

 

8.2                              all reports, documents and information provided by it to the Pledgee with respect to the Pledged Equity Interests and all matters required under this Agreement prior to the effective date of this Agreement are true and accurate in all material aspects as of the effective date of this Agreement.

 

8.3                              all reports, documents and information provided by it to the Pledgee with respect to the Pledged Equity Interests and all matters required under this Agreement subsequent to the effective date of this Agreement will be true and valid in all material aspects as at the time of such provision.

 

7


 

8.4                              this Agreement, upon due execution by it, constitutes its legal and binding obligations, enforceable against it.

 

8.5                              it has full corporate power and authority to execute and deliver this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions contemplated hereunder.

 

8.6                              there is no pending or, to its knowledge, threatened suits, proceedings or claims against it, its assets or the Pledged Equity Interests before any court, arbitration authority, government department or administrative agency which may have material or adverse effect on its economic conditions or the Pledgors’ ability to perform this Agreement or to discharge its obligation of guarantee.

 

8.7                              it hereby agrees to be jointly liable to the Pledgee for the representations and warranties made by the Pledgors under Articles 7.4, 7.5, 7.6, 7.8 and 7.10 under this Agreement.

 

8.8                              it warrants to the Pledgee that the above representations and warranties are and shall remain true and accurate and will be fully complied with at all times and under all circumstances until the discharge of the Contractual Obligations or repayment of the Secured Indebtedness in full.

 

8.9                              to the extent of full compliance with the PRC Laws, it agrees to transfer its assets to the Pledgee or the eligible entity/individual designated by the Pledgee at the lowest price permitted by the PRC Laws then in effect, in the event that the Company is required to be dissolved or wound up as required by the compulsory provisions under the PRC Laws.

 

ARTICLE 9 COVENANTS BY THE PLEDGORS

 

Each of the Pledgors hereby covenants to the Pledgee that:

 

9.1                              without prior written consent of the Pledgee, it will not create or permit to create any new pledge or any other encumbrance over the Pledged Security Interests, and any such pledge or encumbrance created over the Pledged Security Interests without prior written consent of the Pledgee shall be null and void.

 

9.2                              no Pledged Equity Interests shall be transferred by it without first notifying in writing and obtaining the written consent of the Pledgee and any such proposed transfer of Pledged Equity Interests shall be null and void. The proceeds from the sale of the Pledged Equity Interests shall be first applied to repay the Secured Indebtedness or to be held by a third party in escrow as agreed with the Pledgee.

 

9.3                              in the event of any lawsuit, arbitration or claim which may have adverse effect on the interests of the Pledgors and the Pledgee under the Transaction Documents and this Agreement or the Pledged Equity Interests, it undertakes to notify the Pledgee in writing as soon as practicably and, at the reasonable request of the Pledgee, take all necessary steps to protect the security interest of the Pledgee over the Pledged Equity Interests.

 

8


 

9.4                              it will not make or cause to make any conduct or action which may have any adverse effect on the interests of the Pledgee under the Transaction Documents and this Agreement or the Pledged Equity Interests. It waives all rights of first refusal which may arise when the Pledgee realizes the Equity Pledge.

 

9.5                              it undertakes, at the reasonable request of the Pledgee, to take all necessary steps and to execute all documents (including without limitation any supplemental agreement to this Agreement) necessary for the realization of the security interest over the Pledged Equity Interests and the exercise of such rights by the Pledgee.

 

9.6                              it undertakes to take all necessary steps to effect all transfers of the Pledged Equity Interests arising from the realization of the Equity Pledge under this Agreement.

 

9.7                              the proceedings of convening and voting and contents of the meetings of the shareholders and board of directors of the Company for purposes of the execution of this Agreement, creation and realization of the Equity Pledge will not be in breach of any laws, administrative regulations or articles of association of the Company.

 

9.8                              No rights or obligations under this Agreements shall be assigned by the Pledgors without prior consent of the Pledgee.

 

ARTICLE 10 COVENANTS BY THE COMPANY

 

10.1                       The Company shall use its best efforts to procure all consents, approvals, waivers, authorizations from any third party or any permits, approvals, waivers of or any registration or filings (if required by laws) with any governmental authority required for the execution and performance of this Agreement and the Plegded Equity Interests under this Agreement which shall remain valid in full during the effective term of this Agreement.

 

10.2                       The Company will not assist in or permit the creation of any new pledge or any other encumbrance over the Pledged Security Interests, without prior written consent of the Pledgee.

 

10.3                       The Company will not assist in or permit any transfer of the Pledged Equity Interests, without first obtaining the prior written consent from the Pledgee.

 

10.4                       In the event of any lawsuit, arbitration or claim which may have adverse effect on the Company, the Pledged Equity Interests or the interests of the Pledgee under the Transaction Documents and this Agreement, the Company undertakes to notify the Pledgee in writing as soon as practicably and, at the reasonable request of the Pledgee, take all necessary steps to protect the security interest of the Pledgee over the Pledged Equity Interests.

 

9


 

10.5                       The Company will not make or cause to make any conduct or action which may have any adverse effect on the interests of the Pledgee under the Transaction Documents and this Agreement or the Pledged Equity Interests.

 

10.6                       The Plegors shall within the first month of each calendar quarter, provide the financial statements of the Company for the preceding quarter to the Pledgee, including (without limitation) the balance sheet, income statement and cash flow statement.

 

10.7                       The Company undertakes, at the reasonable request of the Pledgee, to take all necessary steps and to execute all documents (including without limitation any supplemental agreement to this Agreement) necessary for the realization of the security interest over the Pledged Equity Interests and the exercise of such rights by the Pledgee.

 

10.8                       The Company undertakes to take all necessary steps to effect all transfers of the Pledged Equity Interests arising from the realization of the Equity Pledge under this Agreement.

 

ARTICLE 11 CHANGE IN CIRCUMSTANCES

 

11.1                       As supplement, and subject to other provisions under the Transaction Documents and this Agreement, if at any time, the Pledgee believes that the validity of this Agreement and/or the disposal of the Pledged Equity Interests under this Agreement is illegal or in breach of any laws, regulations or rules as a result of any enactment or amendment of any laws, regulations or rules of the PRC, or change in the interpretation or application thereof or the relevant registration procedures, the Pledgors and the Company shall at the reasonable request of and in accordance with the written instructions from the Pledgee, take all actions and/or execute all agreements or other documents necessary to:

 

(1) ensure that this Agreement remains valid;

 

(2) facilitate the disposal of the Pledged Equity Interests pursuant to this Agreement; and/or

 

(3) maintain or realize the security created or intended to be created under this Agreement.

 

ARTICLE 12 EFFECTIVE DATE AND TERM OF THE AGREEMENT

 

12.1                       This Agreement shall become effective upon duly execution by the Parties hereto. The Original Equity Pledge Agreement shall be replaced by this Agreement from the effective date of this Agreement.

 

12.2                       The term of this Agreement shall continue until the Contractual Obligations are discharged or the Secured Indebtedness is repaid in full.

 

10


 

ARTICLE 13 NOTICES

 

13.1                       Any notice, request, demand and other correspondence required to be given or made pursuant to this Agreement shall be made in writing and delivered to relevant Parties.

 

13.2                       Such notices or other correspondence shall be deemed to be duly served upon transmission if sent by fax or telex, or upon delivery if sent by hand, or five (5) days after posting if sent by mail.

 

ARTICLE 12 MISCELLANEOUS

 

14.1                       The Pledgors and the Company agree that the Pledgee may transfer its rights and/or obligations under this Agreement to any third party with prior notice to the Pledgors and the Company, whereas none of the Pledgors or the Company shall transfer any of its rights, obligations or liabilities to any third party, without prior written consent of the Pledgee. The successor or permitted assign of the Pledgors and the Company, if any, shall continue to comply with the respective obligations of the Pledgors and the Company under this Agreement.

 

14.2                       The amount of the Secured Indebtedness determined by the Pledgee at its discretion upon its exercise of the Equity Pledge pursuant to this Agreement shall be the conclusive evidence of the Secured Indebtedness under this Agreement.

 

14.3                       This Agreement is made in Chinese in four (4) originals with each Party holding one (1) original.

 

14.4                       The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 

14.5                       Any dispute arising hereunder and in connection herewith shall be settled through consultations between the Parties, and if the Parties are unable to reach an agreement within thirty (30) days from the occurrence of the dispute, such dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration in accordance with the arbitration rules thereof then in effect. The place of arbitration shall be in Beijing, and the language to be used in arbitration shall be Chinese. The award of arbitration shall be final and equally binding on the Parties of this Agreement.

 

14.6                       No right, power or remedy of a Party under any provision of this Agreement shall preclude such Party from any other right, power or remedy of it under the laws and other provisions of this Agreement, nor shall any exercise of any right, power or remedy by a Party preclude such Party from exercising any other right, power or remedy.

 

14.7                       No failure or delay by any Party in exercising any right, power and remedy (the “Rights”) pursuant to this Agreement or laws shall be deemed as a waiver of such Rights, and no single or partial waiver of such Rights of a Party shall preclude any other exercise of it or the exercise of any other Rights.

 

11


 

14.8                       The headings of the Articles in this Agreement are inserted for the convenience of reference only, and under no circumstances shall be used in or otherwise affect the construction of this Agreement.

 

14.9                       Each provision contained in this Agreement shall be severable and independent from other provisions, and in the event that any one or more provisions of this Agreement are held invalid, illegal or unenforceable at any time, the validity, legality or enforceability of the remaining provisions shall not be affected or impaired in any way.

 

14.10                This Agreement, upon execution, supersedes any other legal documents entered into between the Parties in respect of the subject matter hereof. Any amendments or supplements to this Agreement shall be made in writing and come into effect upon due execution by the Parties hereto.

 

14.11                This Agreement shall be binding on the legal assigns or successors of the Parties.

 

14.12                Concurrently with the execution of this Agreement, each of the Pledgors shall execute a power of attorney (the “Power of Attorney”) to authorize any person designated by the Pledgee to execute on behalf of it any and all legal documents necessary for the Pledgee to exercise its rights under this Agreement. The Power of Attorney shall be kept by the Pledgee and, if necessary, may be submitted to the competent governmental authority by the Pledgee at any time.

 

[The remainder of this page is intentionally left blank]

 

12


 

[Signature page to the Second Amended and Restated Equity Pledge Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Equity Pledge Agreement has been executed by the following Parties on the date and at the place first above written.

 

HUANG WANG

 

 

 

 

By:

/s/ Huang Wang

 

 

 

 

LU YUNFEN

 

 

 

 

By:

/s/ Lu Yunfen

 

 

Signature page to the Second Amended and Restated Equity Pledge Agreement

 


 

[Signature page to the Second Amended and Restated Equity Pledge Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Equity Pledge Agreement has been executed by the following Parties on the date and at the place first above written.

 

SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD.

(Company seal: /s/ Shunyuan Kaihua (Beijing) Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

ANHUI HUAMI INFORMATION TECHNOLOGY CO., LTD.

(Company seal: /s/ Anhui Huami Information Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

Signature page to the Second Amended and Restated Equity Pledge Agreement

 


 

 

Appendix I:

 

General Information of the Company

 

Company Name: Anhui Huami Information Technology Co., Ltd.

 

Registered Address: Room 1201, Block A4, National Cartoon and Animation Industry Base, No. 800 Wang Jiang West Road, Hi-Tech Industry Development Zone, Hefei

 

Registered Capital: RMB 1,666,667

 

Legal Representative: Huang Wang

 

Shareholding Structure:

 

 

Name of Shareholder

 

Amount of Contribution
in the Registered Capital
(in RMB 10,000)

 

Percentage of
Contribution

 

Identity Card Number /
Unified Social Credit
Number

 

Huang Wang

 

165.6667

 

99.4000

%

***

 

Lu Yunfen

 

1.0000

 

0.6000

%

***

 

Total

 

166.6667

 

100

%

 

 

Appendix I

 


 

Appendix II:

 

Form of Power of Attorney

 

I/We,             , hereby irrevocably authorize(s)              (Identity Card Number:             ), as my/our duly authorized attorney to execute any and all legal documents necessary or advisable in respect of any and all rights to be exercised by Shunyuan Kaihua (Beijing) Technology Co., Ltd. under the Second Amended and Restated Equity Pledge Agreement Regarding Anhui Huami Information Technology Co., Ltd. by and among Shunyuan Kaihua (Beijing) Technology Co., Ltd., myself/ourselves and Anhui Huami Information Technology Co., Ltd. on March 20, 2020.

 

 

 

 

 

By:

 

 

Date:

 

 

Appendix II

 


Exhibit 4.8

 

SECOND AMENDED AND RESTATED

EQUITY PLEDGE AGREEMENT

 

This SECOND AMENDED AND RESTATED EQUITY PLEDGE AGREEMENT (this “Agreement”) is entered into on March 20, 2020 by and among:

 

1.                          THE SHAREHOLDERS WHOSE NAMES ARE SET OUT IN APPENDIX I (each a “Pledgor” and collectively the “Pledgors”)

 

2.                          SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD. (the “Pledgee”) Registered address: Unit 206-2, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing
Legal representative: Huang Wang

 

3.                          HUAMI (BEIJING) INFORMATION TECHNOLOGY CO., LTD. (the “Company”) Registered address: Unit 206-1, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing
Legal representative: Huang Wang

 

(in this Agreement, each of the above individually being referred to as a “Party”, collectively the “Parties”.)

 

WHEREAS:

 

(1)                     The original shareholders of the Company, including Huang Wang, Lu Yunfen, Fan Meihui, Fan Bin, Zhang Yi, Zhang Xiaojun, Liu De, Cao Lipin, Yue Bin and Lhasa Heye Investment Management Co., Ltd., the Pledgee and the Company entered into an Amended and Restated Equity Pledge Agreement on November 3, 2017 (hereinafter referred to as the “Original Equity Pledge Agreement”). After the share transfer of the Company in 2020, Liu De, Cao Liping, Yue Bin and Lhasa Heye Investment Management Co., Ltd. are no longer registered shareholders of the Company. In order to reflect the above shareholding change, all Parties now agree to enter into this Agreement to amend and restate the Original Equity Pledge Agreement.

 

(2)                     The Pledgors are the registered shareholders of the Company, holding in aggregate all equity interests of the Company (the “Equity Interests”), and as at the date of this Agreement, their respective contribution amount and shareholding percentage in the Company’s registered capital are set out in Appendix I hereof.

 

(3)                     Pursuant to the Second Amended and Restated Exclusive Option Agreement entered into by and among the Parties on March 20, 2020 (the “Option Agreement”), each of the Pledgors or the Company shall, to the extent permitted by the PRC laws and at the request of the Pledgee, transfer all or part of the Equity Interests held by it or the assets in the Company to the Pledgee and/or any other entity or individual designated by the Pledgee.

 

(4)                     Pursuant to the Second Amended and Restated Shareholder Voting Proxy Agreement entered into by and among the Parties on March 20, 2020 (the “Voting Proxy Agreement”), each of the Pledgors has irrevocably appointed the person then designated by the Pledgee as its proxy to exercise all the voting rights it is entitled to as a shareholder of the Company.

 

1


 

(5)                     Pursuant to the Second Amended and Restated Exclusive Consultation and Service Agreement entered into by and among the Parties on March 20, 2020 (the “Consultation Service Agreement”), the Company has engaged the Pledgee to provide consulting services on an exclusive basis, and agreed to pay service fees to the Pledgee for its provision of such services.

 

(6)                     For the purpose of securing the performance of the Contractual Obligations (as defined below) and repayment of the Secured Indebtedness (as defined below) by the Pledgors, each of the Pledgors agrees to pledge all Equity Interests held by it in favor of the Pledgee and grant a first ranking pledge in favor of the Pledgee, and the Company is agreeable to the arrangement of such equity pledge.

 

THEREFORE, upon consultations, the Parties hereby agree as follows:

 

ARTICLE 1 DEFINITIONS

 

1.1.                Unless the context otherwise requires, in this Agreement, the following terms shall have the following meanings:

 

“Contractual Obligations”:

  

means all contractual obligations of the Pledgors under the Option Agreement and Voting Proxy Agreement; all contractual obligations of the Company under the Option Agreement, Voting Proxy Agreement and Consultation Service Agreement; all contractual obligations of the Pledgors and the Company under this Agreement.

 

 

 

“Secured Indebtedness”:

  

means any and all direct, indirect and derivative loss and loss of anticipated profits incurred by the Pledgee as a result of any Event of Default (as defined below) of the Pledgors and/or the Company, the amount of which loss shall be calculated taking into account of factors including but not limited to the reasonable business plan and profit forecast of the Pledgee, and all expenses occurred in connection with enforcement by Pledgee of the Contractual Obligations of the Pledgors and/or the Company.

 

 

 

“Transaction Documents”:

  

mean the Option Agreement, Voting Proxy Agreement and Consultation Service Agreement.

 

 

 

“Event of Default”:

  

means breach by any Pledgor of any of its Contractual Obligations under the Option Agreement, Voting Proxy Agreement and/or this Agreement, and breach by the Company of any of its Contractual Obligations under Option Agreement, Voting Proxy Agreement, Consultation Service Agreement and/or this Agreement.

 

2


 

“Pledged Equity Interests”

  

means all Equity Interests (details of the Equity Interests held by the Pledgors are set out in Schedule 1) in the Company as of the effective date of this Agreement and interests in the increased capital contribution and dividends pursuant to Articles 2.6 and 2.7 of this Agreement legally owned by the Pledgors, which are to be pledged in favor of the Plegee as security for the performance of the Contractual Obligations by the Pldgors and the Company pursuant to this Agreement.

 

 

 

“PRC Laws”:

  

mean the laws, administrative regulations, administrative rules, local decrees, judicial interpretations and regulatory documents with binding effects of the PRC then in effect.

 

1.2.                Any reference to the PRC Laws herein shall be deemed to include: (1) the reference to any revision, amendment, supplement and reenactment of such PRC Laws, irrespective of whether such revision, amendment, supplement and reenactment comes into force before or after the date of execution of this Agreement; and (2) the reference to other decisions, notices or regulations enacted in accordance, or effective as a result of, such PRC Laws.

 

1.3.                Unless otherwise specified in the context herein, any reference to an article, section, item or paragraph shall mean the corresponding article, section, item or paragraph in this Agreement.

 

ARTICLE 2 EQUITY PLEDGE

 

2.1.                Each of the Pledgors hereby agrees to pledge all the Pledged Equity Interests legally owned by it and of which it is entitled to dispose to the Pledgee as security for the repayment of the Secured Indebtedness pursuant to this Agreement. The Company hereby agrees that each of the Pledgor pledges the Equity Interest to the Pledgee pursuant to this Agreement. In particular, as of the date of this Agreement: Huang Wang shall pledge 90.1000% of the Equity Interests in the registered capital of the Company (representing a capital contribution of RMB1,820,200) held by him to the Pledgee; Lu Yunfen shall pledge 2.1285% of the Equity Interests in the registered capital of the Company (representing a capital contribution of RMB 43,000) held by her to the Pledgee; Fan Meihui shall pledge 2.1285% of the Equity Interests in the registered capital of the Company (representing a capital contribution of RMB 43,000) held by him to the Pledgee; Fan Bin shall pledge 2.1285% of the Equity Interests in the registered capital of the Company (representing a capital contribution of RMB 43,000) held by him to the Pledgee; Zhang Yi shall pledge 2.1285% of the Equity Interests in the registered capital of the Company (representing a capital contribution of RMB 43,000) held by him to the Pledgee; and Zhang Xiaojun shall pledge 1.3860% of the Equity Interests in the registered capital of the Company (representing a capital contribution of RMB 28,000) held by him to the Pledgee.

 

3


 

2.2.                Each of the Pledgors covenants to register the pledge of equity interests (the “Equity Pledge”) under this Agreement with the competent industrial and commercial registration authority for the Company on the date of this Agreement. The Company covenants to use its best efforts to cooperate with the Pledgors to complete the registration with the aforesaid industrial and commercial registration authority under this article. The Equity Pledge under this Agreement shall be created upon completion of the registration of the creation of equity pledge by the Company with the competent industrial and commercial authority.

 

2.3.                During the effective term of this Agreement, the Pledgee shall not be liable for any reduction in the value of the Pledged Equity Interests, nor the Pledgors shall have any right to make any claim or request against the Pledgee for any such reduction, provided that such reduction is not a direct result of any willful or gross negligence of the Pledgee.

 

2.4.                Subject to the above Article 2.3, in the event of occurrence of any circumstance which may cause a substantial reduction in the value of the Pledged Equity Interests and is detrimental to the interests of the Pledgee, the Pledgee may sell by auction or otherwise dispose of the Pledged Equity Interests on behalf of the Pledgors and, upon consultation with the Pledgors, apply the proceeds from such disposal for early repayment of the Secured Indebtedness or to be held by the local notary office where the Pledgee is located in escrow (any such costs in connection therewith shall be fully borne by the Pledgee). In addition, at the request of the Pledgee, the Pledgors shall provide other assets as security for the Secured Indebtedness.

 

2.5.                Upon occurrence of any Event of Default, the Pledgee shall be entitled to dispose of the Pledged Equity Interests in accordance with Article 4 under this Agreement.

 

2.6.                The Pledgors shall not increase the capital of the Company without prior written consent of the Pledgee. Any additional contribution made by the Pledgors as a result of the increase in the Company’s capital shall constitute part of the Pledged Equity Interests.

 

2.7.                The Pledgors shall not be entitled to receive any dividend or bonus in respect of the Pledged Equity Interests without prior written consent of the Pledgee.

 

2.8.                Upon occurrence of any Event of Default, the Pledgee shall be entitled to dispose of any Pledged Equity Interests held by any Pledgor in accordance with the terms of this Agreement.

 

ARTICLE 3 RELEASE OF PLEDGE

 

3.1                   Upon sufficient and complete discharge of the Contractual Obligations and repayment of the Secured Indebtedness by the Pledgors and the Company in full, the Pledgee shall, at the request of the Pledgors, release the Pledged Equity Interests and cooperate with the Pledgors to complete the filing of release of the Equity Pledge. The costs and expenses reasonably incurred in connection with such release shall be paid by the Pledgee.

 

4


 

ARTICLE 4 DISPOSAL OF THE PLEDGED EQUITY INTERESTS

 

4.1                   The Parties hereby agree that, upon occurrence of any Event of Default and with the written notice to the Plegors, the Pledgee shall be entitled to exercise all remedial rights and power available to it under the PRC Laws, the Transaction Documents and the terms of this Agreement, including without limitation to transfer, sell by auction or otherwise disposal of the Pledged Equity Interests agreed by both the Pledgee and the Pledgor so as to be compensated in priority. The Pledgee shall not be liable for any loss arising from its reasonable exercise of such rights or power.

 

4.2                   The Pledgee shall be entitled to appoint by written means its attorney or other agent to exercise any and all of the abovementioned rights and power, to which none of the Pledgors or the Company may raise any objection.

 

4.3                   The Pledgee shall be entitled to deduct from the proceeds received from its exercise of the rights and power any costs and expenses reasonably incurred by it in connection with such exercise on a reimbursement basis.

 

4.4                   The proceeds received by the Pledgee from exercise of its rights and power shall be applied in the following sequence:

 

Firstly, to pay all costs and expenses incurred by it in connection with the disposal of the Pledged Equity Interests and exercise of its rights and power, including payment of fees of attorney and agent;

 

Secondly, to pay all taxes arising from the disposal of the Pledged Equity Interests; and

 

Thirdly, to repay the Secured Indebtedness to the Pledgee.

 

Any balance amount of the proceeds shall be returned to the Pledgors or to be held by the local notary office where the Pledgee is located in escrow in accordance with the relevant laws and regulations (any such costs in connection therewith shall be fully borne by the Pledgee).

 

4.5                   The Pledgee shall be entitled to, at its sole discretion, exercise any of its remedial rights and power concurrently or separately. The Pledgee may exercise its right to sell by auction or otherwise dispose of the Pledged Equity Interests without first seeking any other remedies available for breach of contracts.

 

ARTICLE 5 COSTS AND EXPENSES

 

5.1                   Each Party shall be responsible for all of its own actual expenses in connection with creation of the Equity Pledge under this Agreement, including without limitation the stamp duty, or any other taxes and all legal fees.

 

5


 

ARTICLE 6 CONTINUITY AND NO WAIVER

 

6.1                         The Equity Pledge created under this Agreement constitutes a continual security and will survive until the Contractual Obligations are discharged or the Secured Indebtedness is repaid in full. No waiver or extension to any default by the Pledgors or delay in exercising any of its rights under the Transaction Documents or this Agreement by the Pledgee shall affect its rights under this Agreement, the PRC Laws and the Transaction Documents to demand for the Pldegors’ strict compliance with the Transaction Documents and this Agreement or any rights of the Pledgee which may arise as a result of the subsequent breach of the Transaction Documents and/or this Agreement by the Pledgors.

 

ARTICLE 7 REPRESENTATIONS AND WARRANTIES OF PLEDGORS

 

Each of the Pledgors hereby represents and warrants to the Pledgee that:

 

7.1                         it has full legal capacity and the lawful right and capability to execute this Agreement and to be bound by the legal obligations under this Agreement.

 

7.2                         all reports, documents and information provided by it to the Pledgee with respect to the Pledgors and all matters required under this Agreement prior to the effective date of this Agreement are true and accurate in all material aspects as of the effective date of this Agreement.

 

7.3                         all reports, documents and information provided by it to the Pledgee with respect to the Pledgors and all matters required under this Agreement subsequent to the effective date of this Agreement will be true and valid in all material aspects as at the time of such provision.

 

7.4                         it is the sole and legal owner of the respective Pledged Equity Interests as of the effective date of this Agreement and there is no pending dispute with respect to the ownership over the Peldged Equity Interests. It is entitled to dispose of the Pledged Equity Interests or any part thereof.

 

7.5                         save for the encumbrances created pursuant this Agreement and the rights provided under the Transaction Documents, the Pledged Equity Interests are free from any other encumbrances, third party rights or restrictions.

 

7.6                         the Pledged Equity Interests are not prohibited from being pledged or transferred lawfully, and it has full rights and power to pledge the Pledged Equity Interests to the Pledgee.

 

7.7                         this Agreement, upon due execution by it, constitutes its legal and binding obligations, enforceable against it.

 

7.8                         all consents, approvals, waivers, authorizations from any third party or any permits, approvals, waivers of or any registration or filings (if required by laws) with any governmental authority required for the execution and performance of this Agreement and the Plegded Equity Interests under this Agreement have been obtained or completed and will remain valid in full during the effective term of this Agreement.

 

6


 

7.9                         the execution and performance of its obligations under this Agreement will not result in a breach of any agreement to which it is a party or by which it or its assets are bound, or result in a breach of any judgment of any court, any award of any arbitration body, or any decision of any administrative agency to which it is a party.

 

7.10                  the Equity Pledge constitutes a first ranking security over the Pledged Equity Interests.

 

7.11                  all taxes and charges payable for the creation of the Pledged Equity Interests have been fully paid by it.

 

7.12                  there is no pending or, to its knowledge, threatened suits, proceedings or claims against it, its assets or the Pledged Equity Interests before any court, arbitration authority, government department or administrative agency which may have material or adverse effect on its economic conditions or the Pledgors’ ability to perform this Agreement or to discharge its obligation of guarantee.

 

7.13                  it warrants hereby to the Pledgee that the above representations and warranties are and shall remain true and accurate and will be fully complied with at all times and under all circumstances until the discharge of the Contractual Obligations or repayment of the Secured Indebtedness in full.

 

7.14                  it agrees to give to the Pledgee or the entity/individual designated by the Pledgee immediately any dividends, bonus and interests received by it from the Company during the term of this Agreement as gift.

 

7.15                  to the extent permitted by the PRC Laws, it agrees to give to the Pledgee or the entity/individual designated by the Pledgee any interests distributed by the Company following the dissolution or winding up of the Company as gift, in the event that the Company is required to be dissolved or wound up as required by the compulsory provisions under the laws.

 

ARTICLE 8 REPRESENTATIONS AND WARRANTIES OF THE COMPANY

 

The Company represents and warrants to the Pledgee that:

 

8.1                         it is a limited liability company duly registered and validly existing under the PRC Laws with independent legal person status. It has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit.

 

8.2                         all reports, documents and information provided by it to the Pledgee with respect to the Pledged Equity Interests and all matters required under this Agreement prior to the effective date of this Agreement are true and accurate in all material aspects as of the effective date of this Agreement.

 

8.3                         all reports, documents and information provided by it to the Pledgee with respect to the Pledged Equity Interests and all matters required under this Agreement subsequent to the effective date of this Agreement will be true and valid in all material aspects as at the time of such provision.

 

7


 

8.4                         this Agreement, upon due execution by it, constitutes its legal and binding obligations, enforceable against it.

 

8.5                         it has full corporate power and authority to execute and deliver this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions contemplated hereunder.

 

8.6                         there is no pending or, to its knowledge, threatened suits, proceedings or claims against it, its assets or the Pledged Equity Interests before any court, arbitration authority, government department or administrative agency which may have material or adverse effect on its economic conditions or the Pledgors’ ability to perform this Agreement or to discharge its obligation of guarantee.

 

8.7                         it hereby agrees to be jointly liable to the Pledgee for the representations and warranties made by the Pledgors under Articles 7.4, 7.5, 7.6, 7.8 and 7.10 under this Agreement.

 

8.8                         it warrants to the Pledgee that the above representations and warranties are and shall remain true and accurate and will be fully complied with at all times and under all circumstances until the discharge of the Contractual Obligations or repayment of the Secured Indebtedness in full.

 

8.9                         to the extent of full compliance with the PRC Laws, it agrees to transfer its assets to the Pledgee or the eligible entity/individual designated by the Pledgee at the lowest price permitted by the PRC Laws then in effect, in the event that the Company is required to be dissolved or wound up as required by the compulsory provisions under the PRC Laws.

 

ARTICLE 9 COVENANTS BY THE PLEDGORS

 

Each of the Pledgors hereby covenants to the Pledgee that:

 

9.1                         without prior written consent of the Pledgee, it will not create or permit to create any new pledge or any other encumbrance over the Pledged Security Interests, and any such pledge or encumbrance created over the Pledged Security Interests without prior written consent of the Pledgee shall be null and void.

 

9.2                         no Pledged Equity Interests shall be transferred by it without first notifying in writing and obtaining the written consent of the Pledgee and any such proposed transfer of Pledged Equity Interests shall be null and void. The proceeds from the sale of the Pledged Equity Interests shall be first applied to repay the Secured Indebtedness or to be held by a third party in escrow as agreed with the Pledgee.

 

9.3                         in the event of any lawsuit, arbitration or claim which may have adverse effect on the interests of the Pledgors and the Pledgee under the Transaction Documents and this Agreement or the Pledged Equity Interests, it undertakes to notify the Pledgee in writing as soon as practicably and, at the reasonable request of the Pledgee, take all necessary steps to protect the security interest of the Pledgee over the Pledged Equity Interests.

 

8


 

9.4                         it will not make or cause to make any conduct or action which may have any adverse effect on the interests of the Pledgee under the Transaction Documents and this Agreement or the Pledged Equity Interests. It waives all rights of first refusal which may arise when the Pledgee realizes the Equity Pledge.

 

9.5                         it undertakes, at the reasonable request of the Pledgee, to take all necessary steps and to execute all documents (including without limitation any supplemental agreement to this Agreement) necessary for the realization of the security interest over the Pledged Equity Interests and the exercise of such rights by the Pledgee.

 

9.6                         it undertakes to take all necessary steps to effect all transfers of the Pledged Equity Interests arising from the realization of the Equity Pledge under this Agreement.

 

9.7                         the proceedings of convening and voting and contents of the meetings of the shareholders and board of directors of the Company for purposes of the execution of this Agreement, creation and realization of the Equity Pledge will not be in breach of any laws, administrative regulations or articles of association of the Company.

 

9.8                         No rights or obligations under this Agreements shall be assigned by the Pledgors without prior consent of the Pledgee.

 

ARTICLE 10 COVENANTS BY THE COMPANY

 

10.1                  The Company shall use its best efforts to procure all consents, approvals, waivers, authorizations from any third party or any permits, approvals, waivers of or any

 

registration or filings (if required by laws) with any governmental authority required for the execution and performance of this Agreement and the Plegded Equity Interests under this Agreement which shall remain valid in full during the effective term of this Agreement.

 

10.2                  The Company will not assist in or permit the creation of any new pledge or any other encumbrance over the Pledged Security Interests, without prior written consent of the Pledgee.

 

10.3                  The Company will not assist in or permit any transfer of the Pledged Equity Interests, without first obtaining the prior written consent from the Pledgee.

 

10.4                  In the event of any lawsuit, arbitration or claim which may have adverse effect on the Company, the Pledged Equity Interests or the interests of the Pledgee under the Transaction Documents and this Agreement, the Company undertakes to notify the Pledgee in writing as soon as practicably and, at the reasonable request of the Pledgee, take all necessary steps to protect the security interest of the Pledgee over the Pledged Equity Interests.

 

10.5                  The Company will not make or cause to make any conduct or action which may have any adverse effect on the interests of the Pledgee under the Transaction Documents and this Agreement or the Pledged Equity Interests.

 

9


 

10.6                  The Plegors shall within the first month of each calendar quarter, provide the financial statements of the Company for the preceding quarter to the Pledgee, including (without limitation) the balance sheet, income statement and cash flow statement.

 

10.7                  The Company undertakes, at the reasonable request of the Pledgee, to take all necessary steps and to execute all documents (including without limitation any supplemental agreement to this Agreement) necessary for the realization of the security interest over the Pledged Equity Interests and the exercise of such rights by the Pledgee.

 

10.8                  The Company undertakes to take all necessary steps to effect all transfers of the Pledged Equity Interests arising from the realization of the Equity Pledge under this Agreement.

 

ARTICLE 11 CHANGE IN CIRCUMSTANCES

 

11.1                  As supplement, and subject to other provisions under the Transaction Documents and this Agreement, if at any time, the Pledgee believes that the validity of this Agreement and/or the disposal of the Pledged Equity Interests under this Agreement is illegal or in breach of any laws, regulations or rules as a result of any enactment or amendment of any laws, regulations or rules of the PRC, or change in the interpretation or application thereof or the relevant registration procedures, the Pledgors and the Company shall at the reasonable request of and in accordance with the written instructions from the Pledgee, take all actions and/or execute all agreements or other documents necessary to:

 

(1)                           ensure that this Agreement remains valid;

 

(2)                           facilitate the disposal of the Pledged Equity Interests pursuant to this Agreement; and/or

 

(3)                           maintain or realize the security created or intended to be created under this Agreement.

 

ARTICLE 12 EFFECTIVE DATE AND TERM OF THE AGREEMENT

 

12.1                  This Agreement shall become effective upon duly execution by the Parties hereto. The Original Equity Pledge Agreement shall be replaced by this Agreement from the effective date of this Agreement.

 

12.2                  The term of this Agreement shall continue until the Contractual Obligations are discharged or the Secured Indebtedness is repaid in full.

 

ARTICLE 13 NOTICES

 

13.1                  Any notice, request, demand and other correspondence required to be given or made pursuant to this Agreement shall be made in writing and delivered to relevant Parties.

 

13.2                  Such notices or other correspondence shall be deemed to be duly served upon transmission if sent by fax or telex, or upon delivery if sent by hand, or five (5) days after posting if sent by mail.

 

10


 

ARTICLE 14 MISCELLANEOUS

 

14.1                  The Pledgors and the Company agree that the Pledgee may transfer its rights and/or obligations under this Agreement to any third party with prior notice to the Pledgors and the Company, whereas none of the Pledgors or the Company shall transfer any of its rights, obligations or liabilities to any third party, without prior written consent of the Pledgee. The successor or permitted assign of the Pledgors and the Company, if any, shall continue to comply with the respective obligations of the Pledgors and the Company under this Agreement.

 

14.2                  The amount of the Secured Indebtedness determined by the Pledgee at its discretion upon its exercise of the Equity Pledge pursuant to this Agreement shall be the conclusive evidence of the Secured Indebtedness under this Agreement.

 

14.3                  This Agreement is made in Chinese in eight (8) originals with each Party holding one (1) original.

 

14.4                  The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 

14.5                  Any dispute arising hereunder and in connection herewith shall be settled through consultations between the Parties, and if the Parties are unable to reach an agreement within thirty (30) days from the occurrence of the dispute, such dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration in accordance with the arbitration rules thereof then in effect. The place of arbitration shall be in Beijing, and the language to be used in arbitration shall be Chinese. The award of arbitration shall be final and equally binding on the Parties of this Agreement.

 

14.6                  No right, power or remedy of a Party under any provision of this Agreement shall preclude such Party from any other right, power or remedy of it under the laws and other provisions of this Agreement, nor shall any exercise of any right, power or remedy by a Party preclude such Party from exercising any other right, power or remedy.

 

14.7                  No failure or delay by any Party in exercising any right, power and remedy (the “Rights”) pursuant to this Agreement or laws shall be deemed as a waiver of such Rights, and no single or partial waiver of any of the Rights of a Party shall preclude any other exercise of it or the exercise of any other Rights.

 

14.8                  The headings of the Articles in this Agreement are inserted for the convenience of reference only, and under no circumstances shall be used in or otherwise affect the construction of this Agreement.

 

14.9                  Each provision contained in this Agreement shall be severable and independent from other provisions, and in the event that any one or more provisions of this Agreement are held invalid, illegal or unenforceable at any time, the validity, legality or enforceability of the remaining provisions shall not be affected or impaired in any way.

 

11


 

14.10           This Agreement, upon execution, supersedes any other legal documents entered into between the Parties in respect of the subject matter hereof. Any amendments or supplements to this Agreement shall be made in writing and come into effect upon due execution by the Parties hereto.

 

14.11           This Agreement shall be binding on the legal assigns or successors of the Parties.

 

14.12           Concurrently with the execution of this Agreement, each of the Pledgors shall execute a power of attorney (the “Power of Attorney”) to authorize any person designated by the Pledgee to execute on behalf of it any and all legal documents necessary for the Pledgee to exercise its rights under this Agreement. The Power of Attorney shall be kept by the Pledgee and, if necessary, may be submitted to the competent governmental authority by the Pledgee at any time.

 

[The remainder of this page is intentionally left blank]

 

12


 

[Signature page to the Second Amended and Restated Equity Pledge Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Equity Pledge Agreement has been executed by the following Parties on the date first above written.

 

HUANG WANG

 

 

 

 

By:

/s/ Huang Wang

 

 

LU YUNFEN

 

 

 

 

By:

/s/ Lu Yunfen

 

 

FAN MEIHUI

 

 

 

 

By:

/s/ Fan Meihui

 

 

FAN BIN

 

 

 

 

By:

/s/ Fan Bin

 

 

ZHANG YI

 

 

 

 

By:

/s/ Zhang Yi

 

 

ZHANG XIAOJUN

 

 

 

 

By:

/s/ Zhang Xiaojun

 

 

Signature page to the Second Amended and Restated Equity Pledge Agreement

 


 

IN WITNESS WHEREOF, this Second Amended and Restated Equity Pledge Agreement has been executed by the following Parties on the date first above written.

 

SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD.

(Company seal: /s/ Shunyuan Kaihua (Beijing) Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

HUAMI (BEIJING) INFORMATION TECHNOLOGY CO., LTD.

(Company seal: /s/ Huami (Beijing) Information Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

Signature page to the Second Amended and Restated Equity Pledge Agreement

 


 

Appendix I:

 

General Information of the Company

 

Company Name: Huami (Beijing) Information Technology Co., Ltd.

 

Registered Address: Unit 206-1, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing

 

Registered Capital: RMB 2,020,200

 

Legal Representative: Huang Wang

 

Shareholding Structure:

 

Name of
Shareholder

 

Amount of Contribution
in the Registered
Capital (in RMB 10,000)

 

Percentage of
Contribution

 

Identity Card Number /
Unified Social Credit
Number

 

Huang Wang

 

182.02

 

90.1000

%

***

 

Lu Yunfen

 

4.3

 

2.1285

%

***

 

Fan Meihui

 

4.3

 

2.1285

%

***

 

Fan Bin

 

4.3

 

2.1285

%

***

 

Zhang Yi

 

4.3

 

2.12985

%

***

 

Zhang Xiaojun

 

2.8

 

1.3860

%

***

 

Total

 

202.02

 

100

%

 

 

Appendix I

 


 

Appendix II:

 

Form of Power of Attorney

 

I/We,                                 , hereby irrevocably authorize(s)                      (Identity Card Number:                     ), as my/our duly authorized attorney to execute any and all legal documents necessary or advisable in respect of any and all rights to be exercised by Shunyuan Kaihua (Beijing) Technology Co., Ltd. under the Second Amended and Restated Equity Pledge Agreement Regarding Huami (Beijing) Information Technology Co., Ltd. by and among Shunyuan Kaihua (Beijing) Technology Co., Ltd., myself/ourselves and Huami (Beijing) Information Technology Co., Ltd. on March 20, 2020.

 

 

By:

 

 

Date:

 

 

Appendix II

 


Exhibit 4.9

 

SECOND AMENDED AND RESTATED

EXCLUSIVE CONSULTATION AND SERVICE AGREEMENT

 

This SECOND AMENDED AND RESTATED EXCLUSIVE CONSULTATION AND SERVICE AGREEMENT is entered into on March 20, 2020 at Beijing, People’s Republic of China (the “PRC”), by and between:

 

(1)             SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD., a wholly foreign-owned enterprise incorporated under the laws of the PRC with its registered address at Unit 206-2, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing and Huang Wang as its legal representative (“Party A”); and

 

(2)             ANHUI HUAMI INFORMATION TECHNOLOGY CO., LTD., a limited liability company incorporated under the laws of the PRC with its registered address at Room 1201, Block A4, National Cartoon and Animation Industry Base, No. 800 Wang Jiang West Road, Hi-Tech Industry Development Zone, Hefei and Huang Wang as its legal representative (“Party B”).

 

(in this Agreement, each of Party A and Party B individually referred to as a “Party”, collectively the “Parties”).

 

WHEREAS:

 

1.                  The Parties entered into an Amended and Restated Exclusive Consultation and Service Agreement on November 3, 2017 (hereinafter referred to as the “Original Exclusive Consultation and Service Agreement”). Both Parties now agree to enter into this agreement to revise and restate the Original Exclusive Consulting and Service Agreement.

 

2.                  The principal business of Party A includes development and transfer of technology, technical service and consultation; sale of self-developed products; data processing; commission agency (excluding auction); sale of computer software and hardware as well as accessory equipment, communication equipment and accessories, electronic products and accessories, clothing, shoes, hats, sports goods, boxes, bags, stationery; import and export of technology and goods (excluding commodities traded, managed and operated by state; (trading of) items which are subject to quota licensing and management shall make relevant application in accordance with the applicable national regulations).

 

3.                  The principal business of Party B include development, manufacture and sale of electronic products; development and sale of communication equipment; development and sale of medical equipment; development and sale of electronic components; development and sale of embedded computer system (hardware and software); network engineering and communications engineering; information technology consultation and technical service; sale of pre-packaged foods (excluding refrigerated and frozen foods) and health foods; development and sale of footwear, clothing, sports accessories, sporting goods, sports equipment, sports products and related accessories; information services in the second category of value-added telecommunications business (only Internet information services); online data processing and transaction processing services (operating with license) in the second type of value-added telecommunications business; engaged in Internet cultural activities, performances (festivals), and performances (excluding special licensing projects); import and export of goods or technologies (excluding imports and exports of goods and technologies that are prohibited by the state or involve administrative approval).

 


 

4.                  Party B wishes to engage Party A to provide development of software technology, technical consultation and technical services which are related to the Business (as defined below) of Party B, in order to promote the development of its business; and Party A agrees to accept such engagement.

 

THEREFORE, upon consultations, the Parties hereby agree as follows:

 

ARTICLE 1 DEFINITION

 

1.1                              Except as otherwise required by the terms or context hereof, the following terms in this Agreement shall have the following meanings:

 

“PRC Laws”

 

means the laws, administrative regulations, administrative rules, local regulations, judicial interpretations and other binding normative documents of the People ‘s Republic of China in force at that time.

 

 

 

“Party B’s Business”

 

means any and all businesses engaged in and developed by Party B currently and at any time during the effective term of this Agreement.

 

 

 

“Services”

 

means the services to be provided by Party A to Party B, which are related to Party B’s Business, including but not limited to:

 

 

 

 

 

(1) grant of a license to Party B for the use of relevant software necessary for Party B’s Business;

 

 

 

 

 

(2) provision of comprehensive IT solutions necessary for Party B’s Business;

 

 

 

 

 

(3) day-to-day management, maintenance and update of hardware equipment and database;

 

 

 

 

 

(4) development, maintenance and update of relevant application software;

 

 

 

 

 

(5) provision of training for Party B’s professional and technical personnel;

 

 

 

 

 

(6) provision of assistance to Party B in collecting technical and commercial information and conducting market research;

 

 

 

 

 

(7) referral of clients to Party B for establishing commercial and cooperative relationship;

 


 

 

 

(8) provision of suggestions and advice to Party B in relation to the formation and improvement of corporate structure, management system and department set up, and provision of assistance to Party B in improving its internal management system; and

 

 

 

 

 

(9) any other technical and consulting services as may be requested by Party B from time to time, to the extent permitted by the PRC Laws.

 

 

 

Service Team

 

means the team of personnel established by Party A for the purpose of provision of Services to Party B pursuant to this Agreement, including the employees of Party A, independent professional advisors and other contractors retained by Party A.

 

 

 

Service Fees

 

means all fees payable by Party B to Party A pursuant to Article 3 of this Agreement in respect of the Services provided by Party A.

 

 

 

Operating Revenue

 

means in any single fiscal year during the effective term of this Agreement, the total revenue generated by Party B in its daily operation of business of that year as recorded under the “Revenue of Principal Business” in the audited balance sheet prepared in accordance with the PRC accounting standards.

 

 

 

Annual Business Plan

 

means the development plan and budget report for Party B’s Business in the next calendar year which is prepared by Party B with the assistance of Party A pursuant to this Agreement before November 30 of each year.

 

 

 

Equipment

 

shall mean any and all equipment owned by Party A or purchased by Party A from time to time, which are to be used for the purpose of providing the Services.

 

1.2                              Any reference to any PRC Laws herein shall be deemed to include: (1) the reference to any revision, amendment, supplement and reenactment of such Laws, irrespective of whether such revision, amendment, supplement and reenactment comes into force before or after the date of execution of this Agreement; and (2) the reference to other decisions, notices or regulations enacted in accordance, or effective as a result of, such Laws.

 

1.3                              Unless otherwise specified in the context herein, any reference to an article, section, item or paragraph shall mean the corresponding article, section, item or paragraph in this Agreement.

 


 

ARTICLE 2 SERVICES OF PARTY A

 

2.1                              In order to better operate its business, Party B wishes to engage Party A to provide the Services to it, and Party A agrees to provide such Services to Party B. As such, Party B engages Party A as its exclusive consultation and services provider to provide Party B with the Services defined herein, and Party A agrees to accept such engagement.

 

2.2                              Party A shall provide the Services to Party B in accordance with the terms of this Agreement, and Party B shall use its best efforts to facilitate Party A’s provision of the Services.

 

2.3                              Party A shall be equipped with the Equipment and Service Team reasonably necessary for its provision of Services and purchase, acquire new Equipment and deploy new personnel according to the Annual Business Plan and reasonable requirements of Party B so as to achieve the purpose of Party A to provide Party B with high-quality services in accordance with this Agreement. However, from time to time, Party A may replace any member of the Service Team or change the work duties and responsibilities of any member of the Service Team at its sole discretion, provided that such replacement or change of work duties and responsibilities shall not materially adversely affect the day-to-day business operations of Party B.

 

2.4                              Notwithstanding anything to the contrary in this Agreement, Party A is entitled to appoint any third party to provide any or all Services hereunder or to perform any of its obligations hereunder on its behalf. Party B hereby agrees that Party A is entitled to assign its rights and obligations under this Agreement to any third party.

 

ARTICLE 3 SERVICE FEES

 

3.1                              With respect to the Services to be provided by Party A pursuant to this Agreement, Party B shall pay to Party A the Service Fees in the following manner:

 

3.1.1                    an amount equivalent to one hundred percent (100%) of the net income of Party B of that year; and

 

3.1.2                    fees for any specific technical services provided by Party A as may be requested by Party B from time to time, which shall be otherwise agreed by the Parties separately.

 

3.2                              Party B shall within three months from the end of each calendar year pay the Service Fees determined pursuant to Article 3.1 of this Agreement into a bank account designated by Party A on a lump-sum basis. In case that Party A changes its bank account, it shall notify Party B in writing of such change at least seven (7) working days before such change.

 

3.3                              The Parties agree that, in principle, the payment of the abovementioned Service Fees shall not cause any difficulty to the operation of either Party of that year. For the aforesaid purposes, Party A may agree to the deferred payment of Service Fees by Party B.

 


 

3.4                              During the effective term of this Agreement, Party A may at its sole discretion, adjust the specific amount of Service Fees payable by Party B to Party A specified in Article 3.1.1 above in writing without Party B’s consent.

 

3.5                              The amount of Service Fees payable by Party B to Party A pursuant to Article 3.1.2 shall be determined by both Parties in writing separately based on the nature and quantity of services provided.

 

ARTICLE 4 OBLIGATIONS OF PARTY B

 

4.1                              The Services provided by Party A under this Agreement shall be exclusive. During the effective term of this Agreement, without prior written consent of Party A, Party B may not enter into any agreement, orally or written, with any third party or otherwise engage such third party to provide services the same as or similar to those provided by Party A hereunder.

 

4.2                              Party B shall provide Party A with the finalized Annual Business Plan of Party B of the next year before November 30 of each year, in order to facilitate Party A to plan for the Services, purchase necessary software and Equipment and secure necessary personnel and technical service force accordingly. In the event that Party B demands Party A to purchase any new Equipment and/or deploy additional personnel, it shall consult with Party A at least fifteen (15) days in advance in order to reach a mutual agreement between the Parties.

 

4.3                              In order to facilitate provision of the Services by Party A, Party B shall provide Party A with relevant materials requested by Party A in an accurate and timely manner.

 

4.4                              Party B shall pay Service Fees to Party A on time and in full amount in accordance with Article 3 of this Agreement.

 

4.5                              Party B shall maintain its good standing and presence, actively develop its business and procure the maximization of the revenue.

 

4.6                              The Parties hereby acknowledge that, pursuant to the terms and conditions of the Second Amended and Restated Equity Pledge Agreement entered into by all the registered shareholders of Party B as of the date of this Agreement (the “Existing Shareholders”) with Party A on March 20, 2020, each of the Existing Shareholders has pledged all of the equity interests in Party B held by it to Party A as security for Party B’s performance of its obligations under this Agreement.

 

4.7                              During the term of this Agreement, Party B agrees to cooperate with Party A and Party A’s direct or indirect parent company in the audit of related party transactions and other audits, to provide relevant information and materials about Party B’s operation, business, customers, finance and employees to Party A, its parent company or its appointed auditor, and agrees that Party A’s parent company may disclose such information and materials for purpose of satisfying the regulatory requirements of the place where the securities of Party A’s parent company are listed.

 


 

ARTICLE 5 INTELLECTUAL PROPERTY

 

5.1                              To the extent permitted by the applicable PRC Laws then in effect, intellectual property on the work products created in the course of Party A’s provision of Services and the intellectual property on the work product developed by Party B based on Party A’s intellectual property shall belong to Party A (such intellectual property includes, but not limited to, copyright, patent, know-how, trade secret and other intellectual property). Where the applicable PRC Laws expressly prohibits such intellectual property from being owned by Party A, Party B shall hold such intellectual property for the benefit of Party A, and shall immediately transfer such intellectual property to Party A at the lowest price permitted by PRC Laws to Party B once Party B’s ownership of intellectual property is no longer prohibited by PRC Laws; where there is no requirement on the lowest price for such transfer, Party B shall transfer such intellectual property to Party A unconditionally and assist Party A in completing all the filing and registration procedure as required by the competent government authorities in respect of such transfer.

 

5.2                              For the purpose of performing this Agreement, Party B may use the work products created by Party A in the course of provision of Services, subject to the terms and conditions of this Agreement. However, under no circumstances shall this Agreement grant Party B any license to use such work product for any other purpose.

 

5.3                              Each Party warrants to the other Party that it will indemnify the other Party against any and all economic losses incurred by the other Party arising from its infringement of any intellectual property rights (including copyright, trademark, patent and know-how) of others.

 

ARTICLE 6 CONFIDENTIALITY OBLIGATIONS

 

6.1                              During the effective term of this Agreement, all customer information (the “Customer Information”) and other related materials in connection with Party B’s Business and Services provided by Party A shall be owned by Party A.

 

6.2                              Notwithstanding the termination of this Agreement, each Party shall be obliged to keep in strict confidence the trade secrets and proprietary information of the other Party acquired during the performance of this Agreement, Customer Information jointly owned by both Parties and any non-public information of the other Party (collectively, the “Confidential Information”). The receiving party of the Confidential Information (the “Receiving Party”) shall not disclose the Confidential Information or any part thereof to any third parties unless it has obtained the prior written consent of the other Party, or required by relevant laws and regulations or the rules of the relevant stock exchange. The Receiving Party shall not use, directly or indirectly, such Confidential Information or any part thereof for purposes other than performing its obligations under this Agreement.

 

6.3                              The Confidential Information shall not include any information which:

 

(a) as shown by written evidence, was rightfully known to the Receiving Party previously;

 


 

(b) enters the public domain through no fault of the Receiving Party or is known by the public for other reasons; or

 

(c) is rightfully acquired by the Receiving Party from other sources subsequently.

 

6.4                              The Receiving Party may disclose the Confidential Information to its relevant employees, agents or professionals it retains, provided that it shall ensure that such persons shall be bound by this Agreement, keep the Confidential Information confidential, and use such Confidential Information solely for the purpose of performing this Agreement.

 

6.5                              Upon termination of this Agreement, the Receiving Party of the Confidential Information shall return any and all documents, information or software containing any such Confidential Information to the original owner or provider of such Confidential Information; or with prior consent of the original owner or provider, destroy them which includes deleting all of such Confidential Information from any memory devices, and cease to use such Confidential Information.

 

6.6                              The Parties agree that this Article shall survive the amendment, rescission or termination of this Agreement.

 

ARTICLE 7 REPRESENTATIONS AND WARRANTIES

 

7.1                              Party A hereby represents and warrants as follows:

 

7.1.1                    it is a limited liability company duly registered and validly existing under the laws of its incorporation place with independent legal person status, and has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit;

 

7.1.2                    it has full corporate power and authority to execute and deliver this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions hereunder. This Agreement is lawfully and duly executed and delivered by it and constitutes its legal, valid and binding obligations, enforceable against it pursuant to the terms hereof.

 

7.2                              Party B hereby represents and warrants as follows:

 

7.2.1                    it is a limited liability company duly registered and validly existing under the laws of its incorporation place with independent legal person status, and has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit;

 

7.2.2                    it has full corporate power and authority to execute and deliver this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions contemplated hereunder. This Agreement is lawfully and duly executed and delivered by it and constitutes its legal, valid and binding obligations, enforceable against it pursuant to the terms hereof;

 


 

7.2.3                    as of the effective date of this Agreement, it has obtained all and complete business licenses necessary for its operation, and is fully authorized and qualified to conduct Party B’s Business as is currently conducted within the territory of PRC;

 

7.2.4                    it shall notify Party A in a timely manner any litigation it is involved in and any other circumstances with adverse effect, and make its best efforts to prevent further losses therefrom;

 

7.2.5                    without written consent of Party A, Party B shall not dispose of its material assets in any form nor change its current shareholding structure;

 

7.2.6                    it shall not enter into or consummate any transaction that may have material effect on the assets, liabilities, business operation, shareholding structure of Party B, any equity interests in any third party and any other lawful right held by Party B (except for those in the ordinary course of business or which have been disclosed to and approved by Party A in writing).

 

ARTICLE 8 TERM

 

8.1                              The Parties hereby acknowledge that this Agreement shall become effective upon duly execution by the Parties hereto, and shall remain valid until it is terminated by written agreement of the Parties hereto or by the operation of applicable PRC Laws. The Original Exclusive Consultation and Service Agreement shall be replaced by this Agreement from the effective date of this Agreement.

 

8.2                              Each Party shall complete the approval and registration formalities for extension of its business term at least three (3) months before the expiry of its term of business such that this Agreement shall continue to be valid and effective.

 

8.3                              Following the termination of this Agreement, the Parties shall continue to comply with its obligations under Articles 3 and 6 of this Agreement.

 

ARTICLE 9 NOTICE

 

9.1                              Any notice, request, demand and other correspondence required to be given or made pursuant to this Agreement shall be made in writing and delivered to relevant Parties.

 

9.2                              Such notices or other correspondence shall be deemed to be duly served upon transmission if sent by fax or telex, or upon delivery if sent by hand, or five (5) days after posting if sent by mail.

 


 

ARTICLE 10 LIABILITIES FOR BREACH OF CONTRACT

 

10.1                       The Parties agree and acknowledge that, if either Party (“Defaulting Party”) is materially in breach of any provision of this Agreement, or materially fails to perform any of its obligations hereunder, such breach and failure shall constitute a default hereunder (the “Default”), and the non-defaulting Party shall be entitled to demand the Defaulting Party to rectify such Default or take remedial actions within a reasonable period of time. If the Defaulting Party fails to rectify such Default or take remedial actions within such reasonable period of time or ten (10) days from the receipt of the written notice from the non-defaulting Party requiring such rectification, the non-defaulting Party shall be entitled to make a decision at its sole discretion:

 

10.1.1             Party A shall be entitled to terminate this Agreement and claim from the Defaulting Party for damages if the Defaulting Party is Party B;

 

10.1.2             Party B shall be entitled to claim from the Defaulting Party for damages if the Defaulting party is Party A, provided that under no circumstances shall Party B be entitled to terminate or rescind this Agreement unless otherwise provided by PRC Laws.

 

10.2                       Notwithstanding anything to the contrary in this Agreement, this Article 10 shall survive the suspension or termination of this Agreement.

 

ARTICLE 11 FORCE MAJEURE

 

In the event of earthquake, typhoon, flood, fire, war, change of policies or laws, and other unforeseeable or unpreventable or unavoidable event of force majeure, which directly affects the performance of this Agreement by a Party or prevents a Party from performing this Agreement in accordance with the agreed conditions, the Party affected by such a force majeure event shall forthwith issue a notice by facsimile and, within thirty (30) days, provide the documents evidencing the details of such force majeure event and the reasons for failure of or delay in its performance of this Agreement, and such documents shall be issued by the notarial office of the area where such force majeure event takes place. The Party affected by such a force majeure event shall take appropriate actions to mitigate or eliminate the effects arising from such event and shall make its efforts to reassume the obligations the performance of which have been delayed or impeded by such force majeure event. The Parties shall consult each other and decide whether this Agreement shall be waived in part or postponed in its performance with regard to the extent of impact of such force majeure event on the performance of this Agreement. No Party shall be liable for the economic losses suffered by the other Party arising from the force majeure event.

 

ARTICLE 12 MISCELLANEOUS

 

12.1                       This Agreement is made in Chinese in two (2) originals with each Party holding one (1) original.

 

12.2                       The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 


 

12.3                       Any dispute arising hereunder and in connection herewith shall be settled through consultations between the Parties, and if the Parties are unable to reach an agreement within thirty (30) days from the occurrence of the dispute, such dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration in accordance with the arbitration rules thereof then in effect. The place of arbitration shall be in Beijing, and the language to be used in arbitration shall be Chinese. The award of arbitration shall be final and equally binding on the Parties of this Agreement.

 

12.4                       No right, power or remedy of a Party under any provision of this Agreement shall preclude such Party from any other right, power or remedy of it under the PRC Laws and other provisions of this Agreement, nor shall any exercise of any right, power or remedy by a Party preclude such Party from exercising any other right, power or remedy.

 

12.5                       No failure or delay by any Party in exercising any right, power and remedy (the “Rights”) pursuant to this Agreement or PRC Laws shall be deemed as a waiver of such Rights, and no single or partial waiver of any of the Rights of a Party shall preclude any other exercise of it or the exercise of any other Rights.

 

12.6                       The headings of the Articles in this Agreement are inserted for the convenience of reference only, and under no circumstances shall be used in or otherwise affect the construction of this Agreement.

 

12.7                       This Agreement supersedes any other agreements, orally or written, between the Parties in respect of the subject matter hereof, and constitutes the entire agreement between the Parties.

 

12.8                       Each provision contained in this Agreement shall be severable and independent from other provisions, and in the event that any one or more provisions of this Agreement are held invalid, illegal or unenforceable at any time, the validity, legality or enforceability of the remaining provisions shall not be affected or impaired in any way.

 

12.9                       Unless otherwise specified herein, any amendments or supplements to this Agreement shall be made in writing and come into effect upon due execution by the Parties hereto.

 

12.10                Party B shall not assign any of its rights and/or obligations hereunder to any third parties without the prior written consent of Party A. Party A shall be entitled to assign any of its rights and/or obligations hereunder to any third party so appointed by it with prior notice of such assignment to Party B and to the extent not in violation of PRC Laws.

 

12.11                This Agreement shall be binding on the legal successors and assigns of the Parties.

 

12.12                The Parties undertake that they shall make their own declaration and payment of applicable taxes in connection with the transactions contemplated hereunder in accordance with laws.

 

[The remainder of this page is intentionally left blank]

 


 

[Signature page to the Second Amended and Restated Exclusive Consultation and Service Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Exclusive Consultation and Service Agreement has been executed by the following Parties at the place and on the date first above written.

 

SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD.

(Company seal: /s/ Shunyuan Kaihua (Beijing) Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

ANHUI HUAMI INFORMATION TECHNOLOGY CO., LTD.

(Company seal: /s/ Anhui Huami Information Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

Signature page to the Second Amended and Restated Exclusive Consultation and Service Agreement

 


Exhibit 4.10

 

SECOND AMENDED AND RESTATED

EXCLUSIVE CONSULTATION AND SERVICE AGREEMENT

 

This SECOND AMENDED AND RESTATED EXCLUSIVE CONSULTATION AND SERVICE AGREEMENT is entered into on March 20, 2020 at Beijing, People’s Republic of China (the “PRC”), by and between:

 

(1)                     SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD., a wholly foreign-owned enterprise incorporated under the laws of the PRC with its registered address at Unit 206-2, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing and Huang Wang as its legal representative (“Party A”); and

 

(2)                     HUAMI (BEIJING) INFORMATION TECHNOLOGY CO., LTD., a limited liability company incorporated under the laws of the PRC with its registered address at Unit 206-1, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing and Huang Wang as its legal representative (“Party B”).

 

(in this Agreement, each of Party A and Party B individually referred to as a “Party”, collectively the “Parties”).

 

WHEREAS:

 

1.                          The Parties entered into an Amended and Restated Exclusive Consultation and Service Agreement on November 3, 2017 (hereinafter referred to as the “Original Exclusive Consultation and Service Agreement”). Both Parties now agree to enter into this agreement to revise and restate the Original Exclusive Consulting and Service Agreement.

 

2.                          The principal business of Party A includes development and transfer of technology, technical service and consultation; sale of self-developed products; data processing; commission agency (excluding auction); sale of computer software and hardware as well as accessory equipment, communication equipment and accessories, electronic products and accessories, clothing, shoes, hats, sports goods, boxes, bags, stationery; import and export of technology and goods (excluding commodities traded, managed and operated by state; (trading of) items which are subject to quota licensing and management shall make relevant application in accordance with the applicable national regulations.)

 

3.                          The principal business of Party B include development and transfer of technology, technical service and consultation and technology promotion; software development; services of computer system; services of application software; services of basic software; data processing; product design; advertisement design, production, agency, and publication; sale of computer and software as well as accessory equipment, electronic products and communication equipment; information services in the second category of value-added telecommunications services (Internet information services only) (Internet information services exclude news, publishing, education, healthcare, medicines and medical devices, and electronic bulletin services). (The telecom and information service business license is valid until May 20, 2021). (Enterprises decide their own business projects and carry out business activities according to law; information services in the second category of value-added telecommunications services (Internet information services only) (Internet information services exclude news, publishing, education, healthcare, medicines and medical devices, electronic bulletin service) and projects that are subject to approval according to law, shall be carried out with the approval by the relevant authority and within the scope of the approval; business activities of projects prohibited and restricted by industrial policies of this municipality are prohibited.)

 

1


 

4.                          Party B wishes to engage Party A to provide development of software technology, technical consultation and technical services which are related to the Business (as defined below) of Party B, in order to promote the development of its business; and Party A agrees to accept such engagement.

 

THEREFORE, upon consultations, the Parties hereby agree as follows:

 

ARTICLE 1
DEFINITION

 

1.1                   Except as otherwise required by the terms or context hereof, the following terms in this Agreement shall have the following meanings:

 

“PRC Laws”

means the laws, administrative regulations, administrative rules, local regulations, judicial interpretations and other binding normative documents of the People ‘s Republic of China in force at that time.

 

 

 

 

 

Party B’s Business

 

means any and all businesses engaged in and developed by Party B currently and at any time during the effective term of this Agreement.

Services

 

means the services to be provided by Party A to Party B, which are related to Party B’s Business, including but not limited to:

 

(1)

  

grant of a license to Party B for the use of relevant software necessary for Party B’s Business;

 

(2)

  

provision of comprehensive IT solutions necessary for Party B’s Business;

 

(3)

  

day-to-day management, maintenance and update of hardware equipment and database;

 

(4)

  

development, maintenance and update of relevant application software;

 

(5)

  

provision of training for Party B’s professional and technical personnel;

 

(6)

  

provision of assistance to Party B in collecting technical and commercial information and conducting market research;

 

(7)

  

referral of clients to Party B for establishing commercial and cooperative relationship;

 

2


 

 

(8)

  

provision of suggestions and advice to Party B in relation to the formation and improvement of corporate structure, management system and department set up, and provision of assistance to Party B in improving its internal management system; and

 

(9)

  

any other technical and consulting services as may be requested by Party B from time to time, to the extent permitted by the PRC Laws.

Service Team

 

means the team of personnel established by Party A for the purpose of provision of Services to Party B pursuant to this Agreement, including the employees of Party A, independent professional advisors and other contractors retained by Party A.

Service Fees

 

means all fees payable by Party B to Party A pursuant to Article 3 of this Agreement in respect of the Services provided by Party A.

Operating Revenue

 

means in any single fiscal year during the effective term of this Agreement, the total revenue generated by Party B in its daily operation of business of that year as recorded under the “Revenue of Principal Business” in the audited balance sheet prepared in accordance with the PRC accounting standards.

Annual Business Plan

 

means the development plan and budget report for Party B’s Business in the next calendar year which is prepared by Party B with the assistance of Party A pursuant to this Agreement before November 30 of each year.

Equipment

 

shall mean any and all equipment owned by Party A or purchased by Party A from time to time, which are to be used for the purpose of providing the Services.

 

1.2                   Any reference to any PRC Laws herein shall be deemed to include: (1) the reference to any revision, amendment, supplement and reenactment of such Laws, irrespective of whether such revision, amendment, supplement and reenactment comes into force before or after the date of execution of this Agreement; and (2) the reference to other decisions, notices or regulations enacted in accordance, or effective as a result of, such Laws.

 

1.3                   Unless otherwise specified in the context herein, any reference to an article, section, item or paragraph shall mean the corresponding article, section, item or paragraph in this Agreement.

 

ARTICLE 2
SERVICES OF PARTY A

 

2.1                   In order to better operate its business, Party B wishes to engage Party A to provide the Services to it, and Party A agrees to provide such Services to Party B. As such, Party B engages Party A as its exclusive consultation and services provider to provide Party B with the Services defined herein, and Party A agrees to accept such engagement.

 

3


 

2.2                   Party A shall provide the Services to Party B in accordance with the terms of this Agreement, and Party B shall use its best efforts to facilitate Party A’s provision of the Services.

 

2.3                   Party A shall be equipped with the Equipment and Service Team reasonably necessary for its provision of Services and purchase, acquire new Equipment and deploy new personnel according to the Annual Business Plan and reasonable requirements of Party B so as to achieve the purpose of Party A to provide Party B with high-quality services in accordance with this Agreement. However, from time to time, Party A may replace any member of the Service Team or change the work duties and responsibilities of any member of the Service Team at its sole discretion, provided that such replacement or change of work duties and responsibilities shall not materially adversely affect the day-to-day business operations of Party B.

 

2.4                   Notwithstanding anything to the contrary in this Agreement, Party A is entitled to appoint any third party to provide any or all Services hereunder or to perform any of its obligations hereunder on its behalf. Party B hereby agrees that Party A is entitled to assign its rights and obligations under this Agreement to any third party.

 

ARTICLE 3
SERVICE FEES

 

3.1                   With respect to the Services to be provided by Party A pursuant to this Agreement, Party B shall pay to Party A the Service Fees in the following manner:

 

3.1.1                     an amount equivalent to one hundred percent (100%) of the net income of Party B of that year; and

 

3.1.2                     fees for any specific technical services provided by Party A as may be requested by Party B from time to time, which shall be otherwise agreed by the Parties separately.

 

3.2                   Party B shall within three months from the end of each calendar year pay the Service Fees determined pursuant to Article 3.1 of this Agreement into a bank account designated by Party A on a lump-sum basis. In case that Party A changes its bank account, it shall notify Party B in writing of such change at least seven (7) working days before such change.

 

3.3                   The Parties agree that, in principle, the payment of the abovementioned Service Fees shall not cause any difficulty to the operation of either Party of that year. For the aforesaid purposes, Party A may agree to the deferred payment of Service Fees by Party B.

 

3.4                   During the effective term of this Agreement, Party A may at its sole discretion, adjust the specific amount of Service Fees payable by Party B to Party A specified in Article 3.1.1

 

3.5                   The amount of Service Fees payable by Party B to Party A pursuant to Article 3.1.2 shall be determined by both Parties in writing separately based on the nature and quantity of services provided.

 

4


 

ARTICLE 4
OBLIGATIONS OF PARTY B

 

4.1                   The Services provided by Party A under this Agreement shall be exclusive. During the effective term of this Agreement, without prior written consent of Party A, Party B may not enter into any agreement, orally or written, with any third party or otherwise engage such third party to provide services the same as or similar to those provided by Party A hereunder.

 

4.2                   Party B shall provide Party A with the finalized Annual Business Plan of Party B of the next year before November 30 of each year, in order to facilitate Party A to plan for the Services, purchase necessary software and Equipment and secure necessary personnel and technical service force accordingly. In the event that Party B demands Party A to purchase any new Equipment and/or deploy additional personnel, it shall consult with Party A at least fifteen (15) days in advance in order to reach a mutual agreement between the Parties.

 

4.3                   In order to facilitate provision of the Services by Party A, Party B shall provide Party A with relevant materials requested by Party A in an accurate and timely manner.

 

4.4                   Party B shall pay Service Fees to Party A on time and in full amount in accordance with Article 3 of this Agreement.

 

4.5                   Party B shall maintain its good standing and presence, actively develop its business and procure the maximization of the revenue.

 

4.6                   The Parties hereby acknowledge that, pursuant to the terms and conditions of the Second Amended and Restated Equity Pledge Agreement entered into by all the registered shareholders of Party B as of the date of this Agreement (the “Existing Shareholders”) with Party A on March 20, 2020, each of the Existing Shareholders has pledged all of the equity interests in Party B held by it to Party A as security for Party B’s performance of its obligations under this Agreement.

 

4.7                   During the term of this Agreement, Party B agrees to cooperate with Party A and Party A’s direct or indirect parent company in the audit of related party transactions and other audits, to provide relevant information and materials about Party B’s operation, business, customers, finance and employees to Party A, its parent company or its appointed auditor, and agrees that Party A’s parent company may disclose such information and materials for purpose of satisfying the regulatory requirements of the place where the securities of Party A’s parent company are listed.

 

5


 

ARTICLE 5
INTELLECTUAL PROPERTY

 

5.1                   To the extent permitted by the applicable PRC Laws then in effect, intellectual property on the work products created in the course of Party A’s provision of Services and the intellectual property on the work product developed by Party B based on Party A’s intellectual property shall belong to Party A (such intellectual property includes, but not limited to, copyright, patent, know-how, trade secret and other intellectual property). Where the applicable PRC Laws expressly prohibits such intellectual property from being owned by Party A, Party B shall hold such intellectual property for the benefit of Party A, and shall immediately transfer such intellectual property to Party A at the lowest price permitted by PRC Laws to Party B once Party B’s ownership of intellectual property is no longer prohibited by PRC Laws; where there is no requirement on the lowest price for such transfer, Party B shall transfer such intellectual property to Party A unconditionally and assist Party A in completing all the filing and registration procedure as required by the competent government authorities in respect of such transfer.

 

5.2                   For the purpose of performing this Agreement, Party B may use the work products created by Party A in the course of provision of Services, subject to the terms and conditions of this Agreement. However, under no circumstances shall this Agreement grant Party B any license to use such work product for any other purpose.

 

5.3                   Each Party warrants to the other Party that it will indemnify the other Party against any and all economic losses incurred by the other Party arising from its infringement of any intellectual property rights (including copyright, trademark, patent and know-how) of others.

 

ARTICLE 6
CONFIDENTIALITY OBLIGATIONS

 

6.1                   During the effective term of this Agreement, all customer information (the “Customer Information”) and other related materials in connection with Party B’s Business and Services provided by Party A shall be owned by Party A.

 

6.2                   Notwithstanding the termination of this Agreement, each Party shall be obliged to keep in strict confidence the trade secrets and proprietary information of the other Party acquired during the performance of this Agreement, Customer Information jointly owned by both Parties and any non-public information of the other Party (collectively, the “Confidential Information”). The receiving party of the Confidential Information (the “Receiving Party”) shall not disclose the Confidential Information or any part thereof to any third parties unless it has obtained the prior written consent of the other Party, or required by relevant laws and regulations or the rules of the relevant stock exchange. The Receiving Party shall not use, directly or indirectly, such Confidential Information or any part thereof for purposes other than performing its obligations under this Agreement.

 

6.3                   The Confidential Information shall not include any information which:

 

(a)         as shown by written evidence, was rightfully known to the Receiving Party previously;

 

(b)         enters the public domain through no fault of the Receiving Party or is known by the public for other reasons; or

 

(c)          is rightfully acquired by the Receiving Party from other sources subsequently.

 

6


 

6.4                   The Receiving Party may disclose the Confidential Information to its relevant employees, agents or professionals it retains, provided that it shall ensure that such persons shall be bound by this Agreement, keep the Confidential Information confidential, and use such Confidential Information solely for the purpose of performing this Agreement.

 

6.5                   Upon termination of this Agreement, the Receiving Party of the Confidential Information shall return any and all documents, information or software containing any such Confidential Information to the original owner or provider of such Confidential Information; or with prior consent of the original owner or provider, destroy them which includes deleting all of such Confidential Information from any memory devices, and cease to use such Confidential Information.

 

6.6                   The Parties agree that this Article shall survive the amendment, rescission or termination of this Agreement.

 

ARTICLE 7
REPRESENTATIONS AND WARRANTIES

 

7.1                   Party A hereby represents and warrants as follows:

 

7.1.1                           it is a limited liability company duly registered and validly existing under the laws of its incorporation place with independent legal person status, and has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit;

 

7.1.2                           it has full corporate power and authority to execute and deliver this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions hereunder. This Agreement is lawfully and duly executed and delivered by it and constitutes its legal, valid and binding obligations, enforceable against it pursuant to the terms hereof.

 

7.2                   Party B hereby represents and warrants as follows:

 

7.2.1                           it is a limited liability company duly registered and validly existing under the laws of its incorporation place with independent legal person status, and has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit;

 

7.2.2                           it has full corporate power and authority to execute and deliver this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions contemplated hereunder. This Agreement is lawfully and duly executed and delivered by it and constitutes its legal, valid and binding obligations, enforceable against it pursuant to the terms hereof;

 

7


 

7.2.3                           as of the effective date of this Agreement, it has obtained all and complete business licenses necessary for its operation, and is fully authorized and qualified to conduct Party B’s Business as is currently conducted within the territory of PRC;

 

7.2.4                           it shall notify Party A in a timely manner any litigation it is involved in and any other circumstances with adverse effect, and make its best efforts to prevent further losses therefrom;

 

7.2.5                           without written consent of Party A, Party B shall not dispose of its material assets in any form nor change its current shareholding structure;

 

7.2.6                           it shall not enter into or consummate any transaction that may have material effect on the assets, liabilities, business operation, shareholding structure of Party B, any equity interests in any third party and any other lawful right held by Party B (except for those in the ordinary course of business or which have been disclosed to and approved by Party A in writing).

 

ARTICLE 8
 TERM

 

8.1                   The Parties hereby acknowledge that this Agreement shall become effective upon duly execution by the Parties hereto, and shall remain valid until it is terminated by written agreement of the Parties hereto or by the operation of applicable PRC Laws. The Original Exclusive Consultation and Service Agreement shall be replaced by this Agreement from the effective date of this Agreement.

 

8.2                   Each Party shall complete the approval and registration formalities for extension of its business term at least three (3) months before the expiry of its term of business such that this Agreement shall continue to be valid and effective.

 

8.3                   Following the termination of this Agreement, the Parties shall continue to comply with its obligations under Articles 3 and 6 of this Agreement.

 

ARTICLE 9
NOTICE

 

9.1                   Any notice, request, demand and other correspondence required to be given or made pursuant to this Agreement shall be made in writing and delivered to relevant Parties.

 

9.2                   Such notices or other correspondence shall be deemed to be duly served upon transmission if sent by fax or telex, or upon delivery if sent by hand, or five (5) days after posting if sent by mail.

 

8


 

ARTICLE 10
LIABILITIES FOR BREACH OF CONTRACT

 

10.1            The Parties agree and acknowledge that, if either Party (“Defaulting Party”) is materially in breach of any provision of this Agreement, or materially fails to perform any of its obligations hereunder, such breach and failure shall constitute a default hereunder (the “Default”), and the non-defaulting Party shall be entitled to demand the Defaulting Party to rectify such Default or take remedial actions within a reasonable period of time. If the Defaulting Party fails to rectify such Default or take remedial actions within such reasonable period of time or ten (10) days from the receipt of the written notice from the non-defaulting Party requiring such rectification, the non-defaulting Party shall be entitled to make a decision at its sole discretion:

 

10.1.1                    Party A shall be entitled to terminate this Agreement and claim from the Defaulting Party for damages if the Defaulting Party is Party B;

 

10.1.2                    Party B shall be entitled to claim from the Defaulting Party for damages if the Defaulting party is Party A, provided that under no circumstances shall Party B be entitled to terminate or rescind this Agreement unless otherwise provided by PRC Laws.

 

10.2            Notwithstanding anything to the contrary in this Agreement, this Article 10 shall survive the suspension or termination of this Agreement.

 

ARTICLE 11
 FORCE MAJEURE

 

In the event of earthquake, typhoon, flood, fire, war, change of policies or laws, and other unforeseeable or unpreventable or unavoidable event of force majeure, which directly affects the performance of this Agreement by a Party or prevents a Party from performing this Agreement in accordance with the agreed conditions, the Party affected by such a force majeure event shall forthwith issue a notice by facsimile and, within thirty (30) days, provide the documents evidencing the details of such force majeure event and the reasons for failure of or delay in its performance of this Agreement, and such documents shall be issued by the notarial office of the area where such force majeure event takes place. The Party affected by such a force majeure event shall take appropriate actions to mitigate or eliminate the effects arising from such event and shall make its efforts to reassume the obligations the performance of which have been delayed or impeded by such force majeure event. The Parties shall consult each other and decide whether this Agreement shall be waived in part or postponed in its performance with regard to the extent of impact of such force majeure event on the performance of this Agreement. No Party shall be liable for the economic losses suffered by the other Party arising from the force majeure event.

 

ARTICLE 12
MISCELLANEOUS

 

12.1            This Agreement is made in Chinese in two (2) originals with each Party holding one (1) original.

 

12.2            The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 

9


 

12.3            Any dispute arising hereunder and in connection herewith shall be settled through consultations between the Parties, and if the Parties are unable to reach an agreement within thirty (30) days from the occurrence of the dispute, such dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration in accordance with the arbitration rules thereof then in effect. The place of arbitration shall be in Beijing, and the language to be used in arbitration shall be Chinese. The award of arbitration shall be final and equally binding on the Parties of this Agreement.

 

12.4              No right, power or remedy of a Party under any provision of this Agreement shall preclude such Party from any other right, power or remedy of it under the PRC Laws and other provisions of this Agreement, nor shall any exercise of any right, power or remedy by a Party preclude such Party from exercising any other right, power or remedy.

 

12.5            No failure or delay by any Party in exercising any right, power and remedy (the “Rights”) pursuant to this Agreement or PRC Laws shall be deemed as a waiver of such Rights, and no single or partial waiver of any of the Rights of a Party shall preclude any other exercise of it or the exercise of any other Rights.

 

12.6            The headings of the Articles in this Agreement are inserted for the convenience of reference only, and under no circumstances shall be used in or otherwise affect the construction of this Agreement.

 

12.7            This Agreement supersedes any other agreements, orally or written, between the Parties in respect of the subject matter hereof, and constitutes the entire agreement between the Parties.

 

12.8            Each provision contained in this Agreement shall be severable and independent from other provisions, and in the event that any one or more provisions of this Agreement are held invalid, illegal or unenforceable at any time, the validity, legality or enforceability of the remaining provisions shall not be affected or impaired in any way.

 

12.9            Unless otherwise specified herein, any amendments or supplements to this Agreement shall be made in writing and come into effect upon due execution by the Parties hereto.

 

12.10       Party B shall not assign any of its rights and/or obligations hereunder to any third parties without the prior written consent of Party A. Party A shall be entitled to assign any of its rights and/or obligations hereunder to any third party so appointed by it with prior notice of such assignment to Party B and to the extent not in violation of PRC Laws.

 

12.11     This Agreement shall be binding on the legal successors and assigns of the Parties.

 

12.12     The Parties undertake that they shall make their own declaration and payment of applicable taxes in connection with the transactions contemplated hereunder in accordance with laws.

 

[The remainder of this page is intentionally left blank]

 

10


 

[Signature page to the Second Amended and Restated Exclusive Consultation and Service Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Exclusive Consultation and Service Agreement has been executed by the following Parties at the place and on the date first above written.

 

SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD.

(Company seal: /s/ Shunyuan Kaihua (Beijing) Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

HUAMI (BEIJING) INFORMATION TECHNOLOGY CO., LTD.

(Company seal: /s/ Huami (Beijing) Information Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

Signature page to the Second Amended and Restated Exclusive Consultation and Service Agreement

 


Exhibit 4.11

 

SECOND AMENDED AND RESTATED

EXCLUSIVE OPTION AGREEMENT

 

This SECOND AMENDED AND RESTATED EXCLUSIVE OPTION AGREEMENT (this “Agreement”) is entered into on March 20, 2020 by and among:

 

1.                  THE SHAREHOLDERS WHOSE NAMES ARE SET OUT IN APPENDIX I (each an “Existing Shareholder” and collectively the “Existing Shareholders”)

 

2.                  SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD. (the “WFOE”)

 

Registered address: Unit 206-2, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing

 

Legal representative: Huang Wang

 

3.                  ANHUI HUAMI INFORMATION TECHNOLOGY CO., LTD. (the “Company”)

 

Registered address: Room 1201, Block A4, National Cartoon and Animation Industry Base, No. 800 Wang Jiang West Road, Hi-Tech Industry Development Zone, Hefei

 

Legal representative: Huang Wang

 

(in this Agreement, each of the above individually being referred to as a “Party”, collectively the “Parties”.)

 

WHEREAS:

 

(1)             The original shareholders of the Company, including Huang Wang, Lu Yunfen, Liu De, Cao Liping, Yue Bin and Lhasa Heye Investment Management Co., Ltd., the WFOE and the Company entered into an Amended and Restated Exclusive Option Agreement on November 3, 2017 (hereinafter referred to as the “Original Exclusive Option Agreement”). After the Company reduced its registered capital in 2020, Liu De, Cao Liping, Yue Bin and Lhasa Heye Investment Management Co., Ltd. are no longer registered shareholders of the Company. In order to reflect the above shareholding change, all Parties now agree to enter into this Agreement to amend and restate the Original Exclusive Option Agreement.

 

(2)             The Existing Shareholders are the registered shareholders of the Company, holding in aggregate all shares of the Company, and as at the date hereof, their respective contribution amount and shareholding percentage in the Company’s registered capital are set out in Appendix I hereof.

 

(3)             To the extent not in violation of the PRC laws, the Existing Shareholders are in desirous of transferring to the WFOE, and the WFOE is in desirous of accepting such transfers of, the respective shares held by them in the Company.

 

(4)             To the extent not in violation of the PRC laws, the Company is in desirous of transferring to the WFOE, and the WFOE is in desirous of accepting such transfer of, the assets held by the Company.

 


 

(5)             In order to effect such transfer of shares or assets, the Existing Shareholders and the Company agree to grant the WFOE an exclusive and irrevocable share transfer option and an exclusive and irrevocable asset purchase option respectively, pursuant to which the Existing Shareholders or the Company shall, to the extent permitted by the PRC laws and at the request of the WFOE, transfer the Option Shares or the Company Assets (as defined below) to the WFOE and/or any other entity or individual designated by the WFOE in accordance with the terms of this Agreement.

 

(6)             The Existing Shareholders agree that the Company will grant the WFOE an Asset Purchase Option in accordance with this Agreement.

 

THEREFORE, upon consultations, the Parties hereby agree as follows:

 

ARTICLE 1 DEFINITIONS

 

1.1                              Unless the context otherwise requires, in this Agreement, the following terms shall have the following meanings:

 

“PRC Laws”:

 

mean the laws, administrative regulations, administrative rules, local decrees, judicial interpretations and regulatory documents with binding effects of the PRC then in effect.

 

 

 

“Share Transfer Option”:

 

means the option to purchase the shares of the Company granted by the Existing Shareholders to the WFOE in accordance with the terms and conditions of this Agreement.

 

 

 

“Asset Purchase Option”:

 

means the option to purchase any of the Company Assets granted by the Company to the WFOE in accordance with the terms and conditions of this Agreement.

 

 

 

“Option Shares”:

 

mean, with respect to an Existing Shareholder, all shares held by it in the Company’s Registered Capital (as defined below); with respect to all of the Existing Shareholders, 100% shares of the Company.

 

 

 

“Company’s Registered Capital”:

 

means the registered capital of the Company amounting to RMB 1,666,667 as at the date of this Agreement, or the increased registered capital as a result of any capital increase in any form during the effective term of this Agreement.

 

 

 

“Transferred Shares”:

 

mean the shares of the Company that the WFOE is entitled to require any of the Existing Shareholders to transfer to it or the entity or individual designated by it pursuant to Article 3 of this Agreement in exercising the Share Transfer Option, and the number of such Transferred Shares may be all or part of the Option Shares to be determined at the sole discretion of the WFOE in accordance with the PRC Laws then in effect and taking into account its own commercial considerations.

 


 

“Transferred Assets”:

 

mean the Company Assets that the WFOE is entitled to require the Company to transfer to it or the entity or individual designated by it pursuant to Article 3 of this Agreement in exercising the Asset Purchase Option, and the quantity of such Transferred Assets may be all or part of the Company Assets to be determined at the sole discretion of the WFOE in accordance with the PRC Laws then in effect and taking into account its own commercial considerations.

 

 

 

“Exercise”:

 

means the exercise of the Share Transfer Option or Asset Purchase Option by the WFOE.

 

 

 

“Transfer Price”:

 

means the total consideration payable by the WFOE or the entity or individual designated by it in each Exercise to the Existing Shareholders or the Company for acquiring the Transferred Shares or the Company Assets.

 

 

 

“Business License”:

 

means any approval, permit, filing, registration and any other licenses which are required to be obtained by the Company for the lawful and valid conduct of all its business, including without limitation the Business License and other permits and licenses required under the PRC Laws then in effect.

 

 

 

“Company Assets”:

 

mean all of the tangible and intangible assets that is owned by the Company or the Company has the right to dispose of during the effective term of this Agreement, including without limitation any real property, movable property and trademark, copyright, patent, know-how, domain name, software license and such other intellectual property rights.

 

 

 

“Material Agreement”:

 

means any agreement to which the Company is a party that may have material effect on the Company’s business or assets, including without limitation the Second Amended and Restated Exclusive Consultation and Service Agreement executed concurrently with this Agreement and other material agreements in connection with the business of the Company.

 

 

 

“Exercise Notice”:

 

has the meaning ascribed to it in Article 3.7 of this Agreement.

 

 

 

“Confidential Information”:

 

has the meaning ascribed to it in Article 8.1 of this Agreement.

 


 

“Defaulting Party”:

 

has the meaning ascribed to it in Article 11.1 of this Agreement.

 

 

 

“Default”:

 

has the meaning ascribed to it in Article 11.1 of this Agreement.

 

 

 

“Rights”:

 

has the meaning ascribed to it in Article 12.5 of this Agreement.

 

1.2                              Any reference to the PRC Laws herein shall be deemed to include:

 

(1) the reference to any revision, amendment, supplement and reenactment of such PRC Laws, irrespective of whether such revision, amendment, supplement and reenactment comes into force before or after the date of execution of this Agreement; and

 

(2) the reference to other decisions, notices or regulations enacted in accordance, or effective as a result of, such PRC Laws.

 

1.3                              Unless otherwise specified in the context herein, any reference to an article, section, item or paragraph shall mean the corresponding article, section, item or paragraph in this Agreement.

 

ARTICLE 2 GRANT OF SHARE TRANSFER OPTION AND ASSET PURCHASE OPTION

 

2.1                              The Existing Shareholders hereby severally and jointly agree to irrevocably and unconditionally grant the WFOE, and the WFOE agrees to accept, an exclusive share transfer option, pursuant to which the WFOE is entitled to require the Existing Shareholders, to the extent permitted by the PRC Laws, to transfer the Option Shares to it or the entity or individual designated by it in accordance with the terms and conditions of this Agreement.

 

2.2                              The Company hereby agrees that the Existing Shareholders shall grant the WFOE the Share Transfer Option in accordance with Article 2.1 above and other provisions herein.

 

2.3                              The Company hereby agrees to irrevocably and unconditionally grant the WFOE, and the WFOE agrees to accept, an exclusive asset purchase option, pursuant to which the WFOE is entitled to require the Company, to the extent permitted by the PRC Laws, to transfer any or part of the Company Assets to it or the entity or individual designated by it in accordance with the terms and conditions of this Agreement.

 

2.4                              The Existing Shareholders hereby severally and jointly agrees that the Company shall grant the WFOE the Asset Purchase Option in accordance with Article 2.3 above and other provisions herein.

 


 

ARTICLE 3 METHOD OF EXERCISE

 

3.1                              Subject to the terms and conditions of this Agreement and to the extent permitted by the PRC Laws, the WFOE has the absolute discretion to determine the time, manner and number of times of its Exercise.

 

3.2                              Subject to the terms and conditions of this Agreement and to the extent not in violation of the PRC Laws then in effect, the WFOE is entitled to require at any time that all or part of the shares of the Company be transferred from the Existing Shareholders to it or other entity or individual designated by it.

 

3.3                              Subject to the terms and conditions of this Agreement and to the extent not in violation of the then-current PRC Laws, the WFOE is entitled to require at any time that all or part of the Company Assets be transferred from the Company to it or other entity or individual designated by it.

 

3.4                              In respect of the Share Transfer Option, at each Exercise, the WFOE is entitled to determine the number of the Transferred Shares which shall be transferred from the Existing Shareholders to the WFOE and/or its designated entity or individual, and the Existing Shareholders shall sell the Transferred Shares to the WFOE and/or its designated entity or individual of which the number is so determined by the WFOE. In respect of the purchase of the Transferred Shares at each Exercise, the WFOE and/or its designated entity or individual shall pay the Transfer Price to the Existing Shareholders who are selling the Transferred Shares.

 

3.5                              In respect of the Asset Purchase Option, at each Exercise, the WFOE is entitled to determine the specific Company Assets which shall be transferred from the Company to the WFOE and/or its designated entity or individual, and the Company shall sell the Transferred Assets to the WFOE and/or its designated entity or individual as requested by the WFOE. In respect of the purchase of the Transferred Assets at each Exercise, the WFOE and/or its designated entity or individual shall pay the Transfer Price to the Company.

 

3.6                              At each Exercise, the WFOE may require the Transferred Shares or Transferred Assets to be transferred to itself, or require all or part of the Transferred Shares or Transferred Assets to be transferred to any third party designated by it.

 

3.7                              At each Exercise decided by the WFOE, an exercise notice of the Share Transfer Option or the Asset Purchase Option (each an “Exercise Notice,” the form of which is attached as Appendix II and Appendix III) shall be served by the WFOE to the Existing Shareholders or the Company, as the case may be. The Existing Shareholders or the Company shall, upon receipt of the Exercise Notice, immediately transfer, in accordance with the Exercise Notice, all the Transferred Shares to the WFOE and/or its designated entity or individual in the manner provided in Article 3.4 or 3.5 of this Agreement.

 


 

ARTICLE 4 PURCHASE PRICE

 

4.1                              With respect to the Share Transfer Option, the total Transfer Price at each Exercise payable by the WFOE or its designated entity or individual to the Existing Shareholders shall be an amount equivalent to the lower of (i) the amount of contribution in the Company’s Registered Capital which the Transferred Shares represent, or (ii) the lowest price permitted by the PRC Laws then in effect. Each of the Existing Shareholders acknowledges and agrees that it has been sufficiently compensated by the WFOE and therefore shall return the full amount received for the share transfer to the WFOE or its designated entity and individual within ten (10) business days upon receipt of such amount.

 

4.2                              With respect to the Asset Purchase Option, the WFOE or its designated entity or individual shall pay to the Company the lowest price permitted by the PRC Laws then in effect at each Exercise. The Company acknowledges and agrees that it has been sufficiently compensated by the WFOE and therefore shall return the full amount received for the asset transfer to the WFOE or its designated entity or individual within ten (10) business days upon receipt of such amount.

 

ARTICLE 5 REPRESENTATIONS AND WARRANTIES

 

5.1                              Each of the Existing Shareholders hereby severally and jointly represents and warrants that:

 

5.1.1                    it has full and independent legal status and legal capacity to execute, deliver and perform this Agreement and is capable of being an independent party to a lawsuit.

 

5.1.2                    the Company is a limited liability company duly registered and validly existing under the PRC Laws with independent legal person status, and has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit.

 

5.1.3                    it has full power and authority to execute, deliver and perform this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and to consummate the transactions contemplated hereunder.

 

5.1.4                    this Agreement is lawfully and duly executed and delivered by it and constitutes its legal and binding obligations, enforceable against it pursuant to the terms hereof.

 

5.1.5                    it is the registered legal owner of the Option Shares as of the effective date of this Agreement, and the Option Shares are free from any lien, pledge, claim or other security interest or third party right, except for (i) the pledge created pursuant to the Second Amended and Restated Equity Pledge Agreement on March 20, 2020, and (ii) the proxy right created pursuant to the Second Amended and Restated Shareholder Voting Proxy Agreement , executed by and among the Company on March 20, 2020, the WFOE and the Existing Shareholders. Pursuant to this Agreement, the WFOE and/or its designated entity or individual is able to, after the Exercise, acquire the sound ownership of the Transferred Shares free from any lien, pledge, claim or other security interest or third party right of ownership.

 


 

5.1.6                    to (the best of) its knowledge, the Company Assets are free from any lien, pledge, claim or other security interest or third party right. Pursuant to this Agreement, the WFOE and/or its designated entity or individual is able to, after the Exercise, acquire the sound ownership of the Company Assets free from any lien, pledge, claim or other security interest or third party right of ownership.

 

5.1.7                    unless otherwise compelled by the PRC Laws, it shall not demand for any declaration or distribution of any attributable profits, bonus, dividends or interest by the Company, and in the event it receives any profits, bonus, dividends or interest from the Company, it shall, to the extent in compliance with the PRC Laws, promptly give such profits, bonus, dividends or interest to the WFOE or any eligible entity or individual designated by the WFOE as gift.

 

5.2                              The Company hereby represents and warrants that:

 

5.2.1                    it is a limited liability company duly registered and validly existing under the PRC Laws with independent legal person status. It has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit.

 

5.2.2                    it has full corporate power and authority to execute, deliver and perform this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions contemplated hereunder.

 

5.2.3                    this Agreement is lawfully and duly executed and delivered by it and constitutes its legal and binding obligations.

 

5.2.4                    the Company Assets are free from any lien, pledge, claim or other security interest or third party right. Pursuant to this Agreement, the WFOE and/or its designated entity or individual is able to, after the Exercise, acquire the sound ownership of the Company Assets free from any lien, pledge, claim or other security interest or third party right of ownership.

 

5.2.5                    unless otherwise compelled by the PRC Laws, it shall not make any declaration or distribution of any attributable profits, bonus, dividends or interest.

 

5.3                              The WFOE hereby represents and warrants that:

 

5.3.1                    it is an wholly foreign-owned enterprise duly registered and validly existing under the PRC Laws with independent legal person status. It has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit.

 


 

5.3.2                    it has full corporate power and authority to execute, deliver and perform this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions contemplated hereunder.

 

5.3.3                    this Agreement is lawfully and duly executed and delivered by it and constitutes its legal and binding obligations.

 

ARTICLE 6 COVENANTS OF THE EXISTING SHAREHOLDERS

 

Each of the Existing Shareholders hereby covenants that:

 

6.1                              During the effective term of this Agreement, it shall not, without prior written consent of the WFOE:

 

6.1.1                    transfer or otherwise dispose of, or create any security interest or other third party right over, any Option Shares;

 

6.1.2                    increase or reduce the Company’s Registered Capital, or otherwise cause the Company to merge with any other entity;

 

6.1.3                    dispose of or cause the Company’s management to dispose of any material assets of the Company, other than in the ordinary course of business;

 

6.1.4                    terminate or cause the Company’s management to terminate any material agreement entered into by the Company, or enter into any other agreement which is in conflict with any existing material agreement;

 

6.1.5                    appoint or replace any director, supervisor or any other Company’s management who shall be appointed or replaced by the Existing Shareholders;

 

6.1.6                    cause the Company to make any declaration or distribution of attributable profits, bonus, dividends or interest;

 

6.1.7                    terminate, liquidate or dissolve the Company and will ensure that the Company is validly existing;

 

6.1.8                    amend the articles of association of the Company; and

 

6.1.9                    cause the Company to provide or obtain any loan, or provide undertaking or otherwise provide guarantee in any form, or assume any substantial obligation other than in the ordinary course of business.

 

6.2                              During the effective term of this Agreement, it shall use its best efforts to develop the Company’s business and ensure that the operations of the Company are in compliance with laws and regulations, and nothing detrimental to the Company Assets, goodwill or the validity of the Company’s Business License shall be caused by its act or omission.

 


 

6.3                              During the effective term of this Agreement, it shall promptly inform the WFOE of any circumstances that may have material adverse effect on the existence, operations, financial condition, assets or goodwill of the Company, and shall take all steps accepted by the WFOE to prevent such circumstances or take effective remedial actions.

 

6.4                              Upon service of the Exercise Notice by the WFOE:

 

6.4.1                    it shall immediately hold a shareholders’ meeting to pass resolutions at such meeting and take all other necessary actions to approve the transfer of all the Transferred Shares or Transferred Assets from any Existing Shareholder or the Company to the WFOE and/or its designated entity or individual at the Transfer Price, and shall waive any pre-emptive right (if any) it may have;

 

6.4.2                    it shall immediately enter into a share transfer agreement with the WFOE and/or its designated entity or individual to transfer all the Transferred Shares to the WFOE and/or WFOE’s designated entity or person at the Transfer Price, and provide necessary assistance to the WFOE (including the provision and execution of all ancillary legal documents, completion of the procedures for all governmental approvals and registrations, and fulfilment of all relevant obligations) as requested by the WFOE and in compliance with the laws and regulations, so that all the Transferred Shares will be acquired by the WFOE and/or its designated entity or individual free from any encumbrances, or any security interest, third party restriction or any other limitations on the shares.

 

6.5                              In the event that the aggregate amount of the Transfer Price received by it in respect of the Transferred Shares held by it is higher than its contribution in the Company, or it receives any distribution of profits, dividends, interest or bonus from the Company, such Existing Shareholder agrees not to collect, to the extent not in violation of the PRC Laws, the proceeds from such premium and any such distribution of profits, dividends, interest or bonus (net of relevant taxes), and the WFOE shall be entitled to collect such part of proceeds. The Existing Shareholders shall instruct the relevant recipient or the Company to pay such part of proceeds to the bank account then designated by the WFOE.

 

ARTICLE 7 COVENANTS BY THE COMPANY

 

7.1                              The Company hereby covenants that:

 

7.1.1                    it shall use its best efforts to provide assistance in satisfying the requirements to obtain any third parties’ consent, permit, waiver, authorization or any governmental approval, permit, waiver, or to complete the procedures of any registration or filing (if required by laws) with any governmental authority for the execution and performance of this Agreement and the grant of the Share Transfer Option and Asset Purchase Option under this Agreement.

 

7.1.2                    without prior written consent of the WFOE, it shall not provide assistance to or permit the Existing Shareholders to transfer or otherwise dispose of, or create any security interest or other third party right over, any Option Shares.

 

7.1.3                    without prior written consent of the WFOE, it shall not transfer or otherwise dispose of any material assets of the Company (other than in the ordinary course of business), or create any security interest or other third party right over any Company Assets.

 


 

7.1.4                    it shall not conduct or permit the conduct of any act or action that may have material adverse effect on the interests of the WFOE under this Agreement, including without limitation any act or action which is subject to the restrictions under Article 6.1.

 

7.2                              Upon service of the Exercise Notice by the WFOE:

 

7.2.1                    it shall immediately procure a shareholders’ meeting to be held by the Existing Shareholders and the passing of resolutions at such meeting and take all other necessary actions to approve the transfer of all the Transferred Assets from the Company to the WFOE and/or its designated entity or individual at the Transfer Price;

 

7.2.2                    it shall immediately execute an asset transfer agreement with the WFOE and/or its designated entity or individual to transfer all the Transferred Assets to the WFOE and/or its designated entity or individual at the Transfer Price, and procure the necessary assistance from its shareholders to be provided to the WFOE (including the provision and execution of all ancillary legal documents, completion of the procedures for all governmental approvals and registrations, and fulfilment of all relevant obligations) as requested by the WFOE and in compliance with the laws and regulations, so that all the Transferred Assets will be acquired by the WFOE and/or its designated entity or individual free from any encumbrances, or any security interest, third party restriction or any other limitations on the Company Assets.

 

7.3                              In the event that the Company is dissolved or liquidated as required by PRC Laws, to the extent that permitted by PRC Laws, the Company shall transfer all its assets to the WFOE or other eligible person designated by it at the lowest price permitted by the PRC Laws. The Company shall waive the payment obligation of the WFOE or its designated eligible person arising therefrom to the extent permitted by the PRC Laws then in effect; Alternatively, any proceeds from such transaction shall, to the extent permitted by the PRC Laws then in effect, be paid to the WFOE or its designated eligible person as part of the service fees under the exclusive consultation and service agreement.

 

ARTICLE 8 CONFIDENTIALITY OBLIGATIONS

 

8.1                              Notwithstanding the termination of this Agreement, each Party shall be obliged to keep in strict confidence the trade secrets, proprietary and customer information, and all other information which are confidential in nature (collectively, the “Confidential Information”) of the other Party acquired during the entering into and performance of this Agreement. The receiving party of the Confidential Information shall not disclose any Confidential Information to any third parties unless it has obtained the prior written consent of the other Party, or required by relevant laws and regulations or the requirements of the place where a Party’s affiliate is listed. The receiving party of the Confidential Information shall not use, directly or indirectly, such Confidential Information for purposes other than performing its obligations under this Agreement.

 


 

8.2                              The Confidential Information shall not include any information which:

 

(a) as shown by written evidence, was rightfully known to the receiving party previously;

 

(b) enters the public domain through no fault of the receiving party; or

 

(c) is rightfully acquired by the receiving party from other sources subsequent to the receipt of the Confidential Information.

 

8.3                              The receiving party may disclose the Confidential Information to its relevant employees, agents or professionals it retains, provided that it shall ensure that such persons shall comply with the terms and conditions of this Agreement and the receiving party shall be liable for the breach of any relevant terms and conditions of this Agreement by any of such persons.

 

8.4                              Notwithstanding anything to the contrary in this Agreement, this Article shall survive the termination of this Agreement.

 

ARTICLE 9 TERM

 

This Agreement shall become effective upon duly execution by the Parties hereto, and shall terminate upon the completion of transfer of all the Option Shares and Company Assets to the WFOE and/or its designated entity or individual in accordance with laws and the provisions of this Agreement. The Original Exclusive Option Agreement shall be replaced by this Agreement from the effective date of this Agreement.

 

ARTICLE 10 NOTICES

 

10.1                       Any notice, request, demand and other correspondence required to be given or made pursuant to this Agreement shall be made in writing and delivered to relevant Parties.

 

10.2                       Such notices or other correspondence shall be deemed to be duly served upon transmission if sent by fax or telex, or upon delivery if sent by hand, or five (5) days after posting if sent by mail.

 

ARTICLE 11 LIABILITIES FOR BREACH OF CONTRACT

 

11.1                       The Parties agree and acknowledge that, if any Party (“Defaulting Party”) is materially in breach of any provision of this Agreement, or materially fails to perform or delays in performing any of its obligations hereunder, such breach, failure or delay shall constitute a default hereunder (the “Default”), and the non-defaulting Party shall be entitled to demand the Defaulting Party to rectify such Default or take remedial actions within a reasonable period of time. If the Defaulting Party fails to rectify such Default or take remedial actions within such reasonable period of time or ten (10) days from the receipt of the written notice from the non-defaulting Party requiring such rectification, the non-defaulting Party shall be entitled to make a decision at its sole discretion:

 


 

11.1.1             the WFOE shall be entitled to terminate this Agreement and claim from the Defaulting Party for damages if the Defaulting Party is any of the Existing Shareholders or the Company;

 

11.1.2             the non-defaulting Party shall be entitled to claim from the Defaulting Party for damages if the Defaulting party is the WFOE, provided that under no circumstances shall the Non-defaulting Party be entitled to terminate or rescind this Agreement unless otherwise provided by laws.

 

11.2                       Notwithstanding anything to the contrary in this Agreement, this Article shall survive the termination of this Agreement.

 

ARTICLE 12 MISCELLANEOUS

 

12.1                       This Agreement is made in Chinese in four (4) originals with each Party holding one (1) original.

 

12.2                       The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 

12.3                       Any dispute arising hereunder and in connection herewith shall be settled through consultations between the Parties, and if the Parties are unable to reach an agreement within thirty (30) days from the occurrence of the dispute, such dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration in accordance with the arbitration rules thereof then in effect. The place of arbitration shall be in Beijing, and the language to be used in arbitration shall be Chinese. The award of arbitration shall be final and equally binding on the Parties of this Agreement.

 

12.4                       No right, power or remedy of a Party under any provision of this Agreement shall preclude such Party from any other right, power or remedy of it under the laws and other provisions of this Agreement, nor shall any exercise of any right, power or remedy by a Party preclude such Party from exercising any other right, power or remedy.

 

12.5                       No failure or delay by any Party in exercising any right, power and remedy (the “Rights”) pursuant to this Agreement or laws shall be deemed as a waiver of such Rights, and no single or partial waiver of such Rights of a Party shall preclude any other exercise of it or the exercise of any other Rights.

 

12.6                       The headings of the Articles in this Agreement are inserted for the convenience of reference only, and under no circumstances shall be used in or otherwise affect the construction of this Agreement.

 


 

12.7                       Each provision contained in this Agreement shall be severable and independent from other provisions, and in the event that any one or more provisions of this Agreement are held invalid, illegal or unenforceable at any time, the validity, legality or enforceability of the remaining provisions shall not be affected or impaired in any way.

 

12.8                       This Agreement, upon execution, supersedes any other legal documents entered into between the Parties in respect of the subject matter hereof. Any amendments or supplements to this Agreement shall be made in writing and come into effect upon due execution by the Parties hereto.

 

12.9                       No Party shall transfer any of its rights and/or obligations hereunder to any third parties without prior written consent of the other Parties.

 

12.10                This Agreement shall be binding on the legal assigns or successors of the Parties.

 

[The remainder of this page is intentionally left blank]

 


 

[Signature page to the Second Amended and Restated Exclusive Option Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Exclusive Option Agreement has been executed by the following Parties on the date first above written.

 

HUANG WANG

 

 

 

 

By:

/s/ Huang Wang

 

 

 

 

LU YUNFEN

 

 

 

 

By:

/s/ Lu Yunfen

 

 

Signature page to the Second Amended and Restated Exclusive Option Agreement

 


 

[Signature page to the Second Amended and Restated Exclusive Option Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Exclusive Option Agreement has been executed by the following Parties on the date first above written.

 

SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD.

(Company seal: /s/ Shunyuan Kaihua (Beijing) Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

ANHUI HUAMI INFORMATION TECHNOLOGY CO., LTD.

(Company seal: /s/ Anhui Huami Information Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

Signature page to the Second Amended and Restated Exclusive Option Agreement

 


 

Appendix I:

 

General Information of the Company

 

Company Name: Anhui Huami Information Technology Co., Ltd.

 

Registered Address: Room 1201, Block A4, National Cartoon and Animation Industry Base, No. 800 Wang Jiang West Road, Hi-Tech Industry Development Zone, Hefei

 

Registered Capital: RMB 1,666,667

 

Legal Representative: Huang Wang

 

Shareholding Structure:

 

 

Name of Shareholder

 

Amount of Contribution
in the Registered Capital
(in RMB 10,000)

 

Percentage of
Contribution

 

Identity Card Number /
Unified Social Credit
Number

 

Huang Wang

 

165.6667

 

99.4000

%

***

 

Lu Yunfen

 

1.0000

 

0.6000

%

***

 

 

 

 

 

 

 

 

 

Total

 

166.6667

 

100

%

 

 

Appendix I

 


 

Appendix II:

 

Form of Exercise Notice

 

To: Huang Wang, Lu Yunfen

 

WHEREAS, we, you and Anhui Huami Information Technology Co., Ltd. (the “Company”) entered into the Second Amended and Restated Exclusive Option Agreement (the “Option Agreement”) on March 20, 2020 pursuant to which you shall transfer the shares held by you in the Company to us or any third party designated by us at our request to the extent permitted by the PRC laws and regulations.

 

Therefore, we hereby give this notice to you as follows:

 

We hereby request to exercise the Share Transfer Option under the Option Agreement and we/[name of company/individual] designated by us will acquire [·]% of the shares held by you in the Company (the “Proposed Acquired Shares”). You shall, upon receipt of this notice, immediately transfer all the Proposed Acquired Shares to us/[name of the designated company/individual] in accordance with the provisions of the Option Agreement.

 

Regards,

 

 

Shunyuan Kaihua (Beijing) Technology Co., Ltd.

 

(Company seal)

 

 

 

Authorized Representative:

 

 

 

Date:

 

Appendix II

 


 

Appendix III:

 

Form of Exercise Notice

 

To: Anhui Huami Information Technology Co., Ltd.

 

WHEREAS, we, Huang Wang, Lu Yunfen and you entered into the Second Amended and Restated Exclusive Option Agreement (the “Option Agreement”) on March 20, 2020 pursuant to which you shall transfer your assets to us or any third party designated by us at our request to the extent permitted by the PRC laws and regulations.

 

Therefore, we hereby give this notice to you as follows:

 

We hereby request to exercise the Asset Purchase Option under the Option Agreement and we/[name of company/individual] designated by us will acquire all your assets as set out in a separate list (the “Proposed Acquired Assets”). You shall, upon receipt of this notice, immediately transfer all the Proposed Acquired Assets to us/[name of the designated company/individual] in accordance with the provisions of the Option Agreement.

 

Regards,

 

 

Shunyuan Kaihua (Beijing) Technology Co., Ltd.

 

(Company seal)

 

 

 

Authorized Representative:

 

 

 

Date:

 

Appendix III

 


Exhibit 4.12

 

SECOND AMENDED AND RESTATED

EXCLUSIVE OPTION AGREEMENT

 

This SECOND AMENDED AND RESTATED EXCLUSIVE OPTION AGREEMENT (this “Agreement”) is entered into on March 20, 2020 by and among:

 

1.                          THE SHAREHOLDERS WHOSE NAMES ARE SET OUT IN APPENDIX I (each an “Existing Shareholder” and collectively the “Existing Shareholders”)

 

2.                          SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD. (the “WFOE”)

 

Registered address: Unit 206-2, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing
Legal representative: Huang Wang

 

3.                          HUAMI (BEIJING) INFORMATION TECHNOLOGY CO., LTD. (the “Company”)

 

Registered address: Unit 206-1, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing
Legal representative: Huang Wang

 

(in this Agreement, each of the above individually being referred to as a “Party”, collectively the “Parties”.)

 

WHEREAS:

 

(1)               The original shareholders of the Company, including Huang Wang, Lu Yunfen, Fan Meihui, Fan Bin, Zhang Yi, Zhang Xiaojun, Liu De, Cao Lipin, Yue Bin and Lhasa Heye Investment Management Co., Ltd., the WFOE and the Company entered into an Amended and Restated Exclusive Option Agreement on November 3, 2017 (hereinafter referred to as the “Original Exclusive Option Agreement”). After the share transfer of the Company in 2020, Liu De, Cao Liping, Yue Bin and Lhasa Heye Investment Management Co., Ltd. are no longer registered shareholders of the Company. In order to reflect the above shareholding change, all Parties now agree to enter into this Agreement to amend and restate the Original Exclusive Option Agreement.

 

(2)               The Existing Shareholders are the registered shareholders of the Company, holding in aggregate all shares of the Company, and as at the date hereof, their respective contribution amount and shareholding percentage in the Company’s registered capital are set out in Appendix I hereof.

 

(3)               To the extent not in violation of the PRC laws, the Existing Shareholders are in desirous of transferring to the WFOE, and the WFOE is in desirous of accepting such transfers of, the respective shares held by them in the Company.

 

1


 

(4)               To the extent not in violation of the PRC laws, the Company is in desirous of transferring to the WFOE, and the WFOE is in desirous of accepting such transfer of, the assets held by the Company.

 

(5)               In order to effect such transfer of shares or assets, the Existing Shareholders and the Company agree to grant the WFOE an exclusive and irrevocable share transfer option and an exclusive and irrevocable asset purchase option respectively, pursuant to which the Existing Shareholders or the Company shall, to the extent permitted by the PRC laws and at the request of the WFOE, transfer the Option Shares or the Company Assets (as defined below) to the WFOE and/or any other entity or individual designated by the WFOE in accordance with the terms of this Agreement.

 

(6)               The Existing Shareholders agree that the Company will grant the WFOE an Asset Purchase Option in accordance with this Agreement.

 

THEREFORE, upon consultations, the Parties hereby agree as follows:

 

ARTICLE 1
DEFINITIONS

 

1.1                         Unless the context otherwise requires, in this Agreement, the following terms shall have the following meanings:

 

“PRC Laws”:

  

mean the laws, administrative regulations, administrative rules, local decrees, judicial interpretations and regulatory documents with binding effects of the PRC then in effect.

 

 

 

“Share Transfer Option”:

  

means the option to purchase the shares of the Company granted by the Existing Shareholders to the WFOE in accordance with the terms and conditions of this Agreement.

 

 

 

“Asset Purchase Option”:

  

means the option to purchase any of the Company Assets granted by the Company to the WFOE in accordance with the terms and conditions of this Agreement.

 

 

 

“Option Shares”:

  

mean, with respect to an Existing Shareholder, all shares held by it in the Company’s Registered Capital (as defined below); with respect to all of the Existing Shareholders, 100% shares of the Company.

 

 

 

“Company’s Registered Capital”:

  

means the registered capital of the Company amounting to RMB 2,02,020 as at the date of this Agreement, or the increased registered capital as a result of any capital increase in any form during the effective term of this Agreement.

 

2


 

“Transferred Shares”:

  

mean the shares of the Company that the WFOE is entitled to require any of the Existing Shareholders to transfer to it or the entity or individual designated by it pursuant to Article 3 of this Agreement in exercising the Share Transfer Option, and the number of such Transferred Shares may be all or part of the Option Shares to be determined at the sole discretion of the WFOE in accordance with the PRC Laws then in effect and taking into account its own commercial considerations.

 

 

 

“Transferred Assets”:

  

mean the Company Assets that the WFOE is entitled to require the Company to transfer to it or the entity or individual designated by it pursuant to Article 3 of this Agreement in exercising the Asset Purchase Option, and the quantity of such Transferred Assets may be all or part of the Company Assets to be determined at the sole discretion of the WFOE in accordance with the PRC Laws then in effect and taking into account its own commercial considerations.

 

 

 

“Exercise”:

  

means the exercise of the Share Transfer Option or Asset Purchase Option by the WFOE.

 

 

 

“Transfer Price”:

  

means the total consideration payable by the WFOE or the entity or individual designated by it in each Exercise to the Existing Shareholders or the Company for acquiring the Transferred Shares or the Company Assets.

 

 

 

“Business License”:

  

means any approval, permit, filing, registration and any other licenses which are required to be obtained by the Company for the lawful and valid conduct of all its business, including without limitation the Business License and other permits and licenses required under the PRC Laws then in effect.

 

 

 

“Company Assets”:

  

mean all of the tangible and intangible assets that is owned by the Company or the Company has the right to dispose of during the effective term of this Agreement, including without limitation any real property, movable property and trademark, copyright, patent, know-how, domain name, software license and such other intellectual property rights.

 

 

 

“Material Agreement”:

  

means any agreement to which the Company is a party that may have material effect on the Company’s business or assets, including without limitation the Second Amended and Restated Exclusive Consultation and Service Agreement executed concurrently with this Agreement and other material agreements in connection with the business of the Company.

 

 

 

“Exercise Notice”:

  

has the meaning ascribed to it in Article 3.7 of this Agreement.

 

 

 

“Confidential Information”:

  

has the meaning ascribed to it in Article 8.1 of this Agreement.

 

 

 

“Defaulting Party”:

  

has the meaning ascribed to it in Article 11.1 of this Agreement.

 

3


 

“Default”:

  

has the meaning ascribed to it in Article 11.1 of this Agreement.

 

 

 

“Rights”:

  

has the meaning ascribed to it in Article 12.5 of this Agreement.

 

1.2                         Any reference to the PRC Laws herein shall be deemed to include:

 

(1)                     the reference to any revision, amendment, supplement and reenactment of such PRC Laws, irrespective of whether such revision, amendment, supplement and reenactment comes into force before or after the date of execution of this Agreement; and

 

(2)                     the reference to other decisions, notices or regulations enacted in accordance, or effective as a result of, such PRC Laws.

 

1.3                         Unless otherwise specified in the context herein, any reference to an article, section, item or paragraph shall mean the corresponding article, section, item or paragraph in this Agreement.

 

ARTICLE 2
 GRANT OF SHARE TRANSFER OPTION AND ASSET PURCHASE OPTION

 

2.1                         The Existing Shareholders hereby severally and jointly agree to irrevocably and unconditionally grant the WFOE, and the WFOE agrees to accept, an exclusive share transfer option, pursuant to which the WFOE is entitled to require the Existing Shareholders, to the extent permitted by the PRC Laws, to transfer the Option Shares to it or the entity or individual designated by it in accordance with the terms and conditions of this Agreement.

 

2.2                         The Company hereby agrees that the Existing Shareholders shall grant the WFOE the Share Transfer Option in accordance with Article 2.1 above and other provisions herein.

 

2.3                         The Company hereby agrees to irrevocably and unconditionally grant the WFOE, and the WFOE agrees to accept, an exclusive asset purchase option, pursuant to which the WFOE is entitled to require the Company, to the extent permitted by the PRC Laws, to transfer any or part of the Company Assets to it or the entity or individual designated by it in accordance with the terms and conditions of this Agreement.

 

2.4                         The Existing Shareholders hereby severally and jointly agrees that the Company shall grant the WFOE the Asset Purchase Option in accordance with Article 2.3 above and other provisions herein.

 

ARTICLE 3
METHOD OF EXERCISE

 

3.1                         Subject to the terms and conditions of this Agreement and to the extent permitted by the PRC Laws, the WFOE has the absolute discretion to determine the time, manner and number of times of its Exercise.

 

4


 

3.2                         Subject to the terms and conditions of this Agreement and to the extent not in violation of the PRC Laws then in effect, the WFOE is entitled to require at any time that all or part of the shares of the Company be transferred from the Existing Shareholders to it or other entity or individual designated by it.

 

3.3                         Subject to the terms and conditions of this Agreement and to the extent not in violation of the then-current PRC Laws, the WFOE is entitled to require at any time that all or part of the Company Assets be transferred from the Company to it or other entity or individual designated by it.

 

3.4                         In respect of the Share Transfer Option, at each Exercise, the WFOE is entitled to determine the number of the Transferred Shares which shall be transferred from the Existing Shareholders to the WFOE and/or its designated entity or individual, and the Existing Shareholders shall sell the Transferred Shares to the WFOE and/or its designated entity or individual of which the number is so determined by the WFOE. In respect of the purchase of the Transferred Shares at each Exercise, the WFOE and/or its designated entity or individual shall pay the Transfer Price to the Existing Shareholders who are selling the Transferred Shares.

 

3.5                         In respect of the Asset Purchase Option, at each Exercise, the WFOE is entitled to determine the specific Company Assets which shall be transferred from the Company to the WFOE and/or its designated entity or individual, and the Company shall sell the Transferred Assets to the WFOE and/or its designated entity or individual as requested by the WFOE. In respect of the purchase of the Transferred Assets at each Exercise, the WFOE and/or its designated entity or individual shall pay the Transfer Price to the Company.

 

3.6                         At each Exercise, the WFOE may require the Transferred Shares or Transferred Assets to be transferred to itself, or require all or part of the Transferred Shares or Transferred Assets to be transferred to any third party designated by it.

 

3.7                         At each Exercise decided by the WFOE, an exercise notice of the Share Transfer Option or the Asset Purchase Option (each an “Exercise Notice,” the form of which is attached as Appendix II and Appendix III) shall be served by the WFOE to the Existing Shareholders or the Company, as the case may be. The Existing Shareholders or the Company shall, upon receipt of the Exercise Notice, immediately transfer, in accordance with the Exercise Notice, all the Transferred Shares to the WFOE and/or its designated entity or individual in the manner provided in Article 3.4 or 3.5 of this Agreement.

 

ARTICLE 4
PURCHASE PRICE

 

4.1                         With respect to the Share Transfer Option, the total Transfer Price at each Exercise payable by the WFOE or its designated entity or individual to the Existing Shareholders shall be an amount equivalent to the lower of (i) the amount of contribution in the Company’s Registered Capital which the Transferred Shares represent, or (ii) the lowest price permitted by the PRC Laws then in effect. Each of the Existing Shareholders acknowledges and agrees that it has been sufficiently compensated by the WFOE and therefore shall return the full amount received for the share transfer to the WFOE or its designated entity and individual within ten (10) business days upon receipt of such amount.

 

5


 

4.2                         With respect to the Asset Purchase Option, the WFOE or its designated entity or individual shall pay to the Company the lowest price permitted by the PRC Laws then in effect at each Exercise. The Company acknowledges and agrees that it has been sufficiently compensated by the WFOE and therefore shall return the full amount received for the asset transfer to the WFOE or its designated entity or individual within ten (10) business days upon receipt of such amount.

 

ARTICLE 5
REPRESENTATIONS AND WARRANTIES

 

5.1                         Each of the Existing Shareholders hereby severally and jointly represents and warrants that:

 

5.1.1                     it has full and independent legal status and legal capacity to execute, deliver and perform this Agreement and is capable of being an independent party to a lawsuit.

 

5.1.2                     the Company is a limited liability company duly registered and validly existing under the PRC Laws with independent legal person status, and has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit.

 

5.1.3                     it has full power and authority to execute, deliver and perform this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and to consummate the transactions contemplated hereunder.

 

5.1.4                     this Agreement is lawfully and duly executed and delivered by it and constitutes its legal and binding obligations, enforceable against it pursuant to the terms hereof.

 

5.1.5                     it is the registered legal owner of the Option Shares as of the effective date of this Agreement, and the Option Shares are free from any lien, pledge, claim or other security interest or third party right, except for (i) the pledge created pursuant to the Second Amended and Restated Equity Pledge Agreement on March 20, 2020, and (ii) the proxy right created pursuant to the Second Amended and Restated Shareholder Voting Proxy Agreement, executed by and among the Company on March 20, 2020, the WFOE and the Existing Shareholders. Pursuant to this Agreement, the WFOE and/or its designated entity or individual is able to, after the Exercise, acquire the sound ownership of the Transferred Shares free from any lien, pledge, claim or other security interest or third party right of ownership.

 

6


 

5.1.6                     to (the best of) its knowledge, the Company Assets are free from any lien, pledge, claim or other security interest or third party right. Pursuant to this Agreement, the WFOE and/or its designated entity or individual is able to, after the Exercise, acquire the sound ownership of the Company Assets free from any lien, pledge, claim or other security interest or third party right of ownership.

 

5.1.7                     unless otherwise compelled by the PRC Laws, it shall not demand for any declaration or distribution of any attributable profits, bonus, dividends or interest by the Company, and in the event it receives any profits, bonus, dividends or interest from the Company, it shall, to the extent in compliance with the PRC Laws, promptly give such profits, bonus, dividends or interest to the WFOE or any eligible entity or individual designated by the WFOE as gift.

 

5.2                         The Company hereby represents and warrants that:

 

5.2.1                     it is a limited liability company duly registered and validly existing under the PRC Laws with independent legal person status. It has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit.

 

5.2.2                     it has full corporate power and authority to execute, deliver and perform this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions contemplated hereunder.

 

5.2.3                     this Agreement is lawfully and duly executed and delivered by it and constitutes its legal and binding obligations.

 

5.2.4                     the Company Assets are free from any lien, pledge, claim or other security interest or third party right. Pursuant to this Agreement, the WFOE and/or its designated entity or individual is able to, after the Exercise, acquire the sound ownership of the Company Assets free from any lien, pledge, claim or other security interest or third party right of ownership.

 

5.2.5                     unless otherwise compelled by the PRC Laws, it shall not make any declaration or distribution of any attributable profits, bonus, dividends or interest.

 

5.3                         The WFOE hereby represents and warrants that:

 

5.3.1                     it is an wholly foreign-owned enterprise duly registered and validly existing under the PRC Laws with independent legal person status. It has full and independent legal status and legal capacity to execute, deliver and perform this Agreement, and is capable of being an independent party to a lawsuit.

 

7


 

5.3.2                     it has full corporate power and authority to execute, deliver and perform this Agreement and all the other documents related to the transactions contemplated hereunder which are to be executed by it, and the full power and authority to consummate the transactions contemplated hereunder.

 

5.3.3                     this Agreement is lawfully and duly executed and delivered by it and constitutes its legal and binding obligations.

 

ARTICLE 6
COVENANTS OF THE EXISTING SHAREHOLDERS

 

Each of the Existing Shareholders hereby covenants that:

 

6.1                         During the effective term of this Agreement, it shall not, without prior written consent of the WFOE:

 

6.1.1                     transfer or otherwise dispose of, or create any security interest or other third party right over, any Option Shares;

 

6.1.2                     increase or reduce the Company’s Registered Capital, or otherwise cause the Company to merge with any other entity;

 

6.1.3                     dispose of or cause the Company’s management to dispose of any material assets of the Company, other than in the ordinary course of business;

 

6.1.4                     terminate or cause the Company’s management to terminate any material agreement entered into by the Company, or enter into any other agreement which is in conflict with any existing material agreement;

 

6.1.5                     appoint or replace any director, supervisor or any other Company’s management who shall be appointed or replaced by the Existing Shareholders;

 

6.1.6                     cause the Company to make any declaration or distribution of attributable profits, bonus, dividends or interest;

 

6.1.7                     terminate, liquidate or dissolve the Company and will ensure that the Company is validly existing;

 

6.1.8                     amend the articles of association of the Company; and

 

6.1.9                     cause the Company to provide or obtain any loan, or provide undertaking or otherwise provide guarantee in any form, or assume any substantial obligation other than in the ordinary course of business.

 

6.2                         During the effective term of this Agreement, it shall use its best efforts to develop the Company’s business and ensure that the operations of the Company are in compliance with laws and regulations, and nothing detrimental to the Company Assets, goodwill or the validity of the Company’s Business License shall be caused by its act or omission.

 

8


 

6.3                         During the effective term of this Agreement, it shall promptly inform the WFOE of any circumstances that may have material adverse effect on the existence, operations, financial condition, assets or goodwill of the Company, and shall take all steps accepted by the WFOE to prevent such circumstances or take effective remedial actions.

 

6.4                         Upon service of the Exercise Notice by the WFOE:

 

6.4.1                     it shall immediately hold a shareholders’ meeting to pass resolutions at such meeting and take all other necessary actions to approve the transfer of all the Transferred Shares or Transferred Assets from any Existing Shareholder or the Company to the WFOE and/or its designated entity or individual at the Transfer Price, and shall waive any pre-emptive right (if any) it may have;

 

6.4.2                     it shall immediately enter into a share transfer agreement with the WFOE and/or its designated entity or individual to transfer all the Transferred Shares to the WFOE and/or WFOE’s designated entity or person at the Transfer Price, and provide necessary assistance to the WFOE (including the provision and execution of all ancillary legal documents, completion of the procedures for all governmental approvals and registrations, and fulfilment of all relevant obligations) as requested by the WFOE and in compliance with the laws and regulations, so that all the Transferred Shares will be acquired by the WFOE and/or its designated entity or individual free from any encumbrances, or any security interest, third party restriction or any other limitations on the shares.

 

6.5                         In the event that the aggregate amount of the Transfer Price received by it in respect of the Transferred Shares held by it is higher than its contribution in the Company, or it receives any distribution of profits, dividends, interest or bonus from the Company, such Existing Shareholder agrees not to collect, to the extent not in violation of the PRC Laws, the proceeds from such premium and any such distribution of profits, dividends, interest or bonus (net of relevant taxes), and the WFOE shall be entitled to collect such part of proceeds. The Existing Shareholders shall instruct the relevant recipient or the Company to pay such part of proceeds to the bank account then designated by the WFOE.

 

ARTICLE 7
COVENANTS BY THE COMPANY

 

7.1                         The Company hereby covenants that:

 

7.1.1                     it shall use its best efforts to provide assistance in satisfying the requirements to obtain any third parties’ consent, permit, waiver, authorization or any governmental approval, permit, waiver, or to complete the procedures of any registration or filing (if required by laws) with any governmental authority for the execution and performance of this Agreement and the grant of the Share Transfer Option and Asset Purchase Option under this Agreement.

 

9


 

7.1.2                     without prior written consent of the WFOE, it shall not provide assistance to or permit the Existing Shareholders to transfer or otherwise dispose of, or create any security interest or other third party right over, any Option Shares.

 

7.1.3                     without prior written consent of the WFOE, it shall not transfer or otherwise dispose of any material assets of the Company (other than in the ordinary course of business), or create any security interest or other third party right over any Company Assets.

 

7.1.4                     it shall not conduct or permit the conduct of any act or action that may have material adverse effect on the interests of the WFOE under this Agreement, including without limitation any act or action which is subject to the restrictions under Article 6.1.

 

7.2                         Upon service of the Exercise Notice by the WFOE:

 

7.2.1                     it shall immediately procure a shareholders’ meeting to be held by the Existing Shareholders and the passing of resolutions at such meeting and take all other necessary actions to approve the transfer of all the Transferred Assets from the Company to the WFOE and/or its designated entity or individual at the Transfer Price;

 

7.2.2                     it shall immediately execute an asset transfer agreement with the WFOE and/or its designated entity or individual to transfer all the Transferred Assets to the WFOE and/or its designated entity or individual at the Transfer Price, and procure the necessary assistance from its shareholders to be provided to the WFOE (including the provision and execution of all ancillary legal documents, completion of the procedures for all governmental approvals and registrations, and fulfilment of all relevant obligations) as requested by the WFOE and in compliance with the laws and regulations, so that all the Transferred Assets will be acquired by the WFOE and/or its designated entity or individual free from any encumbrances, or any security interest, third party restriction or any other limitations on the Company Assets.

 

7.3                         In the event that the Company is dissolved or liquidated as required by PRC Laws, to the extent that permitted by PRC Laws, the Company shall transfer all its assets to the WFOE or other eligible person designated by it at the lowest price permitted by the PRC Laws. The Company shall waive the payment obligation of the WFOE or its designated eligible person arising therefrom to the extent permitted by the PRC Laws then in effect; Alternatively, any proceeds from such transaction shall, to the extent permitted by the PRC Laws then in effect, be paid to the WFOE or its designated eligible person as part of the service fees under the exclusive consultation and service agreement.

 

10


 

ARTICLE 8
CONFIDENTIALITY OBLIGATIONS

 

8.1                         Notwithstanding the termination of this Agreement, each Party shall be obliged to keep in strict confidence the trade secrets, proprietary and customer information, and all other information which are confidential in nature (collectively, the “Confidential Information”) of the other Party acquired during the entering into and performance of this Agreement. The receiving party of the Confidential Information shall not disclose any Confidential Information to any third parties unless it has obtained the prior written consent of the other Party, or required by relevant laws and regulations or the requirements of the place where a Party’s affiliate is listed. The receiving party of the Confidential Information shall not use, directly or indirectly, such Confidential Information for purposes other than performing its obligations under this Agreement.

 

8.2                         The Confidential Information shall not include any information which:

 

(a)         as shown by written evidence, was rightfully known to the receiving party previously;

 

(b)         enters the public domain through no fault of the receiving party; or

 

(c)          is rightfully acquired by the receiving party from other sources subsequent to the receipt of the Confidential Information.

 

8.3                         The receiving party may disclose the Confidential Information to its relevant employees, agents or professionals it retains, provided that it shall ensure that such persons shall comply with the terms and conditions of this Agreement and the receiving party shall be liable for the breach of any relevant terms and conditions of this Agreement by any of such persons.

 

8.4                         Notwithstanding anything to the contrary in this Agreement, this Article shall survive the termination of this Agreement.

 

ARTICLE 9
TERM

 

This Agreement shall become effective upon duly execution by the Parties hereto, and shall terminate upon the completion of transfer of all the Option Shares and Company Assets to the WFOE and/or its designated entity or individual in accordance with laws and the provisions of this Agreement. The Original Exclusive Option Agreement shall be replaced by this Agreement from the effective date of this Agreement.

 

ARTICLE 10
NOTICES

 

10.1                  Any notice, request, demand and other correspondence required to be given or made pursuant to this Agreement shall be made in writing and delivered to relevant Parties.

 

11


 

10.2                  Such notices or other correspondence shall be deemed to be duly served upon transmission if sent by fax or telex, or upon delivery if sent by hand, or five (5) days after posting if sent by mail.

 

ARTICLE 11
LIABILITIES FOR BREACH OF CONTRACT

 

11.1                  The Parties agree and acknowledge that, if any Party (“Defaulting Party”) is materially in breach of any provision of this Agreement, or materially fails to perform or delays in performing any of its obligations hereunder, such breach, failure or delay shall constitute a default hereunder (the “Default”), and the non-defaulting Party shall be entitled to demand the Defaulting Party to rectify such Default or take remedial actions within a reasonable period of time. If the Defaulting Party fails to rectify such Default or take remedial actions within such reasonable period of time or ten (10) days from the receipt of the written notice from the non-defaulting Party requiring such rectification, the non-defaulting Party shall be entitled to make a decision at its sole discretion:

 

11.1.1              the WFOE shall be entitled to terminate this Agreement and claim from the Defaulting Party for damages if the Defaulting Party is any of the Existing Shareholders or the Company;

 

11.1.2              the non-defaulting Party shall be entitled to claim from the Defaulting Party for damages if the Defaulting party is the WFOE, provided that under no circumstances shall the Non-defaulting Party be entitled to terminate or rescind this Agreement unless otherwise provided by laws.

 

11.2                  Notwithstanding anything to the contrary in this Agreement, this Article shall survive the termination of this Agreement.

 

ARTICLE 12
MISCELLANEOUS

 

12.1                  This Agreement is made in Chinese in eight (8) originals with each Party holding one (1) original.

 

12.2                  The formation, effectiveness, performance, amendment, interpretation and termination of this Agreement shall be governed by the PRC Laws.

 

12.3                  Any dispute arising hereunder and in connection herewith shall be settled through consultations between the Parties, and if the Parties are unable to reach an agreement within thirty (30) days from the occurrence of the dispute, such dispute shall be submitted to China International Economic and Trade Arbitration Commission for arbitration in accordance with the arbitration rules thereof then in effect. The place of arbitration shall be in Beijing, and the language to be used in arbitration shall be Chinese. The award of arbitration shall be final and equally binding on the Parties of this Agreement.

 

12


 

12.4                  No right, power or remedy of a Party under any provision of this Agreement shall preclude such Party from any other right, power or remedy of it under the laws and other provisions of this Agreement, nor shall any exercise of any right, power or remedy by a Party preclude such Party from exercising any other right, power or remedy.

 

12.5                  No failure or delay by any Party in exercising any right, power and remedy (the “Rights”) pursuant to this Agreement or laws shall be deemed as a waiver of such Rights, and no single or partial waiver of such Rights of a Party shall preclude any other exercise of it or the exercise of any other Rights.

 

12.6                  The headings of the Articles in this Agreement are inserted for the convenience of reference only, and under no circumstances shall be used in or otherwise affect the construction of this Agreement.

 

12.7                  Each provision contained in this Agreement shall be severable and independent from other provisions, and in the event that any one or more provisions of this Agreement are held invalid, illegal or unenforceable at any time, the validity, legality or enforceability of the remaining provisions shall not be affected or impaired in any way.

 

12.8                  This Agreement, upon execution, supersedes any other legal documents entered into between the Parties in respect of the subject matter hereof. Any amendments or supplements to this Agreement shall be made in writing and come into effect upon due execution by the Parties hereto.

 

12.9                  No Party shall transfer any of its rights and/or obligations hereunder to any third parties without prior written consent of the other Parties.

 

12.10           This Agreement shall be binding on the legal assigns or successors of the Parties.

 

[The remainder of this page is intentionally left blank]

 

13


 

[Signature page to the Second Amended and Restated Exclusive Option Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Exclusive Option Agreement has been executed by the following Parties on the date first above written.

 

HUANG WANG

 

 

 

 

By:

/s/ Huang Wang

 

 

 

 

LU YUNFEN

 

 

 

 

By:

/s/ Lu Yunfen

 

 

 

 

FAN MEIHUI

 

 

 

 

By:

/s/ Fan Meihui

 

 

 

 

FAN BIN

 

 

 

 

By:

/s/ Fan Bin

 

 

 

 

ZHANG YI

 

 

 

 

By:

/s/ Zhang Yi

 

 

 

 

ZHANG XIAOJUN

 

 

 

 

By:

/s/ Zhang Xiaojun

 

 

Signature page to the Second Amended and Restated Exclusive Option Agreement

 


 

[Signature page to the Second Amended and Restated Exclusive Option Agreement]

 

IN WITNESS WHEREOF, this Second Amended and Restated Exclusive Option Agreement has been executed by the following Parties on the date first above written.

 

SHUNYUAN KAIHUA (BEIJING) TECHNOLOGY CO., LTD.

(Company seal: /s/ Shunyuan Kaihua (Beijing) Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

HUAMI (BEIJING) INFORMATION TECHNOLOGY CO., LTD.

(Company seal: /s/ Huami (Beijing) Information Technology Co., Ltd.)

 

By:

/s/ Huang Wang

 

Name:

Huang Wang

 

Title:

Legal Representative

 

 

Signature page to the Second Amended and Restated Exclusive Option Agreement

 


 

Appendix I:

 

General Information of the Company

 

Company Name: Huami (Beijing) Information Technology Co., Ltd.

 

Registered Address: Unit 206-1, Level 2, Block 23, No. 8 Dong Bei Wang West Road, Haidian District, Beijing

 

Registered Capital: RMB 2,020,200

 

Legal Representative: Huang Wang

 

Shareholding Structure:

 

Name of
Shareholder

 

Amount of Contribution
in the Registered Capital
(in RMB 10,000)

 

Percentage of
Contribution

 

Identity Card Number /
Unified Social Credit
Number

 

Huang Wang

 

182.02

 

90.1000

%

***

 

Lu Yunfen

 

4.3

 

2.1285

%

***

 

Fan Meihui

 

4.3

 

2.1285

%

***

 

Fan Bin

 

4.3

 

2.1285

%

***

 

Zhang Yi

 

4.3

 

2.1285

%

***

 

Zhang Xiaojun

 

2.8

 

1.3860

%

***

 

 

 

 

 

 

 

 

 

Total

 

202.02

 

100

%

 

 

Appendix I

 


 

Appendix II:

 

Form of Exercise Notice

 

To: Huang Wang, Lu Yunfen, Fan Meihui, Fan Bin, Zhang Yi, Zhang Xiaojun

 

WHEREAS, we, you and Huami (Beijing) Information Technology Co., Ltd. (the “Company”) entered into the Second Amended and Restated Exclusive Option Agreement (the “Option Agreement”) on March 20, 2020 pursuant to which you shall transfer the shares held by you in the Company to us or any third party designated by us at our request to the extent permitted by the PRC laws and regulations.

 

Therefore, we hereby give this notice to you as follows:

 

We hereby request to exercise the Share Transfer Option under the Option Agreement and we/[name of company/individual] designated by us will acquire [·]% of the shares held by you in the Company (the “Proposed Acquired Shares”). You shall, upon receipt of this notice, immediately transfer all the Proposed Acquired Shares to us/[name of the designated company/individual] in accordance with the provisions of the Option Agreement.

 

Regards,

 

 

Shunyuan Kaihua (Beijing) Technology Co., Ltd.

 

(Company seal)

 

 

 

Authorized Representative:

 

 

 

Date:

 

Appendix II

 


 

Appendix III:

 

Form of Exercise Notice

 

To: Huami (Beijing) Information Technology Co., Ltd.

 

WHEREAS, we, Huang Wang, Lu Yunfen, Fan Meihui, Fan Bin, Zhang Yi, Zhang Xiaojun and you entered into the Second Amended and Restated Exclusive Option Agreement (the “Option Agreement”) on March 20, 2020 pursuant to which you shall transfer your assets to us or any third party designated by us at our request to the extent permitted by the PRC laws and regulations.

 

Therefore, we hereby give this notice to you as follows:

 

We hereby request to exercise the Asset Purchase Option under the Option Agreement and we/[name of company/individual] designated by us will acquire all your assets as set out in a separate list (the “Proposed Acquired Assets”). You shall, upon receipt of this notice, immediately transfer all the Proposed Acquired Assets to us/[name of the designated company/individual] in accordance with the provisions of the Option Agreement.

 

Regards,

 

 

Shunyuan Kaihua (Beijing) Technology Co., Ltd.

 

(Company seal)

 

 

 

Authorized Representative:

 

 

 

Date:

 

Appendix III

 


Exhibit 8.1

 

List of Subsidiaries and Consolidated Variable Interest Entities of Huami Corporation

 

Subsidiaries

 

Place of Incorporation

Huami, Inc.

 

United States

Huami North America Inc.

 

United States

DingShow

 

United States

Huami Investment Platform I Ltd.

 

United States

Huami Inc. Canada branch

 

Canada

Bitinno Technologies Inc.

 

Cayman Islands

Galaxy Trading Platform Limited

 

British Virgin Islands

Huami HK Limited

 

Hong Kong

Beijing Shunyuan Kaihua Technology Co., Ltd.

 

People’s Republic of China

Anhui Huami Intelligent Technology Co., Ltd.

 

People’s Republic of China

Huami (Shenzhen) Information Technology Co., Ltd.

 

People’s Republic of China

Beijing Huami Intelligent Technology Co., Ltd.

 

People’s Republic of China

 

Consolidated Variable Interest Entities

 

Place of Incorporation

Huami (Beijing) Information Technology Co., Ltd.

 

People’s Republic of China

Anhui Huami Information Technology Co., Ltd.

 

People’s Republic of China

 

Subsidiaries of Consolidated Variable Interest Entities

 

Place of Incorporation

Anhui Huami Healthcare Co., Ltd.

 

People’s Republic of China

Shenzhen Yunding Information Technology Co., Ltd.

 

People’s Republic of China

Oclean Information Technology Co., Ltd.

 

People’s Republic of China

Huami (Nanjing) Information Technology Co., Ltd. 

 

People’s Republic of China

Hefei Hi-Tech Huami Intelligence Polyclinic Co. Ltd.

 

People’s Republic of China

Anhui Huami Medical System Co., Ltd.

 

People’s Republic of China

Huami Beijing Medical Health Technology Co.,  Ltd.

 

People's Republic of China

Hefei Huami Micro-electronics Co., Ltd

 

Hong Kong

 

1


EXHIBIT 12.1

 

Certification by the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, Wang Huang, certify that:

 

1.                                      I have reviewed this annual report on Form 20-F of Huami Corporation (the “Company”);

 

2.                                      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                                      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4.                                      The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

(a)                                 Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)                                 Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)                                  Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)                                 Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 

5.                                      The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

 

(a)                                 All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 

(b)                                 Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Date: April 23, 2020

 

By:

/s/Wang Huang

 

Name:

Wang Huang

 

Title:

Chief Executive Officer

 

 

1


EXHIBIT 12.2

 

Certification by the Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

I, David Cui, certify that:

 

1.                                      I have reviewed this annual report on Form 20-F of Huami Corporation (the “Company”);

 

2.                                      Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3.                                      Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Company as of, and for, the periods presented in this report;

 

4.                                      The Company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Company and have:

 

(a)                                 Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b)                                 Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

(c)                                  Evaluated the effectiveness of the Company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d)                                 Disclosed in this report any change in the Company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting; and

 

5.                                      The Company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Company’s auditors and the audit committee of the Company’s board of directors (or persons performing the equivalent functions):

 

(a)                                 All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Company’s ability to record, process, summarize and report financial information; and

 

(b)                                 Any fraud, whether or not material, that involves management or other employees who have a significant role in the Company’s internal control over financial reporting.

 

Date: April 23, 2020

 

By:

/s/David Cui

 

Name:

David Cui

 

Title:

Chief Financial Officer

 

 

1


EXHIBIT 13.1

 

Certification by the Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the Annual Report of Huami Corporation (the “Company”) on Form 20-F for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Wang Huang, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1)                                 The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2)                                 The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 23, 2020

 

By:

/s/Wang Huang

 

Name:

Wang Huang

 

Title:

Chief Executive Officer

 

 

1


EXHIBIT 13.2

 

Certification by the Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

In connection with the Annual Report of Huami Corporation (the “Company”) on Form 20-F for the fiscal year ended December 31, 2019 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, David Cui, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

(1)                                 The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

(2)                                 The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

 

Date: April 23, 2020

 

By:

/s/David Cui

 

Name:

David Cui

 

Title:

Chief Financial Officer

 

 

1


EXHIBIT 15.1

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in Registration Statement No. 333-226665 on Form S-8 and Registration Statement No. 333-230844 on Form F-3 of our report dated April 23, 2020, relating to the financial statements of Huami Corporation appearing in this Annual Report on Form 20-F for the year ended December 31, 2019.

 

/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP

 

Beijing, the People’s Republic of China

 

 

April 23, 2020

 


Exhibit 15.2

 

 

CONSENT LETTER

 

To                                Huami Corporation

Building H8, No. 2800, Chuangxin Road

Hefei, 230088

People’s Republic of China

 

April 23, 2020

 

Dear Sir/Madam:

 

We hereby consent to the reference of our name under the headings “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure” and “Item 4. Information on the Company—C. Organizational Structure” in Huami Corporation’s Annual Report on Form 20-F for the year ended December 31, 2019 (the “Annual Report”), which will be filed with the Securities and Exchange Commission (the “SEC”) on the date hereof , and further consent to the incorporation by reference, in Huami Corporation’s registration statement on Form S-8 (File No. 333-226665) and registration statement on Form F-3 (File No. 333-230844), of the summary of our opinion under the headings “Item 3. Key Information—D. Risk Factors—Risks Related to Our Corporate Structure” and “Item 4. Information on the Company—C. Organizational Structure” in the Annual Report. We also consent to the filing of this consent letter with the SEC as an exhibit to the Annual Report.

 

In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.

 

Very truly yours,

 

/s/Zhong Lun Law Firm