20-F

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 20-F

(Mark One)

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(B) OR 12(G) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended

December 31, 2020.

OR

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

OR

☐ 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. . . . . . . . . . . . . . . . . . .

For the transition period from                      to                    

Commission file number: 001-38369

ZEPP HEALTH CORPORATION

(Exact Name of Registrant as Specified in Its Charter)

N/A

(Translation of Registrant’s Name Into English)

Cayman Islands

(Jurisdiction of Incorporation or Organization)

Huami Global Innovation Center

Building B2, Zhong’an Chuanggu Technology Park

No. 900 Wangjiang West Road

Hefei, 230088

People’s Republic of China

(Address of Principal Executive Offices)

Leon Cheng Deng, Chief Financial Officer

Huami Global Innovation Center

Building B2, Zhong’an Chuanggu Technology Park

No. 900 Wangjiang West Road

Hefei, 230088

People’s Republic of China

Phone: +86 010 5940 3268

Email: ir@zepp.com

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

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

Title of Each Class	Trading Symbol(s)	Name of Each Exchange On Which Registered
American depositary shares (each representing four Class A ordinary shares Class A ordinary shares, par value US$0.0001 per share) Class A ordinary shares, par value US$0.0001 per share*	ZEPP	New York Stock Exchange

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

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

None

(Title of Class)

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

(Title of Class)

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

As of December 31, 2020, there were (i) 128,736,916 Class A ordinary shares issued and outstanding, par value US$0.0001 per share (excluding the 3,474,604 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) 121,408,247 Class B ordinary shares issued and outstanding, par value US$0.0001 per share.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐  Yes   ☒  No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. ☐  Yes   ☒  No

Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒  Yes   ☐  No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒  Yes   ☐  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐ Accelerated filer ☒ Non-accelerated filer ☐ Emerging growth company ☒

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☒

†The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has fi led a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

	☐
U.S. GAAP ☒	International Financial Reporting Standards as issued by the International Accounting Standards Board ☐	Other ☐

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐  Item 17   ☐  Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐  Yes   ☒  No

(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. ☐  Yes   ☐  No

TABLE OF CONTENTS

INTRODUCTION		1
FORWARD-LOOKING STATEMENTS		2
PART I		3
ITEM 1.	IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS	3
ITEM 2.	OFFER STATISTICS AND EXPECTED TIMETABLE	3
ITEM 3.	KEY INFORMATION	3
ITEM 4.	INFORMATION ON THE COMPANY	47
ITEM 4A.	UNRESOLVED STAFF COMMENTS	76
ITEM 5.	OPERATING AND FINANCIAL REVIEW AND PROSPECTS	76
ITEM 6.	DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES	98
ITEM 7.	MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS	110
ITEM 8.	FINANCIAL INFORMATION	113
ITEM 9.	THE OFFER AND LISTING	114
ITEM 10.	ADDITIONAL INFORMATION	115
ITEM 11.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	128
ITEM 12.	DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES	129
PART II.		131
ITEM 13.	DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES	131
ITEM 14.	MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS	131
ITEM 15.	CONTROLS AND PROCEDURES	132
ITEM 16A.	AUDIT COMMITTEE FINANCIAL EXPERT	133
ITEM 16B.	CODE OF ETHICS	133
ITEM 16C.	PRINCIPAL ACCOUNTANT FEES AND SERVICES	133
ITEM 16D.	EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES	133
ITEM 16E.	PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS	133
ITEM 16F.	CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT	133
ITEM 16G.	CORPORATE GOVERNANCE	134
ITEM 16H.	MINE SAFETY DISCLOSURE	134
PART III.		134
ITEM 17.	FINANCIAL STATEMENTS	134
ITEM 18.	FINANCIAL STATEMENTS	134
ITEM 19.	EXHIBITS	134

i

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;

● “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;

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

● “Zepp,” “we,” “us,” “our company” or “our” refer to Zepp Health Corporation, our Cayman Islands holding company and its subsidiaries, its consolidated variable interest entities and the subsidiaries of the consolidated variable interest entities.

1

FORWARD-LOOKING STATEMENTS

This annual report on Form 20-F contains forward-looking statements that relate to our current expectations and views of future events. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from those expressed or implied by the forward-looking statements. These statements are made under the “safe harbor” provisions of the U.S. Private Securities Litigations Reform Act of 1995.

You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,” “estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-looking statements largely on our current expectations and projections about future events that we believe may affect our financial condition, results of operations, business strategy and financial needs. These forward-looking statements include statements relating to:

● 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 RMB6.5250 to US$1.00, the exchange rate in effect as of December 31, 2020 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.

2

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, 2018, 2019 and 2020, selected consolidated balance sheet data as of December 31, 2019 and 2020 and selected consolidated cash flow data for the years ended December 31, 2018, 2019 and 2020 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, 2016 and 2017, the selected consolidated balance sheet data as of December 31, 2016, 2017 and 2018 and selected consolidated cash flow data for the years ended December 31, 2016 and 2017 have been derived from our audited consolidated financial statements that are not included in this annual report. Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP.

3

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,
	2016	2017	2018	2019	2020
	RMB	RMB	RMB	RMB	RMB	US$
	(in thousands, except for per share data)
Selected Consolidated Statements of Operating Data:
Revenues(1)	1,556,476	2,048,896	3,645,335	5,812,255	6,433,363	985,956
Cost of revenues(2)	1,280,324	1,554,194	2,705,885	4,344,512	5,100,698	781,716
Gross profit	276,152	494,702	939,450	1,467,743	1,332,665	204,240
Operating expenses:
Research and development expenses(3)	132,304	153,827	263,220	430,822	538,009	82,453
General and administrative expenses(3)	102,644	114,880	213,973	248,462	261,805	40,123
Selling and marketing expenses(3)	27,821	44,026	96,538	181,975	358,655	54,966
Total operating expenses	262,769	312,733	573,731	861,259	1,158,469	177,542
Operating income	13,383	181,969	365,719	606,484	174,196	26,698
Other income and expenses:
Realized gain from investments	—	2,373	261	1,822	—	—
Gain from deconsolidation of a subsidiary	—	—	—	—	56,522	8,663
Interest income	754	3,003	11,595	33,478	46,118	7,068
Gain from fair value change of long-term investments	—	—	7,860	—	12,325	1,888
Impairment loss from long-term investments	—	—	(7,590)	(2,600)	—	—
Other income/(loss), net	14,726	4,555	8,768	13,186	(23,552)	(3,610)
Income before income tax	28,863	191,900	386,613	652,370	265,609	40,707
Provision for income taxes	(3,088)	(27,611)	(52,036)	(77,887)	(31,154)	(4,775)
Income before income/(loss) from equity method investments	25,775	164,289	334,577	574,483	234,455	35,932
(Loss)/income from equity method investments	(1,829)	2,806	1,743	(1,112)	(4,749)	(728)
Net income	23,946	167,095	336,320	573,371	229,706	35,204
Less: net (loss)/income attributable to non-controlling interest	—	(587)	(3,726)	(1,825)	953	146
Net income attributable to Zepp Health Corporation	23,946	167,682	340,046	575,196	228,753	35,058
Net (loss)/income per share attributable to ordinary shareholders of Zepp Health Corporation:
Basic (loss)/income per ordinary share	(0.22)	0.68	0.54	2.35	0.92	0.14
Diluted (loss)/income per ordinary share	(0.22)	0.65	0.51	2.24	0.88	0.13

Notes:

(1) Includes RMB1,449.9 million, RMB1,778.6 million, RMB2,817.0 million, RMB4,281.0 million and RMB4,449.8 million (US$682.0 million) with related parties for the years ended December 31, 2016, 2017, 2018, 2019 and 2020, respectively.

4

(2) Includes RMB1,198.3 million, RMB1,355.5 million, RMB2,141.1 million, RMB3,342.1 million and RMB3,713.5 million (US$569.1 million) with related parties for the years ended December 31, 2016, 2017, 2018, 2019 and 2020, 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, 2016, 2017, 2018, 2019 and 2020, we recorded share-based compensation expenses of RMB50.8 million, RMB51.5 million, RMB55.3 million, RMB17.8 million and nil, respectively, in relation to the vesting of the restricted shares of our founders under the share restriction agreements.

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

	As of December, 31
	2016	2017	2018	2019	2020
	RMB	RMB	RMB	RMB	RMB	US$
	(in thousands)
Selected Consolidated Balance Sheet Data:
Current assets:
Cash and cash equivalents	153,152	366,336	1,441,802	1,803,117	2,273,349	348,406
Accounts receivable (net of allowance of nil, nil and nil as of December 31, 2018, 2019 and 2020, respectively)	19,707	32,867	58,925	188,940	298,038	45,676
Amount due from related parties (net of allowance of nil, nil and nil as of December 31, 2018, 2019 and 2020, respectively)	476,698	578,454	656,399	1,421,170	860,213	131,833
Inventories	192,372	249,735	484,622	893,806	1,217,537	186,596
Non-current assets:
Property, plant and equipment, net	10,801	28,755	40,042	64,350	124,619	19,099
Total assets	972,896	1,465,517	3,258,481	5,174,743	5,903,719	904,785
Current liabilities:
Accounts payable	524,072	707,782	1,064,106	1,999,951	1,951,335	299,055
Short-term bank borrowings	10,000	30,000	20,000	—	504,671	77,344
Total liabilities	634,370	887,735	1,448,903	2,677,155	3,173,461	486,353
Total liabilities, mezzanine equity and equity	972,896	1,465,517	3,258,481	5,174,743	5,903,719	904,785

5

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

	Years Ended December 31,
	2016	2017	2018	2019	2020
	RMB	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	157,302	24,107
Net cash used in investing activities	(99,387)	(38,881)	(324,841)	(112,703)	(206,880)	(31,705)
Net cash provided by financing activities	10,024	20,089	639,170	25,609	564,671	86,539
Net (decrease)/increase in cash and cash equivalents	(72,097)	219,544	1,021,934	340,905	515,093	78,941
Exchange rate effect on cash and cash equivalents	5,262	(3,175)	60,357	11,274	(43,334)	(6,641)
Cash, cash equivalents and restricted cash at the beginning of year	219,987	153,152	369,521	1,451,812	1,803,991	276,474
Cash, cash equivalents and restricted cash at end of year	153,152	369,521	1,451,812	1,803,991	2,275,750	348,774

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 14.2% of our total outstanding shares as of March 31, 2021. For the years ended December 31, 2018, 2019 and 2020, sales of Xiaomi Wearable Products contributed 66.9%, 72.2% and 69.0% of our revenues, respectively.

We entered into a strategic cooperation agreement with Xiaomi in October 2017, which grants us the most-preferred-partner status globally to develop future Xiaomi Wearable Products. In October 2020, we extended the strategic cooperation agreement with Xiaomi for three years, which will end in October 2023. The renewed agreement deepened our cooperation with Xiaomi by reinstating our most-preferred-partner status globally to develop future Xiaomi Wearable Products, and expanding our most-preferred-partner status to each other to the research and development of AI-chips and algorithms for wearable devices. This strategic cooperation agreement can be terminated by Xiaomi and we can therefore lose the most-preferred-partner status if we fail to meet the various requirements set out in the agreement, such as requirements on product launching timetable, product quality and annual sales target of Xiaomi Wearable Products. In addition, Xiaomi has the option to develop by itself or engage other companies to develop similar and competing products, if such companies can offer better terms and services than we do—for example such companies may ask for less profit sharing or less intellectual property rights from their cooperation with Xiaomi. 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.”

6

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 products we designed and manufactured for Xiaomi and our self-branded watches, and we expect the dilution to continue, which negatively affects our sales performance and in turn, our results of operations.

When exercising its rights as our shareholder, Xiaomi may take into account not only the interests of our company and our shareholders but also its interests and the interests of its other affiliates. The interests of our company and our shareholders may at times conflict with the interests of Xiaomi and its affiliates. Such conflicts may result in lost corporate opportunities for our company, including opportunities to enter into lines of business that may overlap with those pursued by Xiaomi and/or the companies within its ecosystem.

Furthermore, in January 2021, the U.S. Defense Department added nine Chinese firms, including Xiaomi, to a list of companies the agency claims are owned or controlled by China's military. Businesses on the list are subject to harsh restrictions, including a ban on American investment. Although Xiaomi was removed from the list by a preliminary injunction in March 2021, the ultimate result is still uncertain and there can be restrictions on Xiaomi's overseas business, and could potentially negatively affect our Xiaomi Wearable Products business. As of the date of this annual report, this change has no significant impact to our business but we cannot guarantee that this change will not pose negative impact on our business.

7

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-, Amazfit- and Zepp-branded products) contributed 90.7%, 91.8% and 88.0% of our total revenues in the years ended December 31, 2018, 2019 and 2020, 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.

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. As we are rolling out more self-branded smart wearables, we face increasing competition from not only other participants in the industry, but also products under the Xiaomi brand. Intensified competition may result in pricing pressures and reduced profit margins and may impede our ability to continue to increase the sales of our products or cause us to lose market share, any of which could substantially harm our results of operations.

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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 consumer base as before. Accordingly, if we fail to anticipate and satisfy consumer preferences in a timely manner, or if it is perceived that our future products and services will not satisfy consumer preferences, our business may be adversely affected.

In addition, as the smart wearable technology continues to develop, the functions of smart bands and smart watches may converge, which in turn may cause our smart band product lines to compete with our smart watch product lines and inhibit our future growth.

Our future success depends on our ability to promote our own brands and protect our reputation. The failure to establish and promote our brands, including Amazfit and Zepp, and any damage to our reputation will hinder our growth.

Since September 2015, we have begun to use the brand “Amazfit” to sell our products that are not designed and manufactured for Xiaomi to address the middle to high-end market. In August 2020, we introduced a new brand name, “Zepp” for our self-branded products. We believe the strategy to establish and promote our own brand is crucial to our future success as it expands our addressable market and gives us more flexibility in terms of pricing, distribution and marketing compared to our cooperation with Xiaomi on Xiaomi Wearable Products. We have invested, and will need to continue to dedicate, significant time, efforts and resources to build our own brand recognition. Shipments of our self-branded products have increased from approximately 3.9 million units in 2019 to approximately 4.7 million units in 2020. For the year ended December 31, 2020, revenues from our self-branded products and others segment, substantially all of which was from the sales of our self-branded products, were RMB1,995.3 million (US$305.8 million), representing 31.0% 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.

In addition, negative publicity related to our brand, products, contract manufacturers, component suppliers, distributors, strategic partners and the celebrities we are associated with could damage and offset our effort to promote our own brands. In addition, although brand security initiatives are in place, we cannot guarantee that our efforts against the counterfeiting of our brands will be successful. If a third-party copies our products in a manner that projects lesser quality or carries a negative connotation, our brand image could be materially and adversely affected.

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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. We also expect there may be a cost increase in source materials and shortage in chips with respect to BLE system-on-chip products. In addition, as many of electronics component suppliers are concentrated in East and Southeast Asia, there have been industry-wide conditions, health crisis, natural disasters and global events in the past that have caused material shortages for components, such as a shortage of flash memory in 2011 in aftermath of the tragic earthquake and tsunami in Japan. Starting from the second quarter of 2020, we have been experiencing components shortages and longer lead time for display driver integrated circuits, power management integrated circuits and near field communication integrated circuits, because the COVID-19 pandemic affected the countries and regions where these components are produced. We cannot guarantee that such component shortage will be resolved in the near future, the failure of which may materially and adversely affect our business, results of operations and financial performance.

In the event of a component shortage or supply interruption from suppliers of key components, we will need to identify alternate sources of supply, which can be time-consuming, difficult and costly. We may not be able to source these components on terms that are acceptable to us, or at all, which may undermine our ability to meet our production requirements or to fill our orders in a timely manner. This could cause delays in shipment of our products, harm our relationships with our customers, distributors and users, and adversely affect our results of operations.

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Our operating results could be materially harmed if we or Xiaomi is unable to accurately forecast consumer demand for our products and services or manage our inventory.

To ensure adequate inventory supply for our products, we procure raw materials and components based on sales and production forecasts. The ability to accurately forecast demand for our products and services could be affected by many factors, including changes in customer demand for our products and services or our competitors’, sales promotions by us or our competitors, sales channel inventory levels, and unanticipated changes in general market and economic conditions. In addition, as we continue to introduce new products and services, we may also face challenges managing the production plan of our existing products, which may in turn affect the inventory management for our existing products. If we or Xiaomi fails to accurately forecast customer demand, we may experience excess inventory levels or a shortage of products available for sale. After we sell Xiaomi Wearable Products to Xiaomi, Xiaomi will only have limited right of return if the products have quality issues and will largely bear the inventory risks of such products. However, inventory levels in excess of end-customer demand may still ultimately result in inventory write-downs or write-offs and the sale of excess inventory at discounted prices, which may cause our gross margin to suffer and could impair the strength of our brand. On the other hand, in the case we experience shortage of products, we may be unable to meet the demand for our products, and our business and operating results could be adversely affected. We expect that it will become more difficult to forecast demand as we introduce and develop a more diverse product portfolio and as market competition for similar products intensifies.

We collect, store, process and use personal information and other user data, which subjects us to laws, governmental regulations and other legal obligations related to privacy, information security, and data protection, and any security breaches or our actual or perceived failure to comply with such legal obligations could harm our brand and business.

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.

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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.

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Our business may suffer if it is alleged or determined that our technologies, products, or other aspects of our business infringe third party intellectual property or if third parties infringe our rights.

We may fail to own or apply for key trademarks or patents on important products, services, technologies or designs in a timely fashion, or at all, both in China and overseas. We have registered and applied to register trademarks and service marks, including but not limited to “Amazfit”, “ZEPP”, and “华米” in China and foreign jurisdictions. We may not be able to adequately protect our trademarks and service marks, and our competitors and others may successfully challenge the validity and/or enforceability of our trademarks and service marks and other intellectual property. Additionally, we may be prohibited from entering into certain new markets due to restrictions surrounding competitors’ trademarks. For example, our company name in Chinese characters, “华米”, has been registered as a trademark by a company unaffiliated to us in certain trademark categories in China. Furthermore, the “华米” trademark in several other trademark categories—which is contractually owned jointly by Xiaomi and us—is currently registered under the name of Xiaomi alone. Xiaomi is in the process of transferring its title to us pursuant to the relevant agreement. However, in the event that the transfer process is not completed as planned, we will not be able to use “华米” as a trademark in these additional categories as well.

It may be possible, in jurisdictions where the status of various applications is pending, unclear, challenged or rejected, for a third-party owner of the national trademark registration for a similar mark to prohibit the manufacture, sale or exportation of our products in or from that country. Failure to register our trademarks or purchase or license the right to use our trademarks or logos in these countries could limit our ability to obtain supplies from, or manufacture in, less costly markets or penetrate new markets should our business plan include selling our products in those countries. Additionally, we may receive from time to time letters alleging infringement of patents, trademarks or other intellectual property rights by us.

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 have completed the process of transferring our data to the Amazon Web Services in 2020, except for the data in Russia. Problems with our cloud service providers or the telecommunications network providers with whom they contract could adversely affect the experience of our users. We cannot guarantee that our cloud service providers will provide us with continuously uninterrupted services. Any change in service levels at our cloud servers or any errors, defects, disruptions, or other performance problems with our platform could harm our brand and may damage the data of our users. If changes in technology cause our information systems, or those of third parties whom we depend upon, to become obsolete, or if our or their information systems are inadequate to handle our growth, we could lose users and our business and operating results could be adversely affected.

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.

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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 State Administration for Market Regulation 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. In October 2020, we also received a notice from a governmental authority to make rectification on our app to avoid collecting certain information and we have passed the examination after rectification. 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.

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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 the Committee on Foreign Investment in the United States) and regulations can be costly. Any failure to comply with applicable regulations could also result in regulatory enforcement actions against us, and the misuse of or failure to secure personal information could also result in violation of data privacy laws and regulations, proceedings against us by governmental entities or others, damage our reputation and credibility and could have a negative impact on revenues and profits.

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 44.2% in 2018 to 51.6% in 2019, and further to 54.1% in 2020. International expansion represents a large opportunity to further grow our business and enhance our competitive position, and is one of our core strategies.

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We may enter into new geographic markets where we have limited or no experience in marketing, selling, and localizing and deploying our products. International expansion has required and will continue to require us to invest significant capital and other resources and our efforts may not be successful. International sales and operations may be subject to risks such as:

● limited brand recognition (compared with our home market in China);

● costs associated with establishing new distribution networks;

● foreign consumers’ preferences and customs;

● difficulties in staffing and managing foreign operations;

● burdens of complying with a wide variety of local laws and regulations, including packaging and labeling;

● adverse tax effects and foreign exchange controls making it difficult to repatriate earnings and cash;

● 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. In August 2020, we launched premium smart watches under our own “Zepp” brand. We have incurred expenses on a variety of different sales and marketing efforts designed to enhance our brand recognition and increase sales of our Amazfit and Zepp products. Our marketing and branding activities may not achieve anticipated results. If we 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.

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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.

Furthermore, levels of warranty claims or estimated costs of warranty claims might materially affect our gross margins and operating results. Any failure to detect, prevent, or fix defects, or an increase in defects could result in a variety of consequences, including a greater number of returns and replacement of products than expected from Xiaomi for Xiaomi Wearable Products, or from end users for our Amazfit and Zepp products. This will lead to increases in warranty costs, regulatory proceedings and product recalls, which could harm not only our revenue and operating results, 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.

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Our business, financial condition and results of operations have been, and may continue to be, adversely affected by the COVID-19 pandemic.

The ongoing COVID-19 pandemic has restricted general commercial activities in affected regions and resulted in reduced business volume. It also caused temporary closures of our offices and limited access by our employees to certain warehouses and logistics centers in early 2020. The number of our products manufactured reduced in January and February 2020 as our contracted manufacturing facilities were temporarily shut down, and the manufacturing facilities had been in ramp-up to its full capacity starting from March 2020. We witnessed a decrease in demand than our expectation for smart wearable products, both in China and overseas, which negatively affected our sales performance. In addition, we implemented short-term measures for employees to work remotely from home at the beginning of 2020. Even though the restrictions in China is loosen and our business is currently operational, our operational efficiency had been adversely affected by the COVID-19 pandemic due to decreased productivity of our workforce as a result of work from home measures at the beginning of 2020 and the necessity to comply with various disease control protocols in our business facilities. Due to the uncertainties of the future development of the pandemic in Mainland China, where we operate substantially all of our business, we cannot guarantee that such disruption will not occur again in the future.

The global spread of COVID-19 pandemic in a significant number of countries around the world has resulted in, and may intensify, global economic distress, and the extent to which it may affect our financial condition, results of operations, and cash flows will depend on future developments, which are highly uncertain and cannot be predicted. The worldwide pandemic has not only adversely affect our sales performance overseas, but also led to components and raw materials shortages as we source those from south east Asia, Europe and other areas around the world. While we experienced a rebound on retail sales and growth of device activations in most of the markets during the third quarter, a resurgence of COVID-19 cases widely around the world, including the U.S., many European countries, Russia, and Japan, had a negative impact on our business performance in the fourth quarter, resulting in production delays that affected inventory availability for some new products. We have been actively seeking alternative sources of components and raw materials since the third quarter of 2020 to address the shortage, and have reached agreement on the provision of components and raw materials with certain China local suppliers. However, we cannot guarantee that our manufacturing capabilities and sales performance will not continue to be negatively affected by the COVID-19 pandemic.

Furthermore, some of the companies we have invested in have suffered from the temporary closure of offices and facilities and the downturn of the macroeconomy resulted from the COVID-19 pandemic. Consequently, we may not receive investment returns as expected, and may lose part or all of our investment in these companies.

On the flip side, we have received subsidies and exemptions of social insurance contribution obligation as a part of Chinese government’s relief effort to companies affected by the pandemic. Goverment’s supports to the business world may not continue while adverse COVID-19 pandemic effects ease.

The duration of such business disruption, the extent of reduced sales and financial impact cannot be reasonably estimated at this time. Beginning in the second fiscal quarter of fiscal year 2020, we experienced continued recovery and growth. However, the COVID-19 pandemic may negatively affect our financial results for the fiscal year of 2021, maybe even beyond. Moreover, a second wave or a similar COVID-19 outbreak may occur. The extent to which this pandemic impacts our results will depend on future developments, both in China and globally, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of this pandemic and the actions to contain this pandemic or treat its impact, among others.

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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.

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.

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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 and 2018 Plan is 14,328,358 and 16,729,312 Class A ordinary shares respectively. As of March 31, 2021, awards to purchase 13,735,051 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, 2021, awards to purchase 12,919,520 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, 2020, our unrecognized share-based compensation expenses amounted to RMB128.0 million (US$19.6 million).

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.

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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.

You should not rely on our Mobile App MAU or number of registered users metrics as indicators of future retention of users, continual user engagement or other revenue opportunities.

Our MAU metric tracks the number of the accounts that have been logged into on our mobile apps during a given calendar month. Our number of registered users metric tracks the number of users who have completed the registration process on our mobile apps as of a specified date. They do not fully capture the frequency and duration that users engage with our devices as users may not sign in or stay logged in on our mobile apps when using our devices. The Mobile App MAU and the number of registered users metrics only represent the potential size or growth of our user community and are not necessarily indicators of the actual size and growth of our user community. In addition, most of the services provided on our mobile apps currently are offered to users for free once they have purchased our smart wearable devices. Therefore, our Mobile App MAU metric should not be relied upon as an indicator of the level of retention of individual users in the future, continual user engagement or the potential size and growth of our user community, all of which are indicators for other potential revenue opportunities.

We may engage in acquisition and investment activities, which could require significant management attention, disrupt our business, dilute shareholder value, and adversely affect our operating results.

As part of our business strategy, we have completed acquisitions in the past and may continue to acquire or make investments in other companies, products, or technologies to enhance the features and functionality of our devices, and accelerate the expansion of our platform and network of strategic partners. We may not be able to find suitable acquisition or investment candidates and we may not be able to complete acquisition and investment on favorable terms, if at all. If we do complete acquisition and investment as we expect, we may not ultimately strengthen our competitive position or achieve our goals; and any acquisition and investment we complete could be viewed negatively by users or investors. In addition, if we fail to successfully integrate such acquisitions into our company, the revenue and operating results of the combined company could be adversely affected, we may not realize the expected benefits from the transaction relative to the consideration paid, and our business, financial condition, and results of operations may be adversely affected. To be successful, the integration process requires us to achieve the benefits of combining the companies, including generating operating efficiencies and synergies and eliminating or reducing redundant costs. This integration process involves inherent uncertainties, and we cannot assure you that the anticipated benefits of these acquisitions will be fully realized without incurring unanticipated costs or diverting management’s attention from our core operations.

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Acquisitions and investments may disrupt our ongoing operations, divert management from their primary responsibilities, subject us to additional liabilities, increase our expenses, and adversely impact our business, financial condition, operating results, and cash flows. In particular, our acquisitions and investments may be subject to relevant laws, regulations and governmental approvals, potentially strict scrutiny by foreign governments, both retrospectively and prospectively. For example, in June 2020, we acquired PAI Health, a heart health software company incorporated in Canada. However, we cannot guarantee that the Canadian national security inspection or similar events in the future will not negatively affect our business and results of operations. Failure to obtain necessary governmental approvals or to comply with applicable laws and regulations in the jurisdictions where we or the companies we invest in or acquire operate could subject us to administrative liabilities, which will materially and adversely affect our results of operations and financial performance. In addition, certain early-stage enterprises that we have invested in may require a significant amount of cash to develop their businesses and maintain their daily operations, and therefore are susceptible to market risks. 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 RMB462.4 million (US$70.9 million) of short-term and long-term investments as of December 31, 2020.

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.

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COVID-19 had a severe and negative impact on the Chinese and the global economy in 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 it was further affected by the impact of COVID-19. There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the central banks and financial authorities of some of the world’s leading economies, including the United States and China, 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 made statements and taken certain actions that may lead to potential changes to U.S. and international trade policies towards China. While the “Phase One” agreement was signed between the United States and China on trade matters, it remains unclear what additional actions, if any, will be taken by the U.S. or other governments with respect to international trade, tax policy related to international commerce, or other trade matters. The situation is further complicated by the political tensions between the United States and China that escalated during the COVID-19 pandemic and in the wake of the PRC National People’s Congress’ decision on Hong Kong national security legislation, sanctions imposed by the U.S. Department of Treasury on certain officials of the Hong Kong Special Administrative Region and the central government of the PRC and the executive orders issued by U.S. President in August 2020 that prohibit certain transactions with certain China-based companies and their respective subsidiaries. Rising trade and political tensions could reduce levels of trades, investments, technological exchanges and other economic activities between China and other countries, which would have an adverse effect on global economic conditions, the stability of global financial markets, and international trade policies.

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.

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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.

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.

Our management has concluded that our internal control over financial reporting was effective as of December 31, 2020. 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.

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Risks Related to Our Corporate Structure

If the PRC government finds that the agreements that establish the structure for operating some of our operations in China do not comply with PRC regulations relating to the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.

Our WFOE has entered into a series of contractual arrangements with our VIEs and their respective shareholders, respectively, which enable us to (i) exercise effective control over our VIEs, (ii) receive substantially all of the economic benefits of our VIEs, and (iii) have an exclusive option to purchase all or part of the equity interests and assets in our VIEs when and to the extent permitted by PRC law. As a result of these contractual arrangements, we have control over and are the primary beneficiary of our VIEs and hence consolidate their financial results into our consolidated financial statements under U.S. GAAP. See “Item 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;

● 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.

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We rely on contractual arrangements with our VIEs and their shareholders for a large portion of our business operations, which may not be as effective as direct ownership in providing operational control.

We have relied and expect to continue to rely on contractual arrangements with our VIEs and their shareholders to conduct certain of our key businesses. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIEs. For example, our VIEs and their shareholders could breach their contractual arrangements with us by, among other things, failing to conduct their operations in an acceptable manner or taking other actions that are detrimental to our interests.

If we had direct ownership of our VIEs, we would be able to exercise our rights as a shareholder to effect changes in the board of directors of our VIEs, which in turn could implement changes, subject to any applicable fiduciary obligations, at the management and operational level. However, under the current contractual arrangements, we rely on the performance by our VIEs and their respective shareholders of their obligations under the contracts to exercise control over our VIEs. However, the shareholders of our consolidated VIEs may not act in the best interests of our company or may not perform their obligations under these contracts. Such risks exist throughout the period in which we intend to operate certain portions of our business through the contractual arrangements with our VIEs. If any disputes relating to these contracts remains unresolved, we will have to enforce our rights under these contracts through the operations of PRC law and arbitration, litigation and other legal proceedings and therefore will be subject to uncertainties in the PRC legal system. See “Item 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.

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.

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The shareholders of our VIEs may have potential conflicts of interest with us, which may materially and adversely affect our business and financial condition.

The shareholders of our VIEs may have potential conflicts of interest with us. These shareholders may breach, or cause our VIEs to breach, or refuse to renew, the existing contractual arrangements we have with them and our VIEs, which would have a material and adverse effect on our ability to effectively control our VIEs and receive economic benefits from them. For example, the shareholders may be able to cause our agreements with our VIEs to be performed in a manner adverse to us by, among other things, failing to remit payments due under the contractual arrangements to us on a timely basis. We cannot assure you that when conflicts of interest arise any or all of these shareholders will act in the best interests of our company or such conflicts will be resolved in our favor. Currently, we do not have any arrangements to address potential conflicts of interest between these shareholders and our company. If we cannot resolve any conflict of interest or dispute between us and these shareholders, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.

Contractual arrangements in relation to our VIEs may be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC VIEs owe additional taxes, which could negatively affect our financial condition and the value of your investment.

Under applicable PRC laws and regulations, arrangements and transactions among related parties may be subject to audit or challenge by the PRC tax authorities. We could face material and adverse tax consequences if the PRC tax authorities determine that the VIE contractual arrangements were not entered into on an arm’s length basis in such a way as to result in an impermissible reduction in taxes under applicable PRC laws, rules and regulations, and adjust the income of our VIEs in the form of a transfer pricing adjustment. A transfer pricing adjustment could, among other things, result in a reduction of expense deductions recorded by our VIEs for PRC tax purposes, which could in turn increase its tax liabilities without reducing our WFOE’s tax expenses. In addition, the PRC tax authorities may impose late payment fees and other penalties on our VIEs for the adjusted but unpaid taxes according to the applicable regulations. Our financial position could be materially and adversely affected if our VIEs’ tax liabilities increase or if it is required to pay late payment fees and other penalties.

We may lose the ability to use and enjoy assets held by our VIEs that are material to the operation of certain portion of our business if our VIEs go bankrupt or become subject to a dissolution or liquidation proceeding.

As part of our contractual arrangements with our VIEs, our VIEs and their subsidiaries hold certain assets that are material to the operation of certain portion of our business, including intellectual property and premise. If our VIEs go bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of operations. Under the contractual arrangements, our VIEs may not, in any manner, sell, transfer, mortgage or dispose of their assets or legal or beneficial interests in the business without our prior consent. If our VIEs undergo a voluntary or involuntary liquidation proceeding, independent third-party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and adversely affect our business, financial condition and results of operations.

Our current corporate structure and business operations may be affected by the newly enacted Foreign Investment Law

On March 15, 2019, the National People’s Congress promulgated the Foreign Investment Law or the FIL, which 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.”

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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.

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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.

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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.

The recognition and enforcement of foreign judgments are provided for under the PRC Civil Procedures Law. PRC courts may recognize and enforce foreign judgments in accordance with the requirements of the PRC Civil Procedures Law based either on treaties between China and the country where the judgment is made or on principles of reciprocity between jurisdictions. China does not have any treaties or other forms of reciprocity with the United States that provide for the reciprocal recognition and enforcement of foreign judgments. In addition, according to the PRC Civil Procedures Law, the PRC courts will not enforce a foreign judgment against us or our directors and officers if they decide that the judgment violates the basic principles of PRC laws or national sovereignty, security or public interest. As a result, it is uncertain whether and on what basis a PRC court would enforce a judgment rendered by a court in the United States.

It may be difficult for overseas regulators to conduct investigation or collect evidence within China.

Shareholder claims or regulatory investigation that are common in the United States generally are difficult to pursue as a matter of law or practicality in China. For example, in China, there are significant legal and other obstacles to obtaining information needed for regulatory investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism. Furthermore, according to Article 177 of the PRC Securities Law, or Article 177, which became effective in March 2020, no overseas securities regulator is allowed to directly conduct investigation or evidence collection activities within the territory of the PRC, and no organization or individual may provide documents or materials relating to securities business activities to overseas parties arbitrarily without the consent of the competent securities regulatory authority in China. While detailed interpretation of or implementation rules under Article 177 have yet to be promulgated, the inability for an overseas securities regulator to directly conduct investigation or evidence collection activities within China may further increase the difficulties you face in protecting your interests. See also “—Risks Related to Our ADSs—You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.” for risks associated with investing in us as a Cayman Islands company.

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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.

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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.

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Certain PRC regulations may make it more difficult for us to pursue growth through acquisitions.

Among other things, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and amended in 2009, established additional procedures and requirements that could make merger and acquisition activities by foreign investors more time-consuming and complex. Such regulation requires, among other things, that in some instances the MOFCOM shall be notified in advance of any change-of-control transaction in which a foreign investor 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, the Notices on the Establishment of Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, which became effective in March 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. SAFE Notice 13 also provides that the relevant entities which have completed the above foreign exchange registration shall complete annual existing right registration.

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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 SAFE Notice 13 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 and SAFE Notice 13. The failure or inability of our PRC resident shareholders to comply with the registration procedures set forth in these regulations may subject us to fines and legal sanctions, restrict our cross-border investment activities, limit the ability of our wholly foreign-owned subsidiaries in China to distribute dividends and the proceeds from any reduction in capital, share transfer or liquidation to us, and we may also be prohibited from injecting additional capital into these subsidiaries. Moreover, failure to comply with the various foreign exchange registration requirements described above could result in liability under PRC law for circumventing applicable foreign exchange restrictions. As a result, our business operations and our ability to distribute profits to you could be materially and adversely affected.

Any failure to comply with PRC regulations regarding the registration requirements for employee stock incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.

In February 2012, SAFE promulgated the Notices on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly-Listed Company, replacing earlier rules promulgated in 2007. Pursuant to these rules, PRC citizens and non-PRC citizens who reside in China for a continuous period of not less than one year who participate in any stock incentive plan of an overseas publicly listed company, subject to a few exceptions, are required to register with SAFE through a domestic qualified agent, which could be the PRC subsidiaries of such overseas-listed company, and complete certain other procedures. In addition, an overseas-entrusted institution must be retained to handle matters in connection with the exercise or sale of stock options and the purchase or sale of shares and interests. We and our executive officers and other employees who are PRC citizens or who reside in the PRC for a continuous period of not less than one year and who have been granted options are subject to these regulations as our company has become an overseas-listed company. Failure to complete SAFE registrations may subject them to fines of up to RMB300,000 for entities and up to RMB50,000 for individuals, and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Employee Share Options.”

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If we are classified as a PRC resident enterprise for PRC income tax purposes, such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or ADS holders.

Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside of the PRC with “de facto management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise. In 2009, the State Administration of Taxation, or SAT, issued a circular, known as SAT Circular 82, which provides certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of voting board members or senior executives habitually reside in the PRC.

We believe that Zepp Health 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 Zepp Health Corporation is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to our non-PRC individual shareholders (including our ADS holders) and any gain realized on the transfer of ADSs or ordinary shares by such shareholders may be subject to PRC tax at a rate of 20% unless a reduced rate is available under an applicable tax treaty. It is unclear whether non-PRC shareholders of our company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares.

We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.

On December 10, 2009, SAT issued the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or SAT Circular 698, with retroactive effect from January 1, 2008, to December 1, 2017. Pursuant to the SAT Circular 698, where a non-resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate less than 12.5% or (ii) does not tax foreign income of its residents, the non-resident enterprise, being the transferor, shall report to the competent tax authority of the PRC resident enterprise this Indirect Transfer.

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On February 3, 2015, the SAT issued the Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax Resident Enterprises, or SAT Public Notice 7. SAT Public Notice 7 extends its tax jurisdiction to not only Indirect Transfers set forth under SAT Circular 698 but also transactions involving transfer of other taxable assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides clearer criteria than SAT Circular 698 for assessment of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to pay for the transfer) of taxable assets. Where a non-resident enterprise transfers taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an Indirect Transfer, the non-resident enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such Indirect Transfer may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise. Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor fails to pay the taxes.

On October 17, 2017, the SAT released Public Notice Regarding Issues Concerning the Withholding of Non-resident Enterprise Income Tax at Source, or SAT Public Notice 37, effect from December 1, 2017. SAT Public Notice 37 replaced a series of important circulars, including but not limited to SAT Circular 698, and revised the rules governing the administration of withholding tax on China-source income derived by the non-resident enterprise. SAT Public Notice 37 provided certain key changes to the current withholding regime including, such as (i) the withholding obligation for non-resident enterprise deriving dividend arises on the day the payment is actually made rather than on the day of the resolution to declare the dividends; (ii) the provision that non-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.

Our ADSs may be delisted under the Holding Foreign Companies Accountable Act if the U.S. Public Company Accounting Oversight Board, or the PCAOB, is unable to inspect auditors who are located in China. The delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally, the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections.

The Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted on December 18, 2020. The HFCA Act states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs from being traded on a national securities exchange or in the over the counter trading market in the U.S.

Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not inspected by the PCAOB.

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On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above.

The SEC may propose additional rules or guidance that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President’s Working Group on Financial Markets, or the PWG, issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then President of the United States. This report recommended the SEC implement five recommendations to address companies from jurisdictions that do not provide the PCAOB with sufficient access to fulfil its statutory mandate. Some of the concepts of these recommendations were implemented with the enactment of the HFCA Act. However, some of the recommendations were more stringent than the HFCA Act. For example, if a company was not subject to PCAOB inspection, the report recommended that the transition period before a company would be delisted would end on January 1, 2022.

The SEC has announced that the SEC staff is preparing a consolidated proposal for the rules regarding the implementation of the HFCA Act and to address the recommendations in the PWG report. It is unclear when the SEC will complete its rulemaking and when such rules will become effective and what, if any, of the PWG recommendations will be adopted. The implications of this possible regulation in addition the requirements of the HFCA Act are uncertain. Such uncertainty could cause the market price of our ADSs to be materially and adversely affected, and our securities could be delisted or prohibited from being traded “over-the-counter” earlier than would be required by the HFCA Act. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your ability to sell or purchase our ADSs when you wish to do so, and the risk and uncertainty associated with a potential delisting would have a negative impact on the price of our ADSs.

The PCAOB’s inability to conduct inspections in China prevents it from fully evaluating the audits and quality control procedures of our independent registered public accounting firm. As a result, we and investors in our ordinary shares are deprived of the benefits of such PCAOB inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are subject to the PCAOB inspections, which could cause investors and potential investors in our stock to lose confidence in our audit procedures and reported financial information and the quality of our financial statements.

In May 2013, the PCAOB announced that it had entered into a Memorandum of Understanding on Enforcement Cooperation with 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 in the PRC or by the CSRC or the PRC Ministry of Finance in the United States. 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.

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.

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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.

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.

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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 2020, the trading prices of our ADSs on NYSE have ranged from US$9.10 to US$17.87 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;

● announcements of studies and reports relating to the quality of our product and service offerings or those of our competitors;

● changes in the economic performance or market valuations of other smart wearables companies;

● actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;

● changes in financial estimates by securities research analysts;

● conditions in the online retail market;

● announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments;

● additions to or departures of our senior management;

● fluctuations of exchange rates between the RMB and the U.S. dollar;

● release or expiry of lock-up or other transfer restrictions on our outstanding shares or ADSs;

● sales or perceived potential sales of additional ordinary shares or ADSs;

● any actual or alleged illegal acts of our shareholders or management; and

● proceedings instituted by the SEC against PRC-based accounting firms, including our independent registered public accounting firm.

Any of these factors may result in large and sudden changes in the volume and price at which our ADSs will trade.

In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse effect on our financial condition and results of operations.

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If securities or industry analysts do not publish research or reports about our business, or if they adversely change their recommendations regarding our ADSs, the market price for our ADSs and trading volume could decline.

The trading market for our ADSs will be influenced by research or reports that industry or securities analysts publish about our business. If one or more analysts who cover us downgrade our ADSs, the market price for our ADSs would likely decline. If one or more of these analysts cease to cover us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which in turn could cause the market price or trading volume for our ADSs to decline.

The sale or availability for sale of substantial amounts of our ADSs could adversely affect their market price.

Sales of substantial amounts of our ADSs in the public market, or the perception that these sales could occur, could adversely affect the market price of our ADSs and could materially impair our ability to raise capital through equity offerings in the future. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our ADSs.

Because we 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.

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As of March 31, 2021, holders of our Class B ordinary shares held an aggregate of 117,208,247 Class B ordinary shares, which represent 46.6% of the total outstanding shares and 89.7% 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.

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, 2021, our officers, directors and principal shareholders collectively held 93.0% 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.

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You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are incorporated under Cayman Islands law.

We are an exempted company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our Memorandum and Articles, the Companies Act (As Revised) of the Cayman Islands and the common law of the Cayman Islands. The rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.

Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law to inspect corporate records 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.

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.

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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.

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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.

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.

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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.

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.

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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, such as our company, will be classified as a passive foreign investment company, or PFIC, for U.S. federal income tax purposes for any taxable year if either (i) 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. Based on our income and assets, and the market value of our ADSs, we do not believe that we were a PFIC for the taxable year ended December 31, 2020 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 future, no assurance can be given in this regard because the determination of whether we are or will 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). Furthermore, the composition of our income and assets may also be affected by how, and how quickly, we use our liquid assets.

If we were to be or become a PFIC for any taxable year during which a U.S. Holder (as defined in “Taxation—United States Federal Income Tax Considerations”) holds our ADSs or Class A ordinary shares, certain adverse U.S. federal income tax consequences could apply to such U.S. Holder. See “Item 10. Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”

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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 Zepp Health Corporation (formerly, Huami Corporation) in Cayman Islands as our offshore holding company to facilitate financing and offshore listing. Shortly following its incorporation, Zepp Health Corporation established a wholly-owned Hong Kong subsidiary, Hong Kong Zepp Holding Limited (formerly named Huami HK Limited). From December 2014 to April 2015, our Cayman holding company Zepp Health Corporation issued ordinary shares and preferred shares to the holding vehicles of the then shareholders of Anhui Huami, in proportion to these shareholders’ then respective equity interest percentages in Anhui Huami.

In February 2015, Hong Kong Zepp Holding Limited established a wholly-owned subsidiary in China, Beijing Shunyuan Kaihua Technology Co., Ltd., which we refer to as Shunyuan Kaihua or our WFOE in this annual report. Our WFOE later entered into a series of contractual arrangements with Anhui Huami, Beijing Huami, which two entities we collectively refer to as our VIEs in this annual report, and their respective shareholders. These contractual arrangements enable us to exercise effective control over our VIEs; receive substantially all of the economic benefits of our VIEs; and have an exclusive option to purchase all or part of the equity interests in and assets of them when and to the extent permitted by PRC law. As a result of these contractual arrangements, each of Anhui Huami and Beijing Huami is our consolidated variable interest entity, which generally refers to an entity in which we do not have any equity interests but whose financial results are consolidated into our consolidated financial statements in accordance with U.S. GAAP because we have effective financial control over, and are the primary beneficiary of, that entity. We treat each of Anhui Huami and Beijing Huami and their respective subsidiaries as our consolidated affiliated entities under U.S. GAAP and have consolidated their financial results in our consolidated financial statements in accordance with U.S. GAAP. However, those contractual arrangements may not be as effective as direct ownership in terms of providing operational control.

On February 8, 2018, our ADSs commenced trading on the NYSE under the symbol “HMI.” Counting in the ADSs sold upon the exercise of the over-allotment option by our underwriters, we raised from our initial public offering 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.

In February 2021, we acquired 29.99% of the total outstanding shares of Jiangsu Yitong High-tech Co., Ltd., a PRC company listed in Shenzhen Stock Exchange for an aggregate consideration of RMB959.7 million in cash to expand the healthcare ecosystem for Chinese market in the long term. The transaction was completed in February 2021.

Effective February 25, 2021, we changed our corporate name from “Huami Corporation” to “Zepp Health Corporation,” and our trading symbol at the New York Stock Exchange from “HMI” to “ZEPP.”

Our principal executive offices are located at Huami Global Innovation Center, Building B2, Zhong’an Chuanggu Technology Park, No. 900 Wangjiang West Road Road, Hefei, 230088, People’s Republic of China. Our telephone number is +86 010-5940-3268. Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited at PO Box 309 Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of process in the United States is Puglisi & Associates, located at 850 Library Avenue, Suite 204, Newark, Delaware 19711.

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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:// ir.zepp.com/investor. The information contained on our website is not a part of this annual report.

B.           Business Overview

Our mission is to connect health with technology. In pursuit of that mission, we have developed substantial proprietary technology, which has enabled our company to become a significant global player in producing consumer health and fitness devices.

Through our own Amazfit and Zepp brands, and as the developer of smart wearable devices for Xiaomi brands, we shipped 45.7 million units of smart wearable devices in 2020, and we had shipped 167.3 million units between our inception and December 31, 2020. We collaborate with partners across many verticals such as sports and social network, mobile payment and health and related industries. Our key product and technology offerings include our smart devices, home fitness equipment and healthcare initiatives, together forming our smart health ecosystem.

Smart Bands and Smart Watches

We have developed a wide range of smart wearables that offers robust features at competitive pricing. 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 recently Mi Band 6 in March 2021. We also offer our self-branded smart bands and smart watches with a price range of from $39.99 to $329.00 in the Amazfit line, and from $249.99 to $349.00 in the new Zepp line introduced in 2020. We offer products in different styles, such as round versus rectangular, and specific functions targeting various audiences, such as ruggedized versus everyday, or sports versus fashion, to address the different needs of our consumers. Some products are offered in limited geographies only.

We pursue a strategy of fast development and replacement cycles with shorter manufacturing runs. This brings new products to market fast, stimulating new purchase by delivering compelling newly-launched or updated offerings throughout the year. For example, in 2020, we introduced three different versions of our popular Bip series smart watch, the Bip S, Bip U and Bip U Pro, providing periodic upgrades in features and materials at the $69.99 price point. All of our products utilize the same AI chipset and sensor array, providing consistent biometric data regardless of which device customers choose, and have important differentiating benefits for our data analytics service offerings.

In 2020, we sold our own branded products under the Amazfit and Zepp brand names. Significant models include:

● Amazfit Band 5;

● Amazfit basic smart watches, Bip S, U and U Pro;

● Amazfit sport smart watches, Neo, T-Rex and Stratos 3;

● Amazfit fashion smart watches, GT series and Amazfit X; and

● Zepp advanced smart watches, E and Z.

We launched the Zepp-branded smart watches in 2020. The Zepp smart watches represent a new high-end line of smart watches featuring higher-end materials, designs and finishes, which provides distinctive, dressier smart watch options to consumers.

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Smart Scales

Smart scales, which gather biometric and correlate data and analysis algorithms with other devices, such as smart watch and app, have been a strong component of the smart health device market for several years.

Hearables

Smart ear buds, ear phones and other personal listening devices have become a fast-growing segment of the smart wearables industry in the last three years.

In 2020, we introduced two new smart hearable products, Amazfit PowerBuds and Amazfit ZenBuds, which incorporate true health monitoring and health benefits. Amazfit PowerBuds are designed for listening use during exercise or outdoor activities, and provide heart rate monitoring and data sharing with our Zepp app. Amazfit ZenBuds are designed specifically to enhance sleep, fitting comfortably in the ear overnight, while providing soothing and noise-blocking sounds. ZenBuds also provide sleep monitoring and data sharing with our Zepp app.

Home Fitness Equipment and Accessories

In 2020, we introduced a home treadmill, Amazfit AirRun, primarily for sales in Asia. We also offer sportswear, home appliances and smart watch accessories (primarily replacement bands).

Data Analytics Capability

We have more than 30 million active users of our smart devices in 2020, contributing to a large data set for health related data analytics. In addition, we use the same biosensor array in each of our products, regardless of price or type, which provides us with a consistency as to the quality and format of the data collected that many of our competitors do not possess.

Under strict guidance of our data privacy and security policies, we offer use of various sets of the data set we have accumulated. Use of user data may be individually identified or de-identified, depending upon the application, agreement with the company, and agreement with users. In some cases, users may opt-in to have their personal data seen by the population manager. Each use of data under data analytics services is specifically codified in contract language, with the default always to be protection of individuals’ personal identity and data, and only shared upon users’ specific instruction (opt-in). At the end of 2020, we had partnerships with multiple independent research laboratories, hospitals, pharmaceutical companies and universities to analyze data to create algorithms that can detect health conditions, monitor certain conditions or understand the effects of drugs, treatments, or health or exercise programs. Some of these research programs may turn into commercial applications that we may later jointly pursue with these partners. Until now, however, the revenue of data analysis is minor for our financial performance.

PAI Health, which we acquired in 2020, developed a robust heart health algorithm that has proven to be a strong predictor of longevity. The PAI algorithm is built into our products to give consumers the benefit of PAI information and activity guidance. In 2020, PAI Health entered into an agreement with Prudential Corporation Asia for the inclusion of the PAI algorithm into Prudential's Pulse digital health app to be offered in some countries in Asia.

Subject to our data privacy and security policies, we also offer use of specific data sets and analytics, including PAI Health, to population health managers, such as life and health insurance companies, employers and wellness program providers. These population health managers are granted access to data of their own members or users to drive health and wellness programs, identify at-risk members or improve population risk management. In 2020, U.S.-based re-insurance company Gen Re completed a study using PAI Health analytics for insurance underwriting decisions. Their report concluded that PAI Health analytics provided additional value beyond traditional tools for underwriting. We expect the report to positively influence sales of our PAI Health and other data analytics tools in 2021. The market for such data analytics services is more mature in the U.S., but still very nascent in many other parts of the world.

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Core Technology for Our Products and Services

We design and develop our own core technology for smart devices, which we deem as a key competitive edge of our company as compared to many competitors who outsource their key components. We believe this give us an edge in product design for current and future products, as well as cost advantages.

Huangshan AI-Powered Smart Chipset

In September 2018, we 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 random access memory without waking the primary processor, with dedicated accelerators for neural network workloads. Huangshan-1 also supports real-time movement tracking, real-time biometric identification and real-time warning, among a huge array of functions. In addition, Huangshan-1 can scan the heart rate patterns of users through cloud-based AI, which helps monitor the user’s heart rate carefully, check for any unusual patterns and update users’ health statistics even when the users are not online. With lightning performance and minimal power consumption, 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 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.

In June 2020, at a Zepp-sponsored AI Innovation conference, we announced our next generation of the Huangshan chipset, Huangshan-2. Based on RISC-V architecture and a new independent neural network engine, the Huangshan-2 improves computing efficiency by 38% and can make software algorithms 26 times faster than other standard algorithms, at significantly lower power consumption than the Huangshan-1. Huangshan-2 chips went into production wearable models in the fourth quarter of 2020. At a conference early in 2021, we revealed that we expected to announce a third generation Huangshan chip in 2021.

BioTracker Sensor Array

We develop our own proprietary biosensor array for our smart devices. Like the Huangshan chipset, we believe this provides significant development and cost competitive advantages for our company.

In June 2020, we announced the second generation of our biosensor array, BioTracker™ 2. The new sensor supports five AI-driven biologic data engines, including RealBeats™2 heart rate monitoring, OxygenBeats™ oxygen data monitoring, SomnusCare™ sleep data monitoring, ExerSense™ exercise data detection and monitoring and Zepp-PAI heart health monitoring and analysis. The upgrade to our biosensor capabilities includes improvements in sensitivity, accuracy and scope of information detected by our devices.

Zepp and Mi Fit Mobile Apps

We mainly offer two mobile apps: our “Mi Fit” mobile app and our “Zepp” mobile app (formerly known as the “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 “Zepp” mobile app emphasizes functions relating to health and medical care.

We launched “Mi Fit” mobile app in July 2014. We launched “Amazfit” mobile app in November 2015 and changed its name to “Zepp” in August 2020. Since our inception in 2013, we have amassed a large user base. As of December 31, 2020, we had 38.0 million Mobile App MAUs and 214.5 million registered users of our mobile apps.

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We developed our mobile apps to support and expand the functionalities of our smart wearable devices as a way to attract users and promote sales of our wearable devices. We generate minor certain miscellaneous revenues from our mobile apps, including through sales of products via in-app store and in-app advertising services, and value-added services such as paid courses and paid medical SaaS subscription services. However, the amounts of such revenues are immaterial. We continue to provide innovative features and functionalities to users through our mobile apps, including the following:

● Workout Tutorials and Health Tips. Users can watch workout tutorials and learn helpful tips in our apps to enhance the effectiveness of their training and to learn how to maintain a healthy lifestyle.

● Discover. Users can discover and sign up for exciting online and offline sports and fitness events, such as our 21-Day Healthy Lifestyle Challenge and the Beijing International Marathon, directly via our apps, to compete with other users and win rewards from our partners for their participation.

● 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.

Data Sources and Storage

Our big data storage system stores and processes a massive amount of multi-dimensional user data, including activity data and biometric data, 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;

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● 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. 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 “Zepp” account settings or the account settings on such third parties’ platforms. If users choose to share their data with a third party, the data is governed by the privacy policy of the third party. We do not distribute or share with third parties our users’ personal data to other companies for advertising or any other purposes.

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 has responded effectively to technological changes, and is driving continued innovation to unleash the potential of the wearable devices industry.

As of December 31, 2020, our total research and development staff consisted of 887 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.

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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. Additionally, we also have developed the AI algorithms to recognize the daily workout or exercise, such as walking, running, cycling, rowing and elliptical training to automatically record the workout for customers and provided workout recommendations. Once the recommendation model is set up, we will be able to provide users with recommendations, such as exercise duration and intensity, running posture and foot posture, etc. We can also make personalized activity recommendations to help users achieve their fitness goals, such as weight loss.

● Biometrics. ECG is just as unique to an individual as fingerprints. We have developed ECG recognition algorithms to recognize the unique cardiac rhythms of users, which can be utilized as a biometric ID to authenticate user’s identity. Currently we are exploring new scenarios where this feature can be applied, such as account login and user identification. In addition, we have developed or are in the process of developing AI algorithms to measure various health parameters, including real time heart rates, heart rate variability, arrhythmia (including atrial fibrillation), SpO2, blood oxygen, blood pressure, body temperature and etc., with the bio-sensors embedded in our wearable devices.

In March 2020, we jointly established a laboratory for studies on monitoring respiratory diseases using wearable devices partnered with the respiratory disease team of Dr. Nanshan Zhong, who is a global leading epidemiologist and plays a significant role as an advisor in managing the COVID-19 crisis in China. The focus at this laboratory is on the early prediction of certain respiratory diseases, in particular COVID-19, and how our smart wearables, with our AI and big data advantages, can help establish a cloud service system to provide epidemic prediction and diseases requiring monitoring. In May 2020, we published a research article on infectious disease prediction based on data from wearable devices in journals of Discrete Dynamics in Nature and Society by Hindawi, which indicates that the popularity of wearable devices enables a new perspective for the precaution of the infectious diseases and can be the foundation for a health surveillance system. We plan to utilize the laboratory achievements to further develop our products and services in building a comprehensive health and fitness ecosystem.

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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. We also launched our Amazfit smart watch with 4G LTE module at the beginning of 2021.

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 explore in Insure tech field. According to Gen Re’s extensive study, PAI metrics effectively discriminate mortality risk in the survey population and combined with activity algorithms it can be used as a tool to assess and predict mortality risk in life insurance underwriting. 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, initially entered into in October 2017 and renewed in October 2020 for another three years, grants us the most-preferred-partner status globally to develop future Xiaomi Wearable Products. We leverage Xiaomi’s brand recognition and global distribution networks for the sale of Xiaomi Wearable Products. Our sale of Xiaomi Wearable Products to Xiaomi is governed by a business cooperation agreement, pursuant to which Xiaomi is responsible for the distribution and sales of Xiaomi Wearable Products through their networks and sales channels.

We and Xiaomi discuss on, among others, functions and recommended price range throughout the development process. After we show Xiaomi of prototypes and our internal validation testing results, we start taking orders from Xiaomi for mass production. Xiaomi and us generally discuss order forecast months in advance of the delivery time, which sufficiently allows us to arrange raw material and component procurement and manufacturing. In addition to the recommended price of Xiaomi Wearable Products to be sold to users and wholesalers, we also discuss with Xiaomi and jointly determine discounts offered at promotional events from time to time. We and Xiaomi receive equal shares of gross profit from selling all Xiaomi Wearable Products.

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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. Based on the specific product requirements, some of the key components, such as BLE system-on-chip, we utilize is currently procured from 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.

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.

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Strategic Collaborations and Investments

In October 2019, we made a minority interest investment in AliveCor, Inc., or AliveCor, 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 granted us a license under certain patents, algorithm and trademark rights of AliveCor 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.

In 2020, we identified that miniaturization and artificial intelligence engineering expertise could be applied to emerging medical imaging technology. In the second half of 2020, we announced partnerships and investments with several early-stage companies pioneering new, disruptive imaging systems, including Aspen State Imaging, which is pioneering in portable X-ray systems, and Promaxo, which is pioneering in low field strength MRI technology for the doctor’s office with an initial focus on urology.

Sales and Marketing

Xiaomi directly handles the sales and distributions of Xiaomi Wearable Products and also bears the associated advertising and marketing costs. However, we also play an important role in driving the sales strategy for Xiaomi Wearable Products. For example, we and Xiaomi work together to determine the quantity to be produced, the final selling price, the distribution channel and promotional events.

Since September 2015, we have started to use the brand name “Amazfit” to market our self-branded products. In August 2020, we introduced a new brand name, “Zepp”, for our self-branded products. In 2020, we engaged in various marketing and branding activities, both in China and globally, to promote our Amazfit brand and Zepp brand. 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 2020, we explored domestic and international sales and marketing channels for our Amazfit products and Zepp 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 a call center to provide support to our users.

Additionally, we have set up mobile chat groups to connect with users who are also enthusiastic followers of our products, and conduct focus group study periodically to better understand what our users desire from our products.

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Intellectual Property

Protection of our intellectual property is a strategic priority for our business. We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements, to establish and protect our proprietary rights. Except for certain licenses for the off-the-shelf software used in connection with our day-to-day operations, we generally do not rely on third-party licenses of intellectual property for use in our business.

As of February 28, 2021, we had obtained 494 patents and had submitted 374 additional patent applications. Our issued PRC patents will expire between 2021 and 2039 and our issued foreign patents will expire between 2024 and 2046. As of February 28, 2021, we had registered 1,357 trademarks and had submitted 886 additional trademark applications. Our registered PRC trademarks will expire between 2023 and 2031 but can be renewed. Our registered foreign trademarks will expire between 2021 and 2033 but can be renewed. As of February 28, 2021, we had obtained 54 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 Fitbit, traditional health and fitness companies and traditional watch companies. We also face competition from local providers of similar products in the different regions and countries where our products are distributed.

We believe that the principal competitive factors impacting the market for our products include:

● brand recognition;

● breadth of product offerings;

● functionality;

● sales and distribution;

● data accuracy;

● sensor technology and algorithms;

● user services; and

● pricing.

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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 and Zepp products, both in China and globally.

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 of Industries for Encouraging Foreign Investment, or the Encouraging Catalogue, and the Special Management Measures (Negative List) for the Access of Foreign Investment, or the Negative List, both of which were promulgated and are amended from time to time by MOFCOM, and the NDRC. The Encouraging Catalogue and the Negative List lay 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 Encouraging Catalogue and the Negative List are generally deemed as falling into a fourth category “permitted” unless specifically restricted by other PRC laws.

On December 27, 2020, MOFCOM and the NDRC released the Catalog of Industries for Encouraging Foreign Investment (2020 Version), which became effective on January 27, 2021, to replace the previous Encouraging Catalogue. On June 23, 2020, MOFCOM and the NDRC released the Special Management Measures (Negative List) for the Access of Foreign Investment (2020 Version), which became effective on July 23, 2020, to replace the previous Negative List. 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.

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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. 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.

On December 19, 2020, the MOFCOM and the NDRC jointly promulgated the Measures for the Security Review of Foreign Investments, which took effect on January 18, 2021. Pursuant to the measures, for foreign investments which affect or may affect national security, security review shall be conducted in accordance with the provisions of the measures. The State establishes a working mechanism, or the Working Mechanism, for the security review of foreign investments to be responsible for organizing, coordinating and guiding the security review of foreign investments. For foreign investments related to important cultural products and services, important information technology and internet products and services, and others, the foreign investors who obtains the actual controlling stake in the investee enterprise or relevant parties in the PRC shall declare to the office of the Working Mechanism prior to proceeding with the investments.

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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 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 Civil Code of the PRC, which was issued by the National Congress and became effective on July 1, 2021, where damages to other persons are caused by defective products, the infringed person may claim compensation against the producers or the sellers of the product. Where the defection is due to the fault of the producers, the sellers who have paid compensation to the infringed person shall have the right to indemnification against the producers. Where damages to other persons are caused by defective products due to the fault of a third party, such as the parties providing transportation or warehousing, the producers and the sellers of the products have the right to recover their respective losses from such third parties. If defective products are identified after they have been put into circulation, the producers or the sellers shall take remedial measures such as ceasing the sale, warning and recall of products, etc. in a timely manner. The producers or the sellers shall be liable under tort if they fail to take remedial measures in a timely manner or have not made efforts to take remedial measures, thus causing damages. If the products are produced or sold with known defects, causing deaths or severe adverse health issues, the infringed party has the right to claim punitive damages in addition to compensatory damages.

Regulation on Intellectual Property Rights

The PRC has adopted comprehensive legislation governing intellectual property rights, including patents, trademarks, copyrights and domain names.

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Patents

Pursuant to the PRC Patent Law, 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 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.

The Patent Law of the PRC was further amended by the Standing Committee of the National People's Congress in October, 2020 and will come into effect on June 1, 2021, pursuant to which invention patents are valid for twenty years, while design patents are valid for fifteen years and utility model patents are valid for ten years, commencing from the date of application. Where a patent right for invention is granted after three years from the date of request for substantial examination of a patent for invention and after four years from the filing date, the patent administrative department under the State Council shall grant compensation for the duration of the patent right due to any unreasonable delay in grant of patent rights at the request of the patentee, except for any unreasonable delay caused by the applicant. In addition, the Law of the Patent PRC (Revised in 2020) provides a criterial for compensation amount for intentional patent infringement of one to five times of actual loss suffered by the rights holder due to the infringement or the gains obtained by the infringer from the infringement, and the extension of the limitation of action for patent infringement of up to three years.

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.

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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 February 28, 2021, we had 267 patents granted and 201 patent applications pending in China, 227 patents granted and 173 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 February 28, 2021, we owned 851 registered trademarks in different applicable trademark categories and were in the process of applying to register 368 trademarks in China, 506 registered trademarks in different applicable trademark categories and were in the process of applying to register 518 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 February 28, 2021, we have registered 54 computer software copyrights in China.

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Regulation on Domain Name

The domain names are protected under the Administrative Measures on the Internet Domain Names promulgated by the Ministry of Industry and Information Technology, or the MIIT, effective on November 1, 2017. MIIT is the major regulatory body responsible for the administration of the PRC Internet domain names, under supervision of which China Internet Network Information Center, or CNNIC, is responsible for the daily administration of CN domain names and Chinese domain names. On June 18, 2019, CNNIC promulgated the Implementation Rules of Registration of Country Code Top-level Domain Name, or the ccTLD Registration Rules, which took effect on the same day. Pursuant to the Administrative Measures on the Internet Domain Names and the ccTLD Registration Rules, the registration of domain names adopts the “first to file” principle and the registrant shall complete the registration via the domain name registration service institutions. In the event of a domain name dispute, the disputed parties may lodge a complaint to the designated domain name dispute resolution institution to trigger the domain name dispute resolution procedure in accordance with the China ccTLD Resolution Policy promulgated by CNNIC, file a suit to the People’s Court or initiate an arbitration procedure. As of February 28, 2021, we have registered 116 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.

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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 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.

On December 24, 2019, SAMR issued the Interim Measures for the Censorship of Advertisements on Drugs, Medical Devices, Dietary Supplements and Formula Foods for Special Medical Purpose, which came into effect on March 1, 2020. The Interim Measures regulate the content of advertisement on drugs, medical devices, dietary supplements and formula foods for special medical purpose, and reiterated the advertisements on aforementioned special products shall be true and legal without any false or misleading information. In addition, the Interim Measures stipulates that the SAMR is responsible for organizing and guiding the censorship of the advertisement on drugs and other aforementioned special products, no advertisement on drugs or other aforementioned special products may be allowed to be published without undergoing censorship.

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 on January 4, 2000, and further amended on March 7, 2014, on May 4, 2017 and on February 9, 2021, respectively, the latest amended version of which will take effect on June 1, 2021, 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 provincial 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 at municipal level.

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Currently, Anhui Huami Healthcare Co., Ltd., a subsidiary of Anhui Huami, is producing and selling an ECG sensors-enabled smart band that was certified as Class II medical device 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 Medical Institution

The Administrative Regulations on Medical Institutions (Revised in 2016) was promulgated by the State Council, effective on September 1, 1994, and revised on February 6, 2016, according to which, hospitals, health centers, sanatoriums, out-patient departments, clinics, health clinics, health posts (rooms) and first aid stations are medical institutions. The establishment of medical institutions by entities or individuals shall be subject to the examination and approval of the health administrative department of the local people’s governments at or above the county level and obtain the written approval for the establishment of medical institutions. The practice of medical institutions shall complete the registration and obtain Practicing License for Medical Institution. Furthermore, medical institutions must conduct medical diagnosis and treatment activities in accordance with registered and approved subjects and shall not employ non-medical technical personnel in medical and health technical work.

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 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.

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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.

Pursuant to the Civil Code of the PRC which came into effect on January 1, 2021, the personal information of a natural person shall be protected by the law. Any organization or individual that needs to obtain personal information of others shall obtain such information legally and ensure the safety of such information, and shall not illegally collect, use, process or transmit personal information of others, or illegally purchase or sell, provide or make public personal information of others.

In October 2020, the Standing Committee of the National People’s Congress officially released the Draft Personal Information Protection Law. The Draft Personal Information Protection Law provides the basic regime for personal information protection, including without limitation, stipulating an expanded definition of personal information, providing a long-arm jurisdiction in cross-border scenarios, emphasizing individual rights, and prohibiting rampant infringement of personal information, such as stealing, selling, or secretly collecting personal information.

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 Labor 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.

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Regulation on Insurance Brokerage Business

On June 30, 1995, the Standing Committee of People’s Congress issued the PRC Insurance Law which is the most important law in the regulatory and legal framework for the PRC insurance industry. The PRC Insurance Law was last amended on April 24, 2015, which provides that an insurance broker is an entity that, in the interest of the applicant, provides intermediary services between the applicant and the insurer for the conclusion of an insurance contract and receives a commission in accordance with relevant laws. An insurance broker shall obtain an Insurance Brokerage License before it engages in insurance brokerage business.

Since the promulgation and implementation of the PRC Insurance Law in 1995, the insurance supervision and regulatory authority has promulgated a series of departmental rules and regulations and other regulatory documents pursuant to the PRC Insurance Law, covering almost all aspects of insurance operations. Regarding the establishment of insurance brokers, there are other important laws and regulations besides the PRC Insurance Law, including the Regulatory Provisions on Insurance Brokerages, or the Insurance Brokerages Provisions, which became effective on May 1, 2018. Insurance Brokerages Provisions specify provisions regarding market access, operation rules, exit from market, industry self-discipline, monitoring and inspection and legal obligations for insurance brokers.

Regulation on Tax

PRC Enterprise Income Tax

The PRC Enterprise Income Tax Law, which was promulgated on March 16, 2007 and took effect on January 1, 2008, and further amended on February 24, 2017 and December 29, 2018, imposes a uniform enterprise income tax rate of 25% on all PRC resident enterprises, including foreign-invested enterprises, unless they qualify for certain exceptions. The enterprise income tax is calculated based on the PRC resident enterprise’s global income as determined under PRC tax laws and accounting standards. If a non-resident enterprise sets up an organization or establishment in the PRC, it will be subject to enterprise income tax for the income derived from such organization or establishment in the PRC and for the income derived from outside the PRC but with an actual connection with such organization or establishment in the PRC.

The PRC Enterprise Income Tax Law and its implementation rules, which was promulgated on December 6, 2007 and 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.

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On April 4, 2018, the MOF and the SAT jointly promulgated the Circular of the Ministry of Finance and the State Administration of Taxation on Adjustment of Value-Added Tax Rates, or Circular 32, according to which, (i) for VAT taxable sales or importation of goods originally subject to value-added tax rates of 17% and 11% respectively, such tax rates shall be adjusted to 16% and 10%, respectively; (ii) for purchase of agricultural products originally subject to deduction rate of 11%, such deduction rate shall be adjusted to 10%; (iii) for purchase of agricultural products for the purpose of production and sales or consigned processing of goods subject to tax rate of 16%, such tax shall be adjusted to 12%; (iv) for exported goods originally subject to tax rate of 17% and export tax refund rate of 17%, the export tax refund rate shall be adjusted to 16%; and (v) for exported goods and cross-border taxable acts originally subject to tax rate of 11% and export tax refund rate of 11%, the export tax refund rate shall be adjusted to 10%. Circular 32 became effective on May 1, 2018 and shall supersede any previously existing provisions in case of inconsistency.

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.

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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 Hong Kong Zepp Holding Limited, we cannot assure you that we will be able to enjoy the preferential withholding tax rate of 5% under the China-HK Taxation Arrangement.

Regulation on Foreign Exchange

The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended on August 5, 2008. Under the Foreign Exchange Administration Regulations, payments of current account items, such as profit distributions and trade and service-related foreign exchange transactions can be made in foreign currencies without prior approval from State Administration of Foreign Exchange, or SAFE, by complying with certain procedural requirements. However, approval from or registration with appropriate government authorities is required where 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.

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On August 29, 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular No. 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into 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 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.

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Regulation on Foreign Exchange Registration of Offshore Investment by PRC Residents

On July 4, 2014, SAFE issued the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, and its implementation guidelines, which abolished and superseded the Circular on Several Issues concerning Foreign Exchange Administration for Domestic Residents to Engage in Financing and in Return Investments via Overseas Special Purpose Companies, SAFE Circular 75. Pursuant to SAFE Circular 37 and its implementation guidelines, PRC residents (including PRC institutions and individuals) must register with local branches of SAFE in connection with their direct or indirect offshore investment in an overseas special purpose vehicle, or SPV, directly established or indirectly controlled by PRC residents for the purposes of offshore investment and financing with their legally owned assets or interests in domestic enterprises, or their legally owned offshore assets or interests. Such PRC residents are also required to amend their registrations with SAFE when there is a change to the basic information of the SPV, such as changes of a PRC resident individual shareholder, the name or operating period of the SPV, or when there is a significant change to the SPV, such as changes of the PRC individual resident’s increase or decrease of its capital contribution in the SPV, or any share transfer or exchange, merger, division of the SPV. Failure to comply with the registration procedures set forth in the Circular 37 may result in restrictions being imposed on the foreign exchange activities of the relevant onshore company, including the payment of dividends and other distributions to its offshore parent or affiliate, the capital inflow from the offshore entities and settlement of foreign exchange capital, and may also subject relevant onshore company or PRC residents to penalties under PRC foreign exchange administration regulations.

Wang Huang, Yunfen Lu, Meihui Fan, Bin Fan, Yi Zhang and Xiaojun Zhang, our PRC resident shareholders, have completed required registrations with the local counterpart of SAFE in relation to our financing and restructuring to our shareholding structure.

Regulation on Employee Share Options

On December 25, 2006, the People’s Bank of China promulgated the Administrative Measures for Individual Foreign Exchange. On February 15, 2012, SAFE issued the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules, which replaced the Application Procedures of Foreign Exchange Administration for Domestic Individuals Participating in Employee Stock Ownership Plans or Stock Option Plans of Overseas Publicly-Listed Companies issued by SAFE on March 28, 2007. Pursuant to the Stock Option Rules, PRC residents who are granted shares or stock options by companies listed on overseas stock exchanges according to the stock incentive plans are required to register with SAFE or its local branches, and PRC residents participating in the stock incentive plans of overseas listed companies shall retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly-listed company or another qualified institution selected by such PRC subsidiary, to conduct SAFE registration and other procedures with respect to the stock incentive plans on behalf of these participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise of stock options, purchase and 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.

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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.

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C.           Organizational Structure

The following chart illustrates our company’s organizational structure, including our principal subsidiaries and consolidated affiliated entities as of the date of this annual report:

Notes:

(1) Messrs. Wang Huang, Yunfen Lu, Meihui Fan, Bin Fan, Yi Zhang and Xiaojun Zhang are beneficial owners of the shares of our company and hold 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.

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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.

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 and the registration of the equity pledge of Beijing Huami with the competent office of the State Administration for Market Regulation in accordance with the PRC Property Rights Law.

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.

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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.

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.

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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 45,398 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 11,500 square meters of office space in Beijing, 7,781 square meters of office space in Shenzhen, 2,875 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, 250 square meters of office space in Irvine, 231 square meters of office space in Shijiazhuang and 75 square meters of office space in Taiyuan. These leases vary in duration from 1 year to 6 years.

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.

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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, especially our self-branded products and new services as part of our healthcare initiatives. For the years ended December 31, 2018, 2019 and 2020, research and development expenses accounted for 45.9%, 50.0% and 46.4% of our total operating expenses and 7.2%, 7.4% and 8.4% 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, 2018, 2019 and 2020, revenues from our Xiaomi Wearable Products segment represented 66.9%, 72.2% and 69.0% of our total revenues, respectively. 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.

Increase of brand recognition and sales of our self-branded products

One of our important growth strategies is to attract new users and increase sales of our self-branded products through enhancing the brand recognition for our self-branded products. We plan to make the sale of self-branded products account for significant portion of our revenue in the future. To achieve the goal, we 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.

International expansion also represents a significant opportunity to further grow our business. We are building our own distribution network and promoting our own brand with a focus on North America, the European Union, Russia, Japan, Korea, India and Southeast Asia, which requires us to dedicate additional time and resources.

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.

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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 were 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. In particular, the quantity of our products manufactured reduced in January and February 2020 as our contracted manufacturing facilities in China were temporarily shut down. While these manufacturing facilities had been resumed-up since March 2020, our supply chain, production, and sales in the first quarter of 2020 were all impacted, resulting in lower than initially projected growth rates and gross margin. We experienced a rebound on retail sales and growth of device activations in most of the markets during the third quarter, however in the end of third quarter there was a wide resurgence of COVID-19 cases widely around the world, including the U.S., many European countries, Russia, and Japan, which had a negative impact on our business performance in the fourth quarter and resulted in production delays that affected inventory availability for some new products.

The global spread of COVID-19 pandemic in a significant number of countries around the world has resulted in, and may intensify, global economic distress, and the extent to which it may affect our financial condition, results of operations, and cash flows will depend on future developments, which are highly uncertain and cannot be predicted. In addition, the worldwide pandemic has not only adversely affected our sales performance overseas, but also led to components and raw materials shortages as we source those from south east Asia, Europe and other areas around the world. We have been actively seeking alternative sources of components and raw materials since the third quarter of 2020 to address the shortage, and have reached agreement on the provision of components and raw materials with certain China local suppliers. However, the adverse effect the pandemic has on our sales performance overseas continues as of the date of this annual report.

On the flip side, we have received subsidies and exemptions of social insurance contribution obligation as a part of Chinese government’s relief effort to companies affected by the pandemic. These support, however, may not continue as China recovers from the COVID-19 pandemic.

At the beginning of 2020, we took a series of measures in response to the outbreak, including, among others, remote working arrangement for our employees. These measures, if taken again in the future, could reduce the capacity and efficiency of our operations, which in turn could negatively affect our results of operations. The extent to which the COVID-19 pandemic impacts our results of operations in the future may depend on the future developments of the pandemic, including new information concerning the global severity of and actions taken to contain the pandemic, which are highly uncertain and unpredictable. In addition, our results of operations could be adversely affected to the extent that the pandemic harms the Chinese and global economy and consumer activities in general. See “Item 3. Key Information—D. Risk Factors— Risks Related to Our Business and Industry—Our business, financial condition and results of operations have been, and may continue to be, adversely affected by the COVID-19 pandemic.”

Our cash position at the end of 2020 was RMB2.3 billion (US$0.3 billion). We will pay close attention to the development of the COVID-19 pandemic, perform further assessment of its impact and take relevant measures to minimize the impact.

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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,
	2018		2019		2020
	RMB	%	RMB	%	RMB	US$	%
	(in thousands, except for percentages)
Xiaomi Wearable Products	2,439,534	66.9	4,193,665	72.2	4,438,081	680,166	69.0
Self-branded products and others(1)	1,205,801	33.1	1,618,590	27.8	1,995,282	305,790	31.0
Total revenues	3,645,335	100.0	5,812,255	100.0	6,433,363	985,956	100.0

Note:

(1) The revenue for self-branded products and others includes sales to Xiaomi of RMB359.3 million, RMB77.5 million and RMB9.9 million (US$1.5 million) for the years ended December 31, 2018, 2019 and 2020, 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, and our Zepp-branded smart wearable products, which currently include smart watches. We expect our self-branded products to contribute to a more portion of our revenues in the future.

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.

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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,
	2018		2019		2020
	RMB	%	RMB	%	RMB	US$	%
	(in thousands, except for percentages)
Xiaomi Wearable Products	1,883,509	69.6	3,296,696	75.9	3,706,495	568,045	72.7
Self-branded products and others	822,376	30.4	1,047,816	24.1	1,394,203	213,671	27.3
Total cost of revenues	2,705,885	100.0	4,344,512	100.0	5,100,698	781,716	100.0

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

	Years Ended December 31,
	2018		2019		2020
	RMB		RMB		RMB		US$
	(in thousands, except for percentages)
Xiaomi Wearable Products	556,025		896,969		731,586		112,121
Self-branded products and others	383,425		570,774		601,079		92,119
Total gross profit	939,450		1,467,743		1,332,665		204,240
Xiaomi Wearable Products	22.8	%	21.4	%	16.5	%
Self-branded products and others	31.8	%	35.3	%	30.1	%
Overall gross margin	25.8	%	25.3	%	20.7	%

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.

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.

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.

Other income

Other income primarily consists of subsidies received from local government authorities to encourage technology innovation and investment.

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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,
	2018		2019		2020
	RMB	%	RMB	%	RMB	US$	%
	(in thousands, except for percentages)
Summary Consolidated Statements of Operating Data:
Revenues(1)	3,645,335	100.0	5,812,255	100.0	6,433,363	985,956	100.0
Cost of revenues(2)	2,705,885	74.2	4,344,512	74.7	5,100,698	781,716	79.3
Gross profit	939,450	25.8	1,467,743	25.3	1,332,665	204,240	20.7
Operating expenses:
Research and development expenses(3)	263,220	7.2	430,822	7.4	538,009	82,453	8.4
General and administrative expenses(3)	213,973	5.9	248,462	4.3	261,805	40,123	4.1
Selling and marketing expenses(3)	96,538	2.6	181,975	3.1	358,655	54,966	5.6
Total operating expenses	573,731	15.7	861,259	14.8	1,158,469	177,542	18.0
Operating income	365,719	10.0	606,484	10.4	174,196	26,698	2.7
Realized gain from investments	261	0.0	1,822	0.0	—	—	—
Gain from deconsolidation of a subsidiary	—	—	—	—	56,522	8,663	0.9
Interest income	11,595	0.3	33,478	0.6	46,118	7,068	0.7
Gain from fair value change of long-term investments	7,860	0.2	—	—	12,325	1,888	0.2
Impairment loss from long-term investments	(7,590)	(0.2)	(2,600)	(0.0)	—	—	—
Other income/(loss), net	8,768	0.2	13,186	0.2	(23,552)	(3,610)	(0.4)
Income before income tax	386,613	10.6	652,370	11.2	265,609	40,707	4.1
Provision for income taxes	(52,036)	(1.4)	(77,887)	(1.3)	(31,154)	(4,775)	(0.5)
Income before income/(loss) from equity method investments	334,577	9.2	574,483	9.9	234,455	35,932	3.6
Income/(loss) from equity method investments	1,743	0.0	(1,112)	(0.0)	(4,749)	(728)	(0.1)
Net income	336,320	9.2	573,371	9.9	229,706	35,204	3.6

Notes:

(1) Includes RMB2,817.0 million, RMB4,281.0 million and RMB4,449.8 million (US$682.0 million) with related parties for the years ended December 31, 2018, 2019 and 2020, respectively.

(2) Includes RMB2,141.1 million, RMB3,342.1 million and RMB3,713.5 million (US$569.1 million) with related parties for the years ended December 31, 2018, 2019 and 2020, 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, 2018, 2019 and 2020, we recorded share-based compensation expenses of RMB55.3 million, RMB17.8 million and nil, respectively, in relation to the vesting of the restricted shares of our founders under the share restriction agreements.

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Year Ended December 31, 2020 Compared to Year Ended December 31, 2019

Revenues

Our revenues increased by 10.7% from RMB5,812.3 million for the year ended December 31, 2019 to RMB6,433.4 million (US$986.0 million) for the year ended December 31, 2020, primarily due to the continuous sales growth of Xiaomi Wearable Products and the sales growth of our self-branded products.

Xiaomi Wearable Products. Our Xiaomi Wearable Products segment revenues increased by 5.8% from RMB4,193.7 million for the year ended December 31, 2019 to RMB4,438.1 million (US$680.2 million) for the year ended December 31, 2020. The increase was primarily attributable to an increase in shipment volume of our Xiaomi Wearable Products from approximately 38.4 million in 2019 to approximately 41.0 million in 2020.

Self-branded products and others. Our self-branded products and others segment revenues increased by 23.3% from RMB1,618.6 million in 2019 to RMB1,995.3 million (US$305.8 million) in 2020. The increase was primarily attributable to an increase in shipment volume of our self-branded products from approximately 3.9 million in 2019 to approximately 4.7 million in 2020.

Cost of revenues

Our cost of revenues increased by 17.4% from RMB4,344.5 million for the year ended December 31, 2019 to RMB5,100.7 million (US$781.7 million) for the year ended December 31, 2020.

Xiaomi Wearable Products. Costs of revenues for our Xiaomi Wearable Products segment increased by 12.4% from RMB3,296.7 million for the year ended December 31, 2019 to RMB3,706.5 million (US$568.0 million) for the year ended December 31, 2020. The increase was due to higher unit cost of newly introduced Xiaomi Wearable Products.

Self-branded products and others. Cost of revenues for our self-branded products and others segment increased by 33.1% from RMB1,047.8 million for the year ended December 31, 2019 to RMB1,394.2 million (US$213.7 million) for the year ended December 31, 2020. The increase was due to the changes in our product mix.

Gross profit

Our gross profit decreased by 9.2% from RMB1,467.7 million for the year ended December 31, 2019 to RMB1,332.7 million (US$204.2 million) for the year ended December 31, 2020. The decrease was mainly driven by the lower margin of Xiaomi Wearable products and newly introduced self-branded products.

Research and development expenses

Research and development expenses increased by 24.9% from RMB430.8 million for the year ended December 31, 2019 to RMB538.0 million (US$82.5 million) for the year ended December 31, 2020, primarily due to (i) an increase of RMB96.5 million (US$14.8 million) in personnel-related costs due to personnel additions for expansion of R&D activities of future products and new product categories; and (ii) an increase of RMB12.6 million (US$1.9 million) in share-based compensation expenses due to the vest of newly granted options and restricted share units, partially offset by a decrease of RMB31.7 million (US$4.9 million) of lower resource consumption in testing procedures. The company optimized its integrated product development process to effectively develop new smart products and services to the consumers, and believed that smart R&D investment was a key factor to maintain its competitive position in the global market.

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General and administrative expenses

General and administrative expenses increased by 5.4% from RMB248.5 million for the year ended December 31, 2019 to RMB261.8 million (US$40.1 million) for the year ended December 31, 2020, primarily due to (i) an increase of RMB25.4 million (US$3.9 million) in personnel-related costs; (ii) an increase of RMB14.7 million (US$2.3 million) and RMB5.0 million (US$0.8 million) in depreciation and amortization and rental fees due to office expansion; and (iii) an increase of RMB7.3 million (US$1.1 million) in professional fee, partially offset by a decrease of RMB41.7 million (US$6.4 million) in foreign exchange rate fluctuation.

Selling and marketing expenses

Selling and marketing expenses increased by 97.1% from RMB182.0 million for the year ended December 31, 2019 to RMB358.7 million (US$55.0 million) for the year ended December 31, 2020, primarily due to (i) an increase of RMB69.3 million (US$10.6 million) in personnel-related costs; (ii) an increase of RMB64.7 million (US$9.9 million) in advertising and promotional fees; and (iii) an increase of RMB29.4 million (US$4.5 million) in e-commerce platform service fee. The increase for selling and marketing expenses was driven by investments in global expansion of Amazfit and Zepp-branded products.

Operating income

As a result of the factors set out above, we recorded an operating income of RMB174.2 million (US$26.7 million) for the year ended December 31, 2020, as compared to an operating income of RMB606.5 million for the year ended December 31, 2019.

Interest income

Interest income represents interest earned on bank deposits. We had interest income of RMB46.1 million (US$7.1 million) in 2020 and RMB33.5 million in 2019.

Gain from deconsolidation of a subsidiary

We recognized RMB56.5 million (US8.7 million) gain from deconsolidation of Yunding in 2020 when we sold our 26.7% equity interest to its founder. We did not have similar transactions in 2019.

Other (loss)/income, net

We had other income of RMB13.2 million in 2019 and other loss of RMB23.6 million (US$3.6 million) in 2020.

Provision for income taxes

We recorded provision for income taxes in the amount of RMB77.9 million in 2019 and RMB31.2 million (US$4.8 million) in 2020. The decrease in income tax expenses for the year ended December 31, 2020 was attributable to a decrease in taxable income. The material reconciling items between the tax expense computed by applying the PRC enterprise tax rate of 25% to income before income tax and the actual income tax expense is the tax impact from the tax holidays, which amounted to RMB72.4 million in 2019 and RMB41.9 million (US$6.4 million) in 2020.

Net income

As a result of the foregoing, our net income decreased by 59.9% from RMB573.4 million for the year ended December 31, 2019 to RMB229.7 million (US$35.2 million) for the year ended December 31, 2020.

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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 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 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 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 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 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 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 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 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.

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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 for the year ended December 31, 2019, primarily due to (i) an increase of RMB38.1 million 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.

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 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 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 in 2019 and RMB11.6 million in 2018.

Other income

We had other income of RMB8.8 million in 2018 and RMB13.2 million in 2019.

Income tax expenses

We recorded income tax expenses in the amount of RMB52.0 million in 2018 and RMB77.9 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 RMB58.3 million in 2018 and RMB72.4 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 for the year ended December 31, 2019.

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.

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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, Hong Kong Zepp Holding 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 Hong Kong Zepp Holding 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 Hong Kong Zepp Holding Limited to us are not subject to any Hong Kong withholding tax.

PRC

Generally, our PRC subsidiaries, VIEs and their subsidiaries are subject to enterprise income tax on their taxable income in China at a statutory rate of 25%. A “high and new technology enterprise” is entitled to a favorable statutory tax rate of 15% and such qualification is reassessed by relevant governmental authorities every three years. Anhui Huami began to qualify as a high and new technology enterprise, or HNTE, since 2015 and renewed the HNTE certificate in July 2018. Anhui Huami Health Technology Co., Ltd. began to qualify as a HNTE since August 2020. Accordingly Anhui Huami was subject to a tax rate of 15% during the years ended December 31, 2018, 2019 and 2020. 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 Hong Kong Zepp Holding Limited satisfies all the requirements under the tax arrangement and receives approval from the relevant tax authority, then the dividends paid to the Hong Kong subsidiary would be subject to withholding tax at the standard rate of 5%. Effective from November 1, 2015, the above mentioned approval requirement has been abolished, but a Hong Kong entity is still required to file application package with the relevant tax authority, and settle the overdue taxes if the preferential 5% tax rate is denied based on the subsequent review of the application package by the relevant tax authority. According to the SAT Circular No. 35, effective from January 1, 2020, a Hong Kong entity shall adopt the method of “self-discrimination, declaration of enjoyment, and retention of relevant materials for future reference,” and the above mentioned requirement of filing application package with the relevant tax authority has been abolished. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our ability to conduct our business.”

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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.

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, 2019 and 2020, we generated 66.9%, 72.2% and 69.0% of revenue from one customer for sales of exclusively designed and manufactured smart wearable devices, and 33.1%, 27.8% and 31.0% 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.

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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, RMB1.72 to RMB10.62 per unit and from RMB1.83 to RMB8.40 per unit for the years ended December 31, 2018, 2019 and 2020, 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 and others

For the years ended December 31, 2018, 2019 and 2020, we generated 33.1%, 27.8% and 31.0% 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, 2019 and 2020, we generated 66.9% 72.2% and 69.0% 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.

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Sales Incentive

We periodically provide sales incentives to certain of our customers for self-branded products, including reduced sales prices and volume-based discounts. Volume discounts are negotiated on a contract-by-contract basis with customers and the discount will increase depending upon the volume purchased over the period. The sales incentives are discounts to be applied to future sales to the customer which cannot be exchanged for cash. To the extent that the volume discount or sales incentive represents a material right or options to acquire additional goods or services at a discount in the future period, the material right is recognized as a separate performance obligation at the outset of the arrangement based on the most likely amount of incentive to be provided to the customer. Amounts allocated to a material right are recognized as revenue when those future goods are sold to the customers.

Practical Expedients and Exemptions

We generally expense sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within selling and marketing expenses. In addition, we do not disclose the value of unsatisfied performance obligations as all of its contracts have an original expected length of one year or less.

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, 2019 and 2020, 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. During the years ended December 31, 2018, 2019 and 2020, inventory provision amounted to nil, RMB23.8 million and RMB4.4 million, respectively.

Intangible asset, net

Acquired intangible assets other than goodwill consist of the domain name for our website www.huami.com, an insurance brokerage license, trademark and patents.

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The domain name and insurance brokerage license are recognized as an intangible asset with indefinite life and evaluated for impairment at least annually or if events or changes in circumstances indicate that the asset might be impaired. Such impairment test compares the fair values of the asset with its carrying value amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair value. The estimates of values of the intangible asset not subject to amortization are determined using discounted cash flow valuation approach. Significant assumptions are inherent in this process, including estimates of discount rates and cash flow.

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 five to ten years.

Leases

We lease administrative office spaces in different cities in the PRC, and in the United States and Canada 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.

For short-term leases with lease term less than one year, 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, determination of our weighted average cost of capital and consideration of the impact of COVID-19. The estimates used to calculate the fair value of a reporting unit change from year to year based on 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.

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Prior to January 1, 2020, we performed a two-step goodwill impairment test. The first step compared the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeded its carrying amount, goodwill was not considered impaired and the second step was not required. If the carrying amount of a reporting unit exceeded its fair value, the second step compared the implied fair value of the affected reporting unit’s goodwill to the carrying amount of that goodwill. An impairment loss was recognized for any excess in the carrying amount of goodwill over the implied fair value of goodwill.

We adopted ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) On January 1, 2020, and used the one-step method for the goodwill impairment assessment for the year ended December 31, 2020. The guidance removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment is now the amount by which a reporting unit’s carrying value exceeds its fair value, not the difference between the implied fair value and carrying amount of goodwill which was the step 2 test before.

During the years ended December 31, 2018, 2019 and 2020, 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.

We account for equity investments that do not have a readily determinable fair value under the measurement alternative prescribed within Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to the extent such investments are not subject to consolidation or the equity method. Under the measurement alternative, these financial instruments are carried at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

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 and the impact of COVID-19, the operating performance of the companies including current earning trends and other company specific information.

(b)         Equity Method Investment.

For an investee company over which we have the ability to exercise significant influence, but does not have a controlling interest, we accounts for the investment under the equity method. Significant influence is generally considered to exist when we 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 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.

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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, the determination of the weighted average cost of capital and the consideration of COVID-19 impact. We recorded RMB4.1 million, RMB0.2 million and nil impairment losses on its equity method investments during the years ended December 31, 2018, 2019 and 2020.

(c)          Available-for-sale Investments.

For investments which are determined to be debt securities, we 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. We recorded RMB12.3 million, RMB3.5 million unrealized gains and RMB22.6 million unrealized losses in accumulated other comprehensive income on its available-for-sale investments during the years ended December 31, 2018, 2019 and 2020, respectively.

We evaluate each individual investment periodically for impairment. For investments where we do not intend to sell, we evaluates whether a decline in fair value is due to deterioration in credit risk. Credit-related impairment losses, not to exceed the amount that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses on the consolidated balance sheet with corresponding adjustment in the consolidated statements of operations and comprehensive income. Subsequent increases in fair value due to credit improvement are recognized through reversal of the credit loss and corresponding reduction in the allowance for credit loss. Any decline in fair value that is non-credit related is recorded in accumulated other comprehensive income as a component of shareholder’s equity. As of December 31, 2020, there were no investments held by us that had been in continuous unrealized loss position.

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.

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 elect to recognize forfeitures when they occur.

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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:

	For the years ended December 31,
	2018		2019		2020
Risk-free interest rate	2.04%-2.83	%	2.14	%	0.67%-0.72	%
Expected volatility	36%-52.5	%	50.4	%	51.9%-52.0	%
Expected life of option (years)	1-10		10		10
Expected dividend yield	0.0	%	0.0	%	0.0	%
Fair value per ordinary share	15.03-16.85		12.65		21.60-23.10

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, 2018, 2019 and 2020, we recorded share-based compensation expenses of RMB29.4 million, RMB3.7 million and RMB22.8 million related to restricted shares and restricted share units.

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.

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 Zepp Health Corporation and its subsidiaries pursuant to Item 17 of Part III of this annual report.

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B.           Liquidity and Capital Resources

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

	Years Ended December 31,
	2018	2019	2020
	RMB	RMB	RMB	US$
	(in thousands)
Selected Consolidated Cash Flow Data:
Net cash provided by operating activities	707,605	427,999	157,302	24,107
Net cash used in investing activities	(324,841)	(112,703)	(206,880)	(31,705)
Net cash provided by financing activities	639,170	25,609	564,671	86,539
Net (decrease)/increase in cash and cash equivalents	1,021,934	340,905	515,093	78,941
Exchange rate effect on cash and cash equivalents	60,357	11,274	(43,334)	(6,641)
Cash, cash equivalents and restricted cash at the beginning of year	369,521	1,451,812	1,803,991	276,474
Cash, cash equivalents and restricted cash at end of year	1,451,812	1,803,991	2,275,750	348,774

As of December 31, 2018, 2019 and 2020, our cash, cash equivalents and restricted cash were RMB1,451.8 million, RMB1,804.0 million and RMB2,275.8 million (US$348.8 million), respectively, out of which RMB513.5, RMB717.6 million and RMB609.7 million (US$93.4 million) were held in U.S. dollars, and RMB937.7 million, RMB1,084.3 million and RMB1,618.7 million (US$248.1 million) were held in Renminbi, as of December 31, 2018, 2019 and 2020, respectively. Our cash, cash equivalents and restricted cash primarily consist of cash at banks and on hand. 84.6% of our cash, cash equivalents and restricted cash as of December 31, 2020 were held in China, and 57.6% of our cash, cash equivalents and restricted cash were held by our VIEs.

We believe our current cash and cash equivalents and anticipated cash flow from operations will be sufficient to meet our current and anticipated needs for general corporate purposes for at least the next 12 months. We may decide to enhance our liquidity position or increase our cash reserve for future investments through additional capital and finance funding. The issuance and sale of additional equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could result in operating covenants that would restrict our operations.

Although we consolidate the results of our VIEs and their subsidiaries, we only have access to the assets or earnings of our VIEs and their subsidiaries through our contractual arrangements with our consolidated variable interest entities and their shareholders. See “Item 4. Information on the Company—C. Organizational Structure.” For restrictions and limitations on liquidity and capital resources as a result of our corporate structure, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Holding Company Structure.”

In utilizing the proceeds we received from our initial public offering and our ADS offering in April 2019, and the other cash that we hold offshore, we may make additional capital contributions to our PRC subsidiaries, establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, make loans to our PRC subsidiaries, or acquire offshore entities with business operations in China in offshore transactions. However, most of these uses are subject to PRC regulations and approvals. For example:

● capital contributions to our PRC subsidiaries must be approved by the Ministry of Commerce or its local counterparts; and

● loans by us to our PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with SAFE or its local branches.

See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulation on Foreign Exchange.”

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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.

Operating activities

Net cash provided by operating activities for the year ended December 31, 2020 was RMB157.3 million (US$24.1 million). The difference between our net income of RMB229.7 million (US$35.2 million) and the net cash provided by operating activities was primarily due to additional RMB210.0 million (US$32.2 million) used in working capital, partially offset by the adjustment of RMB137.6 million (US$21.1 million) in non-cash items, which primarily consisted of inventory provision and write off and share-based compensation. Changes in working capital for the year ended December 31, 2020 primarily consisted of an increase by RMB410.7 million (US$62.9 million) in inventories, a decrease by RMB149.4 million (US$22.9 million) in accrued expense and other current liabilities, an increase by RMB131.2 million (US$20.1 million) in accounts receivable, and an increase by RMB80.0 million (US$12.3 million) in prepaid expenses and other current assets, partially offset by a decrease by RMB583.5 million (US$89.4 million) in amount due from related parties.

Net cash provided by operating activities for the year ended December 31, 2019 was RMB428.0 million. The difference between our net income of RMB573.4 million and the net cash provided by operating activities was primarily due to additional RMB249.7 million used in working capital, partially offset by the adjustment of RMB104.3 million in non-cash items, which primarily consisted of inventory write-off and share-based compensation. Changes in working capital for the year ended December 31, 2019 primarily consisted of an increase by RMB771.0 million in amount due from related parties, an increase by RMB433.0 million in inventories, and an increase by RMB130.0 million in accounts receivable, partially offset by an increase by RMB935.8 million in accounts payable and an increase by RMB86.2 million in accrued expense and other current liabilities.

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.

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As of December 31, 2018, 2019 and 2020, we had amount due from related parties of RMB656.4 million, RMB1,421.2 million and RMB860.2 million (US$131.8 million), respectively, among which RMB648.4 million, RMB1,418.6 million and RMB833.2 million (US$127.7 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, 2018, 2019 and 2020 was collected in the first quarter of 2019, 2020 and 2021, respectively.

Investing activities

Net cash used in investing activities was RMB206.9 million (US$31.7 million) for the year ended December 31, 2020, primarily due to purchase of term deposits of RMB212.1 million (US$32.5 million), purchase of property, plant and equipment of RMB83.6 million (US$12.8 million), purchase of long-term investments of RMB82.2 million (US$12.6 million) and acquisition of businesses and assets of RMB26.7 million (US$4.1 million), partially offset by proceeds from the maturity of term deposits of RMB207.1 million (US$31.7 million).

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

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.

Financing activities

Net cash provided by financing activities for the year ended December 31, 2020 was RMB564.7 million (US$86.5 million), primarily due to bank borrowings of RMB1,207.8 million (US$185.1 million), partially offset by the repayment of bank borrowing of RMB643.1 million (US$98.6 million).

Net cash provided by financing activities for the year ended December 31, 2019 was RMB25.6 million, primarily due to the proceeds of RMB49.2 million from the offering of our ADSs in April 2019, partially offset by the repayment of bank borrowing of RMB20.0 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.

Capital Expenditures

Our capital expenditures are primarily incurred for purchases of property, plant and equipment and intangible assets. Our capital expenditures were RMB69.2 million, RMB46.1 million and RMB84.8 million (US$13.0 million) in the years ended December 31, 2018, 2019 and 2020, respectively. We will continue to make capital expenditures to meet the expected growth of our business.

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Holding Company Structure

Zepp Health Corporation is a holding company with no material operations of its own. We conduct our operations primarily through our PRC subsidiaries, our VIEs and their subsidiaries in China. As a result, Zepp Health Corporation’s ability to pay dividends depends upon dividends paid by our PRC subsidiaries. If our existing PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us only out of their retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our subsidiaries and our VIEs in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain statutory reserve funds until such reserve funds reach 50% of its registered capital. In addition, each of our wholly foreign-owned subsidiaries in China may allocate a portion of its after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds at its discretion, and our VIEs may allocate a portion of their after-tax profits based on PRC accounting standards to a discretionary surplus fund at its discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.

The table below sets forth the respective revenues contribution and assets of Zepp and our wholly-owned subsidiaries and our VIEs as of the dates and for the periods indicated:

	Revenues(1)						Total assets(1)
	For the Year Ended December 31,						As of December 31,
	2018		2019		2020		2019		2020
Zepp and its wholly-owned subsidiaries	0.2	%	0.2	%	2.1	%	17.0	%	27.7	%
VIEs	99.8	%	99.8	%	97.9	%	83.0	%	72.3	%
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, 2020 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.

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F.           Tabular Disclosure of Contractual Obligations

The following table sets forth our contractual obligations as of December 31, 2020:

	Payment due by December 31,
	Total	2021	2022 - 2023	2024 - 2026	After 2026
	(in thousands of RMB)
Lease commitments(1)(2)	182,877	50,398	98,266	34,213	—

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	45	Chairman of the Board of Directors and Chief Executive Officer
De Liu	47	Director
Yunfen Lu	55	Director
Xiaojun Zhang	49	Director
Jimmy Lai	64	Independent Director
Hongjiang Zhang	60	Independent Director
Bing Xie	53	Independent Director
Leon Cheng Deng	38	Chief Financial Officer
Mike Yan Yeung	50	Chief Operating Officer
Hui Wang	43	Vice President of Corporate Strategy and General Manager of Beijing Operations
Pengtao Yu	39	Chief Industrial Designer

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Mr. Wang Huang is our founder and has served as the chairman of our board of directors and our chief executive officer since our inception. Mr. Huang is a serial entrepreneur with significant experience and expertise in the technology and Internet sectors in China. Mr. Huang founded Anhui Huami in December 2013 to develop, manufacture and sell smart wearable devices. Prior to that, Mr. Huang founded Hefei Huaheng Electronic Technology Co., Ltd., a company focused on the development of tablets and tablet-based mobile apps and provision of e-magazine network services, and led the team that rolled out China’s first tablet. In 2002, Mr. Huang founded Hefei Huakai Yuanheng Information Technology Co., Ltd., a company focused on the development of embedded Linux software and hardware. In addition, Mr. Huang has served as the director, the executive director or the general manager at several other technology companies in Hefei. Mr. Huang previously was a research and development engineer at Huawei Technologies Co. Ltd., a leading global information and communications technology solutions provider, where he played an instrumental role in the development of high-speed switching and routing equipment. Mr. Huang has received many honors in the business world as well. To name a few, he was awarded “Anhui Economic Person of the Year 2015,” “ Leading Talents of Strategic Emerging Industry Technology in Anhui” and “Hefei Youth Entrepreneurship.” Mr. Huang received his bachelor’s degree in applied physics from the University of Science and Technology of China in 1997. Mr. Huang is appointed as a director to our board by HHtech Holdings Limited, Haiyu Holding Limited, Fandler Holding Limited, Forest Mountain Holding Limited, Wenshui Holding Limited and Shu Hill Holdings, which we collectively refer to as the Co-Founder Entities in this annual report. Pursuant to the Memorandum and Articles, the Co-Founders Entities will be entitled to appoint three directors so long as they continue to beneficially own no less than 60% of the shares they beneficially owned as of January 12, 2018.

Mr. 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.

Ms. Yunfen Lu has served as our director since April 2015. Ms. Lu also serves as the director of Anhui Huami, Beijing Huami, Hong Kong Zepp Holding Limited, Shenzhen Yunding Information Technology Co., Ltd. and Jiangsu Yitong High-tech Co., Ltd., (Shenzhen: 300211). Ms. Lu served as the financial controller of Hefei Huaheng Electronic Technology Co., Ltd. From November 2002 to March 2009, Ms. Lu worked at Hefei Huakai Yuanheng Information Technology Co., Ltd, where she was responsible for overseeing financial accounting, procurement, administrative affairs and manufacturing management. Ms. Lu received her secondary vocational degree in accounting from Shanghai Lixin Vocational School of Accounting (now Shanghai Lixin University of Accounting and Finance) in 1986. Ms. Lu is appointed as a director to our board by the Co-Founder Entities. Pursuant to the Memorandum and Articles, the Co-Founders Entities will be entitled to appoint three directors so long as they continue to beneficially own no less than 60% of the shares they beneficially owned as of January 12, 2018.

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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. 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. In addition to this role, Mr. Lai also serves as chief financial officer of a biotechnology company, Acepodia, Inc., since March 2021. Mr. Lai has served as the chief financial officer of China Online Education Group, 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. He also serves as an independent non-executive director of BabyTree Group, a Hong Kong listed company, and an independent director of Digital China Ltd. listed in Shenzhen Stock Exchange in China, and is currently the non-executive chairman of AAC Technologies Holdings Inc. listed in Hong Kong. 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 addition, during his service to Kingsoft, he also served as a director at various public companies listed in the United States, including Cheetah Mobile Inc., Xunlei Limited and 21 Vianet Group, Inc., all listed in the United States. Prior to joining Kingsoft, Dr. Zhang was the chief technology officer for Microsoft Asia-Pacific Research and Development Group from January 2006 to October 2011, the managing director of the Microsoft Advanced Technology Center from January 2004 to October 2011, and the assistant managing director of Microsoft Research Asia from April 1999 to December 2003. 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.

Mr. Bing Xie has served as our director since November 2020. Prior to that, Mr. Xie was senior vice president and executive officer of Texas Instrument from 2013 to 2020, leading the worldwide sales and applications teams. Mr. Xie started his career at Hewlett-Packard, and later joined Bay Networks and 3Com. He has lived and worked in China, Italy, America and Canada. Mr. Xie holds a bachelor of science degree in electronics engineering from Xidian University, and an MBA from Clemson University.

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Mr. Leon Cheng Deng has served as our chief financial officer since October 2020. Mr. Deng has extensive experience in accounting, financial management, manufacturing, and international business with Royal Philips. He was the head of finance in Philips’ business group of domestic appliances from July 2019 to October 2020 and the head of finance in the business group of personal care from September 2018 to July 2019. Prior to that, Mr. Deng was the head of corporate finance and financial risks in Philips’ treasury group. Mr. Deng also played a critical leadership role in the divestiture of Philips’ TV and Audio divisions, the Philips Lighting separation, and a series of acquisitions in the past. Mr. Deng holds a CPA certificate in Australia, and a Chartered Global Management Accountant certification from CIMA. He earned a Bachelor of Finance degree from Shanghai International Studies University, and a Master of International Finance degree from the University of Amsterdam.

Mr. Mike Yan 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 corporate strategy 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.

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.

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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, 2020, we paid an aggregate of approximately RMB24.4 million (US$3.7 million) in cash to our executive officers and RMB1.1 million (US$0.2 million) to our non-executive directors. We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our directors and executive officers. Our PRC subsidiaries and VIEs are required by law to make contributions equal to certain percentages of each employee’s salary for his or her pension insurance, medical insurance, unemployment insurance and other statutory benefits and a housing provident fund.

2015 Share Incentive Plan

In October 2015, our shareholders and board of directors approved the 2015 Share Incentive Plan, which we refer to as the 2015 Plan in this annual report, to attract and retain the best available personnel, provide additional incentives to employees, directors and consultants, and promote the success of our business. The 2015 Plan consists of a share incentive plan for U.S. service providers and a share incentive plan for PRC service providers. The maximum aggregate number of Class A ordinary shares that may be issued pursuant to all awards under the 2015 Plan is 14,328,358 Class A ordinary shares. As of March 31, 2021, awards to purchase 13,735,051 Class A ordinary shares have been granted and are outstanding under the 2015 Plan, excluding awards that were forfeited or cancelled after the relevant grant dates. Grantees of our share incentive awards under the 2015 Plan resident in China were not permitted to exercise their options prior to the completion of our initial public offering.

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

Types of Awards. 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.

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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 16,729,312 as of January 1, 2021. As of March 31, 2021, awards to purchase 12,919,520 Class A ordinary shares under the 2018 Plan have been granted and outstanding, excluding awards that were forfeited or cancelled after the relevant grant dates.

The following paragraphs describe the principal terms of the 2018 Plan.

Types of Awards. The 2018 Plan permits the awards of options, restricted shares, restricted share units, or any other type of awards that the committee decides.

Plan Administration. Our board of directors or a committee of one or more members of the board of directors will administer the 2018 Plan. The committee or the full board of directors, as applicable, will determine the participants to receive awards, the type and number of awards to be granted to each participant, and the terms and conditions of each award grant.

Award Agreement. Awards granted under the 2018 Plan are evidenced by an award agreement that sets forth terms, conditions and limitations for each award, which may include the term of the award, the provisions applicable in the event of the grantee’s employment or service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.

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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, 2021, 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:

	Ordinary Shares Underlying
	Options and	Exercise Price
Name	Restricted Shares	(US$/Share)	Date of Grant	Date of Expiration
Mike Yan Yeung	*(1)	—	October 21, 2015	—
	*	0.79	October 21, 2015	February 1, 2019
	*(1)	—	August 18, 2020	—
Leon Cheng Deng	*	—	August 31, 2020	August 31, 2030
Hui Wang	*	—	October 21, 2015	October 20, 2025
	*	—	August 18, 2020	August 18, 2030
Pengtao Yu	*(1)	—	October 21, 2015	—
	*(1)	—	August 18, 2020	—
Yunfen Lu	*	—	August 18, 2020	August 18, 2030
Xiaojun Zhng	*	—	August 18, 2020	August 18, 2030
Total	9,474,700

Notes:

* Less than one percent of our total outstanding shares.

(1)         Restricted shares

As of March 31, 2021, other employees as a group held outstanding options to purchase 9,435,873 Class A ordinary shares of our company, at a weighted average exercise price of US$0.25 per share, 2,076,217 restricted shares, and 3,240,201 restricted share units.

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C.           Board Practices

Our board of directors consists of seven directors. A director is not required to hold any shares in our company to qualify to serve as a director. A director may vote with respect to any contract, proposed contract or arrangement in which he is materially interested provided (a) such director, if his interest in such contract or arrangement is material, has declared the nature of his interest at the earliest meeting of the board at which it is practicable for him to do so, either specifically or by way of a general notice, (b) such director has not been disqualified by the chairman of the relevant board meeting, and (c) if such contract or arrangement is a transaction with a related party, such transaction has been approved by the audit committee in accordance with the rules of the New York Stock Exchange. The directors may exercise all the powers of the company to borrow money, mortgage its undertaking, property and uncalled capital, and issue debentures or other securities whenever money is borrowed or as security for any obligation of the company or of any third party. None of our non-executive directors has a service contract with us that provides for benefits upon termination of service.

Committees of the Board of Directors

We have established three committees under the board of directors: an audit committee, a compensation committee and a nominating and corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are described below.

Audit Committee. Our audit committee consists of Mr. Jimmy Lai, Dr. Hongjiang Zhang and Mr. Bing Xie. Mr. Lai is the chairman of our audit committee. We have determined that Mr. Jimmy Lai, Dr. Hongjiang Zhang, and Mr. Bing Xie satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange and Rule 10A-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, Dr. Hongjiang Zhang and Mr. Bing Xie. Dr. Zhang is the chairman of our compensation committee. We have determined that Mr. Jimmy Lai, Dr. Hongjiang Zhang, and Mr. Bing Xie satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The compensation committee assists the board in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The compensation committee is responsible for, among other things:

● reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other executive officers;

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● 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, Dr. Hongjiang Zhang and Mr. Bing Xie. Mr. Huang is the chairperson of our nominating and corporate governance committee. Mr. Jimmy Lai, Dr. Hongjiang Zhang, and Mr. Bing Xie satisfy the “independence” requirements of Section 303A of the Corporate Governance Rules of the New York Stock Exchange. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for, among other things:

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

● 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

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● 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 694, 1,132 and 1,507 employees as of December 31, 2018, 2019 and 2020, respectively. The following table sets forth the numbers of our employees categorized by function as of December 31, 2020:

	As of
	December 31,
	2020
Function:
Research and development	887
Selling and marketing	339
Administrative	183
Supply chain management	98
Total	1,507

As of December 31, 2020, we had 511 employees in Shenzhen, 414 employees in Hefei, 344 employees in Beijing, 130 employees in Nanjing, 19 employees in other cities in mainland China, 42 employees in Vancouver, 19 employees in Cupertino, 7 employees in Irvine, 13 employees in cities in Europe and 8 employees in cities in Asia.

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 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.

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E.           Share Ownership

The following table sets forth information with respect to the beneficial ownership of our ordinary shares as of March 31, 2021 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 134,606,068 Class A ordinary shares and 117,208,247 Class B ordinary shares outstanding as of March 31, 2021, 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.

	Ordinary Shares
	Beneficially Owned
						Percentage
				Percentage		of
	Class A	Class B	Total	of total		aggregate
	ordinary	ordinary	ordinary	ordinary		voting
	shares	shares	shares	shares		power†
Directors and Executive Officers:**
Wang Huang(1)	—	81,347,127	81,347,127	32.3	%	62.3	%
De Liu	—	—	—	—		—
Yunfen Lu(2)	*	3,450,746	3,450,746	1.4	%	2.6	%
Xiaojun Zhang(3)	*	2,107,463	2,107,463	*		1.6	%
Jimmy Lai(4)	*	—	*	*		*
Hongjiang Zhang(5)	—	—	—	—		—
Bing Xie	—	—	—	—		—
Leon Cheng Deng	—	—	—	—		—
Mike Yan Yeung	*	—	*	*		*
Hui Wang(6)	*	—	*	*		*
Pengtao Yu(7)	*	—	*	*		*
All Directors and Executive Officers as a Group	4,998,724	81,347,127	86,345,851	33.7	%	62.4	%
Principal Shareholders:
HHtech Holdings Limited(8)	—	81,347,127	81,347,127	32.3	%	62.3	%
Wells Fargo & Company(9)	24,530,284	—	24,530,284	9.7	%	1.9	%
People Better Limited(10)	—	35,861,112	35,861,112	14.2	%	27.4	%
Shunwei High Tech Limited(11)	16,598,560	—	16,598,560	6.6	%	1.3	%

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.

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*     Less than 1% of our total outstanding ordinary shares and aggregate voting power.

**   Each of Mr. Wang Huang, Yunfen Lu, Xiaojun Zhang, Leon Cheng Deng, Mike Yan Yeung and Hui Wang’s business address is Huami Global Innovation Center, Building B2, Zhong’an Chuanggu Technology Park, No. 900 Wangjiang West Road Road, Hefei, 230088, People’s Republic of China. Pengtao Yu’s business address is 10050 North Wolfe Road, Cupertino, California 95104. Mr. De Liu’s business address is Keliyuan Building, No.72 Anningzhuang East Road, Haidian District, Beijing, 100085, People’s Republic of China. Mr. Jimmy Lai’s business address is 4521 Turnberry Ct, Plano, Texas, 75024, USA. Dr. Hongjiang Zhang’s business address is 627 Jurong West St 65, #14-380, Singapore 640627. Bing Xie’s business address is 10005 Meadowbrook Drive, Dallas, Texas, U.S. 75229.

(1) Represents 65,836,680 Class B ordinary shares held by HHtech Holdings Limited, a British Virgin Islands company, and 15,510,447 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 at Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, 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. Yunfen 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 at Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.

(3) Represents (i) the share options Mr. Xiaojun Zhang has the right to exercise within 60 days after February 28, 2021, and (ii) 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 at Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, 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. Hui Wang has the right to acquire upon exercise of option within 60 days after the date of this annual report.

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

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(8) Based on the information provided 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 65,836,680 Class B ordinary shares are held by HHtech Holdings Limited, and 15,510,447 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 at Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.

(9) Based on information provided by Wells Fargo & Company, a Delaware corporation, 24,530,284 Class A ordinary shares are held by Wells Fargo & Company on its own behalf and on behalf its subsidiaries Wells Capital Management Incorporated and Wells Fargo Funds Management, LLC.

(10) 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. The registered address of People Better Limited is at 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.

(11) Based on the statement on Schedule 13G/A filed on February 9, 2021 jointly by (i) Shunwei High Tech Limited, (ii) Shunwei China Internet Fund II, L.P., (iii) Shunwei Capital Partners II GP, L.P., (iv) Shunwei Capital Partners II GP Limited and (v) Mr. Koh Tuck Lye, pursuant to which 16,598,560 Class A 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, which is controlled by Mr. Koh Tuck Lye.

To our knowledge, as of March 31, 2021, 141,557,820 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.

As of the date of this annual report, none of our ordinary shares are held by governmental entities of our place of incorporation, and no government entity in the place where our registered public accounting firm is located and organized has a controlling financial interest in our company.

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.”

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Shareholders Agreement

We entered into our shareholders agreement on April 29, 2015 with our shareholders, which consist of holders of ordinary shares and preferred shares.

The shareholders agreement provides for certain special rights, including right of first refusal, co-sale rights, preemptive rights and contains provisions governing the board of directors and other corporate governance matters. Those special rights, as well as the corporate governance provisions, automatically terminated upon the completion of our initial public offering.

We have also granted certain registration rights to our shareholders. Set forth below is a description of the registration rights granted under the shareholders agreement.

Demand Registration Rights. At any time after the earlier of (i) April 29, 2020 or (ii) one year following the taking effect of a registration statement for a qualified initial public offering, holders of at least 50% of the registrable securities (including preferred shares and ordinary shares issued on conversion of preferred shares) then outstanding have the right to demand that we file a registration statement covering at least 20% (or any lesser percentage if the anticipated gross proceeds to us from such proposed offering would exceed US$5 million) of the registrable securities. We have the right to defer filing of a registration statement for a period of not more than 90 days after the receipt of the request of the initiating holders if we furnish to the holders requesting registration a certificate signed by our president or chief executive officer stating that in the good faith judgment of our board of directors, it would be materially detrimental to us and our shareholders for such registration statement to be filed at such time. However, we cannot exercise the deferral right more than once in any twelve-month period. We are obligated to effect no more than two demand registrations, other than demand registration to be effected pursuant to registration statement on Form F-3, for which an unlimited number of demand registrations shall be permitted.

Piggyback Registration Rights. If we propose to file a registration statement for a public offering of our securities, we must offer our shareholders an opportunity to include in the registration all or any part of the registrable securities held by such holders. If the managing underwriters of any underwritten offering determine in good faith that marketing factors require a limitation of the number of shares to be underwritten, and the number of shares that may be included in the registration and the underwriting shall be allocated first to us, second to each of the holders requesting for the inclusion of their registrable securities on a pro rata basis, and third to holders of other securities of us.

Form F-3 Registration 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.”

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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, 2021, Xiaomi held 14.2% 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. In October 2020, we extended the strategic cooperation agreement with Xiaomi for three years, which will end in October 2023. The renewed agreement deepened our cooperation with Xiaomi by expanding our most-preferred-partnership with each other on development and sales of products customized for Xiaomi, including smart band, smart watch and smart scale as well as in the field of chip development and algorithms regarding smart wearable technology.

Strategic Cooperation Agreement

Under our strategic cooperation agreement with a subsidiary of Xiaomi, (i) we are Xiaomi’s most preferred partner for Xiaomi-branded smart bands, smart watches (excluding children watches and quartz watches) and smart scales products, and (ii) if any other smart band, smart watch or smart scale is sold on any sales platform or channel operated by Xiaomi (including its official website, Mi.com, offline retail stores and online mobile apps), Xiaomi is required to provide better or equally prominent displays for our products.

This extended strategic cooperation agreement will expire in October 2023, 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 above certain threasholds or 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.

With respect to intellectual properties, we and Xiaomi will have joint ownership over 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.

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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, 2020, we recorded RMB4,449.8 million (US$682.0 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, 2020, the amount due from Xiaomi and its affiliates was RMB833.2 million (US$127.7 million).

In the year ended December 31, 2019, we recorded RMB4,281.0 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.

In the year ended December 31, 2018, we recorded RMB2,816.7 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. 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.

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. In 2019, we evaluated the loan extended to Hangzhou Yunyou Technology Co. Ltd. and concluded that it would not be collected. We recognized an impairment loss of RMB5.6 million therefrom. In addition, we also extended loans to Hangzhou Aqi Vision Technology Co., Ltd. and Xi’an Haidao information Technology Co., Ltd., but we wrote off all the outstanding balance of the loans made to them 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 RMB308 thousand from it for the year ended December 31, 2018. In 2019, we purchased certain intangible assets from it, which amounted to RMB11.3 million.

In 2020, we sold 26.7% equity interest in Shenzhen Yunding Information Technology Co., Ltd. for a cash consideration of RMB22.5 million to Gongqingcheng Yunding Ruiheng Investment L.P., of which RMB20.0 million had been received in January 2021.

In 2020, we made a prepayment of RMB12.0 million to purchase a building of Hefei Yizhi Electronic Technology Co., Ltd., a company controlled by Mr. Wang Huang.

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.

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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.”

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. Our ADSs traded under the symbol “HMI” from February 8, 2018 to February 24, 2021. Our ADSs started trading under the new symbol, “ZEPP” in February 25, 2021.

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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 Act (As Revised), insofar as they relate to the material terms of our ordinary shares. Neither our certificate of incorporation nor our memorandum and articles of association contains any charter of the Chinese Communist party or any text thereof.

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 Act. 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.

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Voting Rights. On a show of hands, each shareholder is entitled to one vote, or on a poll, each shareholder is entitled to one vote for each Class A ordinary share and ten votes for each Class B ordinary share, voting together as a single class, on all matters that require a shareholder’s vote. Voting at any shareholders’ meeting is by show of hands unless a poll is demanded. A poll may be demanded by the chairman of such meeting or any shareholder which is present in person or by proxy at the meeting.

An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attaching to the ordinary shares cast at a meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes cast attaching to the outstanding ordinary shares at a meeting. A special resolution will be required for important matters such as a change of name or making changes to our Memorandum and Articles. Holders of the ordinary shares may, among other things, divide or combine their shares by ordinary resolution.

General Meetings of Shareholders. As a Cayman Islands exempted company, we are not obliged by the Companies Act 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 Act 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;

● 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.

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If our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer was lodged, send to each of the transferor and the transferee notice of such refusal.

The registration of transfers may, after compliance with any notice required of the New York Stock Exchange, be suspended and the register closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the registration of transfers shall not be suspended nor the register closed for more than 30 days in any year as our board may determine.

Liquidation. On the winding up of our company, if the assets available for distribution amongst our shareholders shall be more than sufficient to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholders in proportion to the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect of which there are monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders in proportion to the par value of the shares held by them.

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 Act, 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 Act 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

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● 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.”

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 Act. The Companies Act 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).

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Differences in Corporate Law

The Companies Act is derived, to a large extent, from the older Companies Acts of England but does not follow recent English statutory enactments and accordingly there are significant differences between the Companies Act and the current Companies Act of England. In addition, the Companies Act differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of certain significant differences between the provisions of the Companies Act applicable to us and the laws applicable to companies incorporated in the United States and their shareholders.

Mergers and Similar Arrangements. The Companies Act permits mergers and consolidations between Cayman Islands companies and between Cayman Islands companies and non-Cayman Islands companies. For these purposes, (i) “merger” means the merging of two or more constituent companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company, and (ii) a “consolidation” means the combination of two or more constituent companies into a consolidated company and the vesting of the undertaking, property and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of the shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s articles of association. The plan must be filed with the Registrar of Companies of the Cayman Islands together with a declaration as to the solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of the certificate of merger or consolidation will be given to the members and creditors of each constituent company and that notification of the merger or consolidation will be published in the Cayman Islands Gazette. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.

A merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders of that Cayman subsidiary if a copy of the plan of merger is given to every member of that Cayman subsidiary to be merged unless that member agrees otherwise. For this purpose a company is a “parent” of a subsidiary if it holds issued shares that together represent at least ninety percent (90%) of the votes at a general meeting of the subsidiary.

The consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.

Save in certain limited circumstances, a shareholder of a Cayman constituent company who dissents from the merger or consolidation is entitled to payment of the fair value of his shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) upon dissenting to the merger or consolidation, provide the dissenting shareholder complies strictly with the procedures set out in the Companies Act. The exercise of dissenter rights will preclude the exercise by the dissenting shareholder of any other rights to which he or she might otherwise be entitled by virtue of holding shares, save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.

Separate from the statutory provisions relating to mergers and consolidations, the Companies Act also contains statutory provisions that facilitate the reconstruction and amalgamation of companies by way of schemes of arrangement, provided that the arrangement is approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder has the right to express to the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:

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

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● 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 Act.

The Companies Act also contains a statutory power of compulsory acquisition which may facilitate the “squeeze out” of dissentient minority shareholder upon a tender offer. When a tender offer is made and accepted by holders of 90% of the shares affected within four months, the offeror may, within a two-month period commencing on the expiration of such four-month period, require the holders of the remaining shares to transfer such shares to the offeror on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.

If an arrangement and reconstruction by way of scheme of arrangement is thus approved and sanctioned, or if a tender offer is made and accepted, in accordance with the foregoing statutory procedures, a dissenting shareholder would have no rights comparable to appraisal rights, save that objectors to a takeover offer may apply to the Grand Court of the Cayman Islands for various orders that the Grand Court of the Cayman Islands has a broad discretion to make, which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for the judicially determined value of the shares.

Shareholders’ Suits. In principle, we will normally be the proper plaintiff to sue for a wrong done to us as a company, and as a general rule a derivative action may not be brought by a minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, the Cayman Islands court can be expected to follow and apply the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) so that a non-controlling shareholder may be permitted to commence a class action against or derivative actions in the name of the company to challenge actions where:

● 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.

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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.

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.

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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 Zepp Health Corporation is not a PRC resident enterprise for PRC tax purposes. Zepp Health Corporation is not controlled by a PRC enterprise or PRC enterprise group and we do not believe that Zepp Health Corporation meets all of the conditions above. Zepp Health Corporation is a company incorporated outside the PRC. As a holding company, its key assets are its ownership interests in its subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders) are maintained, outside the PRC. For the same reasons, we believe our other entities outside of China are not PRC resident enterprises either. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.” There can be no assurance that the PRC government will ultimately take a view that is consistent with us.

If the PRC tax authorities determine that Zepp Health Corporation is a PRC resident enterprise for enterprise income tax purposes, we may be required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of our ADSs. In addition, non-resident enterprise shareholders (including our ADS holders) may be subject to a 10% PRC tax on gains realized on the sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within the PRC. It is unclear whether our non-PRC individual shareholders (including our ADS holders) would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. It is also unclear whether non-PRC shareholders of Zepp Health Corporation would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that Zepp Health 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.

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Accordingly, our subsidiary Hong Kong Zepp Holding Limited may be able to enjoy the 5% tax rate for the dividends it receives from its PRC incorporated subsidiaries if they satisfy the conditions prescribed under SAT Circular 81 and other relevant tax rules and regulations and obtain the approvals as required. However, according to SAT Circular 81, if the relevant tax authorities determine our transactions or arrangements are for the primary purpose of enjoying a favorable tax treatment, the relevant tax authorities may adjust the favorable tax rate on dividends in the future.

Provided that our Cayman Islands holding company, Zepp Health Corporation, is not deemed to be a PRC resident enterprise, holders of our ADSs and ordinary shares who are not PRC residents will not be subject to PRC income tax on dividends distributed by us or gains realized from the sale or other disposition of our shares or ADSs. SAT Public Notice 7 further clarifies that, if a non-resident enterprise derives income by acquiring and selling shares in an offshore listed enterprise in the public market, such income will not be subject to PRC tax. However, there is uncertainty as to the application of SAT Public Notice 37 and SAT Public Notice 7, we and our non-PRC resident investors may be at risk of being required to file a return and being taxed under SAT Public Notice 37 and SAT Public Notice 7 and we may be required to expend valuable resources to comply with SAT Public Notice 37 and SAT Public Notice 7 or to establish that we should not be taxed under SAT Public Notice 37 and SAT Public Notice 7. See “Item 3. Key Information—D. Risk Factors—Risks Related to Doing Business in China—We face uncertainty with respect to indirect transfers of equity interests in PRC resident enterprises by their non-PRC holding companies.”

United States Federal Income Tax Considerations

The following discussion is a summary of U.S. federal income tax considerations generally applicable to the ownership and disposition of our ADSs or Class A ordinary shares by a U.S. Holder (as defined below) that acquires our ADSs and holds our ADSs as “capital assets” (generally, property held for investment) under the U.S. Internal Revenue Code of 1986, as amended, or the Code. This discussion is based upon existing U.S. federal tax law, which is subject to differing interpretations or change, possibly with retroactive effect. There can be no assurance that the Internal Revenue Service, or the IRS, or a court will not take a contrary position. This discussion, moreover, does not address the U.S. federal estate, gift, Medicare, and alternative minimum tax considerations, or any state, local and non-U.S. tax considerations, relating to the ownership or disposition of our ADSs or Class A ordinary shares. The following summary does not address all aspects of U.S. federal income taxation that may be important to particular investors in light of their individual circumstances or to persons in special tax situations such as:

● banks and other financial institutions;

● insurance companies;

● pension plans;

● cooperatives;

● regulated investment companies;

● real estate investment trusts;

● broker-dealers;

● traders in securities that elect to use a mark-to-market method of accounting;

● certain former U.S. citizens or long-term residents;

● tax-exempt entities (including private foundations);

● persons liable for alternative minimum tax;

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● holders who acquire their ADSs or Class A ordinary shares pursuant to any employee share option or otherwise as compensation;

● investors that will hold their ADSs or Class A ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated transaction for U.S. federal income tax purposes;

● investors that have a functional currency other than the U.S. dollar;

● persons that actually or constructively own 10% or more of our stock by vote or value; or

● 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.

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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 that we were a PFIC for the taxable year ended December 31, 2020 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 future, no assurance can be given in this regard because the determination of whether we are or will 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.”

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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.

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.

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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.

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.

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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.

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 4.5% for December 2019 and 4.7% for December 2020. 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.

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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.

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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;

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● such fees and expenses as are incurred by the depositary in connection with compliance with exchange control regulations and other regulatory requirements applicable to ordinary shares, deposited securities, ADSs and ADRs;

● the fees and expenses incurred by the depositary in connection with the delivery of deposited securities, including any fees of a central depository for securities in the local market, where applicable; and

● any additional fees, charges, costs or expenses that may be incurred by the depositary or a division or affiliate(s) of the depositary from time to time.

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, 2020, we received reimbursement of US$136,211 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

By the end of 2019, we had applied all the net proceeds from our initial public offering and the registered follow-on offering of our ADSs in April 2019.

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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, 2020, 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, 2020 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, 2020.

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

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.

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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.zepp.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,
	2019	2020
	(in thousands of RMB)
Audit fees(1)	8,400	7,923
Tax fees(2)	300	450

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 ADS offering in April 2019.

(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.

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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 Zepp Health 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 (incorporated herein by reference to Exhibit 2.5 to the registration statement on Form 20-F filed with the Securities and Exchange Commission April 23, 2020 (File No. 001-38369))
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))

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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))
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 (incorporated herein by reference to Exhibit 4.5 to the registration statement on Form 20-F filed with the Securities and Exchange Commission April 23, 2020 (File No. 001-38369))
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 (incorporated herein by reference to Exhibit 4.6 to the registration statement on Form 20-F filed with the Securities and Exchange Commission April 23, 2020 (File No. 001-38369))
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 (incorporated herein by reference to Exhibit 4.7 to the registration statement on Form 20-F filed with the Securities and Exchange Commission April 23, 2020 (File No. 001-38369))
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 (incorporated herein by reference to Exhibit 4.8 to the registration statement on Form 20-F filed with the Securities and Exchange Commission April 23, 2020 (File No. 001-38369))
4.9	English translation of the second amended and restated Exclusive Consultation and Services Agreement among our WFOE, Anhui Huami dated March 20, 2020 (incorporated herein by reference to Exhibit 4.9 to the registration statement on Form 20-F filed with the Securities and Exchange Commission April 23, 2020 (File No. 001-38369))
4.10	English translation of the second amended and restated Exclusive Consultation and Services Agreement among our WFOE, Beijing Huami dated March 20, 2020 (incorporated herein by reference to Exhibit 4.10 to the registration statement on Form 20-F filed with the Securities and Exchange Commission April 23, 2020 (File No. 001-38369))
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 (incorporated herein by reference to Exhibit 4.11 to the registration statement on Form 20-F filed with the Securities and Exchange Commission April 23, 2020 (File No. 001-38369))
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 (incorporated herein by reference to Exhibit 4.12 to the registration statement on Form 20-F filed with the Securities and Exchange Commission April 23, 2020 (File No. 001-38369))
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))

135

4.18*(1)	English translation of Product-related Strategic Cooperation Agreement between Xiaomi Communications Co., Ltd. and Anhui Huami Information Technology Co., Ltd. dated October 19, 2020
4.19*	English translation of Share Transfer Agreement in Respect of Shares in Jiangsu Yitong High-tech Co., Ltd. between Wang Zhenhong and Anhui Shunyuan Xinke Management Consulting Partnership (LP) dated January 5, 2021
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
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
104*	Cover Page Interactive Data File (embedded within the Inline XBRL document)

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

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

(1) Portions of this exhibit have been omitted in reliance of the revised Item 601 of Regulation S-K. The registrant hereby undertakes to furnish copies of any of the omitted portions upon request by the Securities and Exchange Commission.

136

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

	Zepp Health Corporation
	By:	/s/ Wang Huang
	Name:	Wang Huang
	Title:	Chairman of the Board of Directors and Chief Executive Officer
Date: April 19, 2021

137

ZEPP HEALTH 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, 2019 AND 2020	F-3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020	F-5
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020	F-6
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020	F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2018, 2019 AND 2020	F-8
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS	F-9
ADDITIONAL INFORMATION-FINANCIAL STATEMENT SCHEDULE I	F-51

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the shareholders and the Board of Directors of Zepp Health Corporation

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Zepp Health Corporation (formerly, Huami Corporation) and its subsidiaries (the “Company”) as of December 31, 2020 and 2019, 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, 2020, and the related notes and the financial statement schedule (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, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

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 19, 2021

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

F-2

ZEPP HEALTH 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
	2019	2020	2020
	RMB	RMB	US$
			(Note2)
Assets
Current assets:
Cash and cash equivalents	1,803,117	2,273,349	348,406
Restricted cash	874	2,401	368
Term deposit	—	5,000	766
Accounts receivable (net of allowance of nil and nil as of December 31, 2019 and 2020, respectively)	188,940	298,038	45,676
Amounts due from related parties (net of allowance of nil and nil as of December 31, 2019 and 2020, respectively)	1,421,170	860,213	131,833
Inventories, net	893,806	1,217,537	186,596
Short-term investments	17,187	18,430	2,825
Prepaid expenses and other current assets	67,358	152,898	23,433
Total current assets	4,392,452	4,827,866	739,903
Property, plant and equipment, net	64,350	124,619	19,099
Intangible assets, net	85,753	145,213	22,255
Long-term investments	406,099	443,986	68,044
Deferred tax assets	102,649	120,190	18,420
Operating lease right-of-use assets	108,682	151,165	23,167
Goodwill	5,930	62,515	9,581
Other non-current assets	8,828	28,165	4,316
Total assets	5,174,743	5,903,719	904,785
Liabilities
Current liabilities:
Accounts payable (including accounts payable of the consolidated VIEs without recourse to the Group of RMB1,996,010 and RMB1,945,731 as of December 31, 2019 and 2020, respectively)	1,999,951	1,951,335	299,055
Advance from customers (including advance from customers of the consolidated VIEs without recourse to the Group of RMB44,380 and RMB41,312 as of December 31, 2019 and 2020, respectively)	44,793	42,502	6,514
Amount due to related parties (including amount due to related parties of the consolidated VIEs without recourse to the Group of RMB14,769 and RMB892 as of December 31, 2019 and 2020, respectively)	14,769	11,185	1,714
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Group of RMB236,708 and RMB175,747 as of December 31, 2019 and 2020, respectively)	352,249	252,275	38,663
Income tax payables of the consolidated VIEs without recourse to the Group	67,854	27,706	4,246
Notes payable of the consolidated VIEs without recourse to the Group	2,184	—	—
Short-term bank borrowings of the consolidated VIEs without recourse to the Group	—	504,671	77,344
Total current liabilities	2,481,800	2,789,674	427,536
Deferred tax liabilities (including deferred tax liabilities of the consolidated VIEs without recourse to the Group of RMB5,399 and RMB17,171 as of December 31, 2019 and 2020, respectively)	5,399	22,374	3,429
Other non-current liabilities (including other non-current liabilities of the consolidated VIEs without recourse to the Group of RMB113,596 and RMB183,920 as of December 31, 2019 and 2020, respectively)	113,596	185,168	28,378
Long-term borrowing of the consolidated VIEs without recourse to the Group	—	60,000	9,195
Noncurrent operating lease liabilities (including Noncurrent operating lease liabilities of the consolidated VIEs without recourse to the Group of RMB64,300 and RMB48,650 as of December 31, 2019 and 2020, respectively)	76,360	116,245	17,815
Total liabilities	2,677,155	3,173,461	486,353

F-3

ZEPP HEALTH 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
	2019	2020	2020
	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, 2019 and 2020; 91,459,708 and 128,736,916 shares issued and outstanding as of December 31, 2019 and 2020, respectively)	57	81	12
Class B Ordinary shares (US$0.0001 par value; 200,000,000 and 200,000,000 shares authorized as of December 31, 2019 and 2020; 156,060,279 and 121,408,247 shares issued and outstanding as of December 31, 2019 and 2020, respectively)	98	76	12
Additional paid-in capital	1,478,902	1,552,109	237,871
Accumulated retained earnings	910,612	1,133,368	173,696
Accumulated other comprehensive income	111,081	44,624	6,841
Total Zepp Health Corporation shareholders’ equity	2,500,750	2,730,258	418,432
Noncontrolling interest	(3,162)	—	—
Total equity	2,497,588	2,730,258	418,432
Total liabilities and equity	5,174,743	5,903,719	904,785

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

F-4

ZEPP HEALTH 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,
	2018	2019	2020	2020
	RMB	RMB	RMB	US$
				(Note2)
Revenues (including RMB2,816,995, RMB4,281,005 and RMB4,449,757 with related parties for the years ended December 31, 2018, 2019 and 2020, respectively)	3,645,335	5,812,255	6,433,363	985,956
Cost of revenues (including RMB2,141,123, RMB3,342,084 and RMB3,713,536 with related parties for the years ended December 31, 2018, 2019 and 2020, respectively)	2,705,885	4,344,512	5,100,698	781,716
Gross profit	939,450	1,467,743	1,332,665	204,240
Operating expenses
Selling and marketing	96,538	181,975	358,655	54,966
General and administrative	213,973	248,462	261,805	40,123
Research and development	263,220	430,822	538,009	82,453
Total operating expenses	573,731	861,259	1,158,469	177,542
Operating income	365,719	606,484	174,196	26,698
Other income and expenses
Interest income	11,595	33,478	46,118	7,068
Realized gain from investments	261	1,822	—	—
Gain from deconsolidation of a subsidiary	—	—	56,522	8,663
Gain from fair value change of long-term investments	7,860	—	12,325	1,888
Impairment loss from long-term investments	(7,590)	(2,600)	—	—
Other income (expense), net	8,768	13,186	(23,552)	(3,610)
Income before income tax and income/(loss) from equity method investments	386,613	652,370	265,609	40,707
Provision for income taxes	(52,036)	(77,887)	(31,154)	(4,775)
Income before income/(loss) from equity method investments	334,577	574,483	234,455	35,932
Income/(loss) from equity method investments	1,743	(1,112)	(4,749)	(728)
Net income	336,320	573,371	229,706	35,204
Less: Net (loss) income attributable to noncontrolling interest	(3,726)	(1,825)	953	146
Net income attributable to Zepp Health Corporation	340,046	575,196	228,753	35,058
Less: Accretion of Series A Preferred Shares	177	—	—	—
Less: Accretion of Series B-1 Preferred Shares	368	—	—	—
Less: Accretion of Series B-2 Preferred Shares	4,049	—	—	—
Less: Deemed dividend to preferred shareholders	209,752	—	—	—
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares	12,210	2,450	—	—
Net income attributable to ordinary shareholders of Zepp Health Corporation	113,490	572,746	228,753	35,058
Net income per share attributable to ordinary shareholders of Zepp Health Corporation
Basic income per ordinary share	0.54	2.35	0.92	0.14
Diluted income per ordinary share	0.51	2.24	0.88	0.13
Weighted average number of shares used in computing net income per share
Ordinary share - basic	211,873,704	243,648,186	248,470,684	248,470,684
Ordinary share - diluted	225,034,650	255,959,172	260,351,994	260,351,994

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

F-5

ZEPP HEALTH 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,
	2018	2019	2020	2020
	RMB	RMB	RMB	US$
				(Note2)
Net income	336,320	573,371	229,706	35,204
Other comprehensive income/(loss), net of tax
Foreign currency translation adjustment	60,357	11,274	(45,117)	(6,914)
Unrealized gain on available-for-sale investments and others, (net of tax effect of RMB2,250, RMB620 and RMB4,017 for years ended December 31, 2018, 2019 and 2020, respectively)	14,684	2,666	(21,340)	(3,270)
Comprehensive income	411,361	587,311	163,249	25,020
Less: Net (loss) income attributable to noncontrolling interest	(3,726)	(1,825)	953	146
Comprehensive income attributable to Zepp Health Corporation	415,087	589,136	162,296	24,874

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

F-6

ZEPP HEALTH 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)

						Total Huami
				Accumulated		Corporation
	Ordinary Shares		Additional	Other	Accumulated	Shareholders’		Total
	Shareholders’		Paid-in	Comprehensive	Retained	(Deficit)/	Noncontrolling	Shareholders'
	Shares	Amount	Capital	Income	Earnings	Equity	Interest	Equity
		RMB	RMB	RMB	RMB	RMB	RMB	RMB
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
Exercise of option and restricted shares	2,625,176	2	(2)	—	—	—	—	—
Net income	—	—	—	—	228,753	228,753	953	229,706
Foreign currency translation adjustment	—	—	—	(45,117)	—	(45,117)	—	(45,117)
Share-based compensation	—	—	67,212	—	—	67,212	—	67,212
Unrealized loss on available-for-sale investments, net of tax effect of RMB4,017	—	—	—	(21,340)	—	(21,340)	—	(21,340)
Statutory reserve	—	—	5,997	—	(5,997)	—	—	—
Deconsolidation of a subsidiary	—	—	—	—	—	—	2,209	2,209
Balance as of December 31, 2020	250,145,163	157	1,552,109	44,624	1,133,368	2,730,258	—	2,730,258

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

F-7

ZEPP HEALTH 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,
	2018	2019	2020	2020
	RMB	RMB	RMB	US$
				(Note2)
Cash Flows from Operating Activities
Net income	336,320	573,371	229,706	35,204
Adjustment to reconcile net income to net cash provided by operating activities:
Non-cash lease expense	—	27,683	48,191	7,386
Depreciation and amortization	6,216	17,215	27,129	4,158
Provision and write off for excess and obsolete inventories	—	23,799	64,223	9,843
Share-based compensation	134,709	55,128	65,154	9,985
Share of results of equity method investment	(1,743)	1,112	4,749	728
Loss on disposal of property, plant and equipment	26	767	7,406	1,135
Gain from fair value change of long-term investments	(7,860)	—	(12,325)	(1,888)
Deferred income taxes	(32,895)	(27,800)	(10,442)	(1,600)
Gain from deconsolidation of a subsidiary	—	—	(56,522)	(8,663)
Write-off of short-term loans	5,500	5,640	—	—
Impairment loss from long-term investments	7,590	2,600	—	—
Realized gain from investments	(261)	(1,822)	—	—
Others	295	—	—	—
Changes in operating assets and liabilities
Accounts receivable	(26,058)	(130,015)	(131,215)	(20,110)
Inventories	(234,887)	(432,983)	(410,691)	(62,941)
Prepaid expenses and other current assets	(5,748)	(32,444)	(79,957)	(12,257)
Amount due from related parties	(45,116)	(770,976)	583,457	89,419
Other non-current assets	(3,150)	(2,678)	(33,049)	(5,065)
Amount due to related parties	5,757	4,074	(3,584)	(549)
Accounts payable	356,324	935,845	(9,761)	(1,496)
Notes payable	13,693	(16,752)	(2,184)	(335)
Advance from customers	(4,740)	38,850	(2,189)	(335)
Income tax payable	32,437	13,817	(40,148)	(6,153)
Accrued expense and other current liabilities	119,887	86,221	(149,385)	(22,894)
Other non-current liability	51,309	57,347	68,739	10,535
Net Cash provided by Operating Activities	707,605	427,999	157,302	24,107
Cash Flows from Investing Activities
Purchase of property, plant and equipment	(17,136)	(34,276)	(83,554)	(12,805)
Purchase of intangible assets	(52,017)	(11,845)	(1,220)	(187)
Purchase of term deposits	(385,028)	—	(212,065)	(32,500)
Proceeds from maturity of term deposits	288,771	96,969	207,065	31,734
Loans provided to related parties	(5,000)	—	—	—
Loans provided to third-parties	(8,920)	—	(480)	(74)
Proceeds received from loan repayment	5,578	6,772	—	—
Purchase of short-term investments	(41,300)	—	—	—
Purchase of long-term investments	(109,854)	(180,927)	(82,221)	(12,600)
Disposal of long-term investments	—	10,461	—	—
Acquisition of businesses and assets, net of cash acquired of RMB7,497	—	—	(26,713)	(4,094)
Deconsolidation of a subsidiary	—	—	(7,701)	(1,180)
Other investing activities	65	143	9	1
Net Cash Used in Investing Activities	(324,841)	(112,703)	(206,880)	(31,705)
Cash Flows from Financing Activities
Loans repaid to related party	(3,221)	—	—	—
Exercise of share options and restricted shares	3,486	933	—	—
Bank borrowings	20,000	—	1,207,793	185,102
Repayment of bank borrowing	(30,000)	(20,000)	(643,122)	(98,563)
Net proceeds from initial public offering	657,062	—	—	—
Repurchase of ordinary shares	(8,157)	—	—	—
Net proceeds from the secondary offering	—	49,214	—	—
Deemed dividend to shareholders	—	(4,538)	—	—
Net Cash Provided by Financing Activities	639,170	25,609	564,671	86,539
Net increase in cash and cash equivalents and restricted cash	1,021,934	340,905	515,093	78,941
Effect of exchange rate changes	60,357	11,274	(43,334)	(6,641)
Cash and cash equivalents and restricted cash at beginning of year	369,521	1,451,812	1,803,991	276,474
Cash and cash equivalents and restricted cash at end of the year	1,451,812	1,803,991	2,275,750	348,774
Supplemental disclosure of cash flow information
Income tax paid	52,063	91,732	82,406	12,629
Interest paid	1,310	286	14,858	2,277
Non-cash investing and financing activity
Payable for long-term investment	275	—	—	—
Payable for Intangible asset	—	16	1,641	251
Receivable from the disposal of a subsidiary	—	—	22,500	3,448
Conversion from convertible bond to equity interest investment	—	15,800	8,393	1,286
Disposal of previous equity interest in exchange for acquisition	—	—	87,716	13,443
Forgiveness of loan related to acquisition	—	—	13,711	2,101
Non-monetary exchange of convertible bond to intangible assets	7,104	8,019	—	—
Non-monetary transaction of exchanging loan for Intangible assets	—	9,957	—	—
Payable for property, plant and equipment	15	351	173	27
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

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

1. ORGANAZATION AND PRINCIPAL ACTIVITIES

Zepp Health Corporation (the “Company”), formerly known as Huami Corporation, 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”), Anhui Huami's subsidiaries and Beijing Huami's subsidiaries, are collectively referred to as the “Group”.

The Group primarily engages in the business of developing, manufacturing and selling smart, wearable technological devices in the People’s Republic of China (“PRC”). During the years ended December 31, 2018, 2019 and 2020, the Group derived 66.9%, 72.2% and 69.0% 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, 2020, details of the Company’s major subsidiaries and major VIEs were as follows:

		Date of	Percentage
	Place of incorporation	incorporation/acquisition	of ownership
Major subsidiaries of the Company:
Hong Kong Zepp Holding Limited (“Zepp HK”)	Hong Kong (“HK”)	December 23, 2014	100%
ZEPP, INC. (“Zepp Inc”)	United States of America (“U.S.”)	January 15, 2015	100%
Beijing ShunYuan KaiHua Technology Co., Ltd. (“Shun Yuan”)	PRC	February 25, 2015	100%
Huami (Shenzhen) Information Technology Co., Ltd.	PRC	December 7, 2015	100%
Anhui Huami Intelligent Technology Co., Ltd. (“Huami Intelligent”)	PRC	December 28, 2015	100%
Huami North America Inc. ("HNA")	U.S.	June 16, 2016	100%
Galaxy Trading Platform Limited ("Galaxy")	HK	May 8, 2019	100%
Zepp Europe Holding B.V.	Netherlands	June 11, 2020	100%
Variable interest entities of the Company:
Anhui Huami	PRC	December 27, 2013	Consolidated VIE
Beijing Huami	PRC	July 11, 2014	Consolidated VIE
Major subsidiaries of Anhui Huami:
Anhui Huami Healthcare Co., Ltd.	PRC	December 5, 2016	VIE’s subsidiary

The VIE arrangements

The Company conducts substantially all of its smart, wearable and technological devices business in the PRC through contractual arrangements with its VIEs, Anhui Huami and 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

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

VIE Arrangements between the VIEs and the Company’s PRC subsidiary

The Company, through Shun Yuan, a wholly-owned subsidiary of the Company in the PRC (the “WFOE”) has entered into the following contractual arrangements with Anhui Huami, Beijing Huami and their shareholders that enable the Company to (1) have power to direct the activities that most significantly affects the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, the Company is considered the primary beneficiary of the VIEs and has consolidated the VIEs’ financial results of operations, assets and liabilities in the Company’s consolidated financial statements. In making the conclusion that the Company is the primary beneficiary of the VIEs, the Company believes the Company’s rights under the terms of the purchase option agreement provide it with a substantive kick-out right. More specifically, the Company believes the terms of the purchase option agreement are valid, binding and enforceable under PRC laws and regulations currently in effect. The Company also believes that the consideration which is the minimum amount permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for the Company to currently exercise its rights under the purchase option agreement.

A simple majority vote of the Company’s board of directors is required to pass a resolution to exercise the Company’s rights under the purchase option agreement, for which Mr. Wang Huang’s, the chief executive officer (“CEO”) 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.

F-10

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

Equity pledge agreement - continued

On March 20, 2020, due to the change of the nominee shareholders in the VIEs, the Group updated the registration of its equity pledge for Anhui Huami and Beijing Huami. The equity pledge agreement for Anhui Huami and Beijing Huami was amended and restated with the same terms as before.

Exclusive purchase option agreement

Pursuant to the exclusive purchase option agreements entered into on April 29, 2015 and amended on November 3, 2017 among Shun Yuan, Anhui Huami, Beijing Huami and their shareholders, the shareholders of Anhui Huami and Beijing Huami are obligated to sell 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.

F-11

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

Risks in relation to VIE structure

The Company believes that the contractual arrangements with its VIEs and their respective shareholders are in compliance with PRC laws and regulations and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce the contractual arrangements. If the legal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:

● revoke the business and operating licenses of the Company’s PRC subsidiaries and VIEs;

● discontinue or restrict the operations of any related-party transactions between the Company’s PRC subsidiaries and VIEs;

● limit the Group’s business expansion in China by way of entering into contractual arrangements;

● impose fines or other requirements with which the Company’s PRC subsidiaries and VIEs may not be able to comply;

● impose additional conditions or requirements with which the Group may not be able to comply;

● take other regulatory or enforcement actions against the Group that could be harmful to the Group’s business or

● require the Company or the Company’s PRC subsidiaries or VIEs to restructure the relevant ownership structure or operations.

The Company’s ability to conduct its business may be negatively affected if the PRC government were to carry out any of the aforementioned actions. As a result, the Company may not be able to consolidate its VIEs in its consolidated financial statements as it may lose the ability to exert effective control over the VIEs and their respective shareholders and it may lose the ability to receive economic benefits from the VIEs. The Company, however, does not believe such actions would result in the liquidation or dissolution of the Company, its PRC subsidiaries or VIEs.

The VIE agreements were amended on November 3, 2017 and March 20, 2020 with no significant differences.

Mr. Huang is the largest shareholder of Anhui Huami and Beijing Huami, and Mr. Huang is also the largest beneficiary owner of the Company. The interests of Mr. Huang as the largest beneficiary owner of the VIEs may differ from the interests of the Company as a whole, since Mr. Huang is only one of the beneficiary shareholders of the Company, holding 27.8% of the total common shares as of December 31, 2020. The Company cannot assert that when conflicts of interest arise, Mr. Huang will act in the best interests of the Company or that conflicts of interests will be resolved in the Company’s favor. Currently, the Company does not have existing arrangements to address potential conflicts of interest Mr. Huang may encounter in his capacity as a beneficial owner and director of the VIEs, on the one hand, and as a beneficial owner and director of the Company, on the other hand. The Company believes Mr. Huang will not act contrary to any of the contractual arrangements and the exclusive option agreement provides the Company with a mechanism to remove Mr. Huang as a beneficiary shareholder of the VIEs should he act to the detriment of the Company. The Company relies on Mr. Huang, as a director and executive officer of the Company, to fulfill his fiduciary duties and abide by laws of the PRC and Cayman Islands and act in the best interest of the Company. If the Company cannot resolve any conflicts of interest or disputes between the Company and Mr. Huang, the Company would have to rely on legal proceedings, which could result in disruption of its business, and there is substantial uncertainty as to the outcome of any such legal proceedings.

F-12

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

1.ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

Risks in relation to VIE structure - continued

In addition, most of the current shareholders of Anhui Huami and Beijing Huami are also beneficial owners of the Company and therefore have no current interest in seeking to act contrary to the contractual arrangements. However, to further protect the investors’ interest from any risk that the shareholders of Anhui Huami and Beijing Huami may act contrary to the contractual arrangements, the Company, through Shun Yuan, entered into an irrevocable power of attorney with all of the shareholders of Anhui Huami and Beijing Huami on April 29, 2015 and November 3, 2017. Through the power of attorney, all shareholders of Anhui Huami and Beijing Huami have entrusted the person designated by Shun Yuan as its proxy to exercise their rights as the shareholders of Anhui Huami and Beijing Huami with respect to an aggregate of 100% of the equity interests in Anhui Huami and Beijing Huami.

The following financial statement 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,
	2019	2020
	RMB	RMB
Total current assets	3,828,544	3,675,394
Total non-current assets	466,774	593,603
Total assets	4,295,318	4,268,997
Total current liabilities	2,361,906	2,696,059
Total non-current liabilities	183,295	309,741
Total liabilities	2,545,201	3,005,800

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Revenues	3,638,560	5,801,405	6,297,534
Net income	643,239	987,672	751,803

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Net cash provided by operating activities	712,210	478,806	165,512
Net cash used in investing activities	(72,862)	(126,887)	(728,797)
Net cash provided by/(used in) financing activities	(13,221)	(20,000)	564,671

The intercompany payable between Anhui Huami and Shunyuan were RMB43,971 and RMB153,190 as of December 31, 2019 and 2020, 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.

F-13

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Reclassifications

Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current year’s presentation. These reclassifications had no impact on net income, shareholders’ equity, or cash flows as previously reported.

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Group’s consolidated financial statements include allowance for doubtful accounts, inventory valuation, the useful lives of long-lived assets, impairment of long-lived assets, impairment of goodwill, incremental borrowing rate for leases, product warranties, fair value measurement of long-term available-for-sale investments and long-term investments of non-marketable equity securities with fair value change through profit or loss, share-based compensation, the valuation allowance for deferred tax assets and income tax. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.

Fair value

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:

Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

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, 2019 and 2020.

F-14

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Measured fair value on a nonrecurring basis

The Group measured acquired intangible assets using the income approach-discounted cash flow method when events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. The fair values were determined using models with significant unobservable inputs (Level 3 inputs). The Group did not recognize any impairment loss related to acquired intangible assets arising from acquisitions during the years ended December 31, 2018, 2019 and 2020.

The Group measured the fair value of the intangible assets acquired through non-monetary exchange at fair value. The fair values were 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 19% was used for the fair value measurement of intangible assets during 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 the reporting unit is determined using discounted cash flows. The Group did not recognize any impairment loss related to goodwill during the years ended December 31, 2018, 2019 and 2020.

For equity investments without readily determinable fair values for which the Company elected to use the measurement alternative, the equity investment is measured at fair value on a nonrecurring basis when there is an orderly transaction for identical or similar investments of the same issuer.

Fair value of financial instruments

The Group'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 long-term bank borrowing. 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. The carrying amounts of long-term borrowing approximates its fair value as the interest rates are based on the prevailing interest rates in the market.

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.

F-15

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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 require the Group to make a deposit for 40% or 60% of the face value of the bank acceptance notes issued as collateral. Restricted cash also consists of cash pledged for bank loan facility. The deposits for unsettled bank acceptance notes and cash pledged for bank loan facility are recorded as restricted cash in the consolidated balance sheet as of December 31, 2019 and 2020.

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. Beginning on January 1, 2020, the Group evaluates its accounts receivable for expected credit losses on a regular basis. The Group maintains an estimated allowance for credit losses to reduce its accounts receivable to the amount that it believes will be collected. The Group uses the creditworthiness of customers, aging of the receivables, past transaction history with customers and their current condition, changes in customer payment terms, specific facts and circumstances, and the overall economic climate in the industries the Group serves to monitor the Group's receivables within the scope of expected credit losses model and use these as a basis to develop the Group's expected loss estimates. As of December 31, 2019 and 2020, 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.

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. The Group recorded RMB2,335, RMB(848), and RMB1,243 unrealized gains/(losses) in accumulated other comprehensive income on its available-for-sale investments during the years ended December 31, 2018, 2019 and 2020, respectively.

F-16

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

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, an insurance brokerage license, trademark and patents.

The domain name and insurance brokerage license are recognized as an intangible asset with indefinite life and evaluated for impairment at least annually or if events or changes in circumstances indicate that the asset might be impaired. Such impairment test compares the fair values of the asset with its carrying value amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair value. The estimates of values of the intangible asset not subject to amortization are determined using discounted cash flow valuation approach. Significant assumptions are inherent in this process, including estimates of discount rates and cash flow.

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 5 to10 years.

Leases

The Group leases administrative office spaces in different cities in the PRC, and in the United States and Canada under operating leases. The Group determines whether an arrangement constitutes a lease and records lease liabilities and right-of-use assets on its consolidated balance sheets at the lease commencement. The Group measures its lease liabilities based on the present value of the total lease payments not yet paid discounted based on its incremental borrowing rate, which is the estimated rate the Group would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. The Group estimates its incremental borrowing rate based on an analysis of publicly traded debt securities of companies with credit and financial profiles similar to its own. The Group measures right-of-use assets based on the corresponding lease liability adjusted for payments made to the lessor at or before the commencement date, and 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-17

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Leases - continued

For short-term leases with lease term less than one year, 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, determination of the Group's weighted average cost of capital and consideration of the impact of COVID-19. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.

Prior to January 1, 2020 the Group performed a two-step goodwill impairment test. The first step compared the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeded its carrying amount, goodwill was not considered impaired and the second step was not be required. If the carrying amount of a reporting unit exceeded its fair value, the second step compared the implied fair value of the affected reporting unit's goodwill to the carrying value of that goodwill. An impairment loss was recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

The Group adopted ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) on January 1, 2020, and used the one-step method for the goodwill impairment assessment for the year ended December 31, 2020. The guidance removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment is now the amount by which a reporting unit's carrying value exceeds its fair value, not the difference between the implied fair value and carrying amount of goodwill which was the step 2 test before.

During the years ended December 31, 2018, 2019 and 2020, 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

F-18

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Long-term investments - continued

The Group accounts for equity investments that do not have a readily determinable fair value under the measurement alternative prescribed within Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to the extent such investments are not subject to consolidation or the equity method. Under the measurement alternative, these financial instruments are carried at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

The Group reviews its equity securities without readily determinable fair value for impairment at each reporting period by considering factors including, but not limited to, current economic and market conditions and the impact of COVID-19, the operating performance of the companies including current earning trends and other company specific information.

(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, the determination of the weighted average cost of capital and the consideration of COVID-19 impact. The Group recorded RMB4,133, RMB218 and nil impairment losses on its equity method investments during the years ended December 31, 2018, 2019 and 2020.

(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 recorded RMB12,349, RMB3,514, and RMB(22,583) unrealized gains/(losses) in accumulated other comprehensive income on its available-for-sale investments during the years ended December 31, 2018, 2019 and 2020, respectively.

F-19

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Long-term investments - continued

The Group evaluates each individual investment periodically for impairment. For investments where the Group does not intend to sell, the Company evaluates whether a decline in fair value is due to deterioration in credit risk. Credit-related impairment losses, not to exceed the amount that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses on the consolidated balance sheet with corresponding adjustment in the consolidated statements of operations and comprehensive income. Subsequent increases in fair value due to credit improvement are recognized through reversal of the credit loss and corresponding reduction in the allowance for credit loss. Any decline in fair value that is non-credit related is recorded in accumulated other comprehensive income as a component of shareholder's equity. As of December 31, 2020, there were no investments held by the Group that had been in continuous unrealized loss position.

Notes payable

The Group endorses bank acceptance notes (“Notes”) to suppliers in the PRC in the normal course of business. The Group may endorse these Notes with its suppliers to clear its accounts payable. When the Notes are endorsed by the Group, the Group is jointly liable with other endorsers in the Notes. Notes that have been presented to banks or endorsed with suppliers are derecognized from the consolidated balance sheets when the Notes are settled with banks or when the obligations as endorser are discharged.

Revenue recognition

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 years ended December 31, 2018, 2019 and 2020, the Group generated 66.9%, 72.2% and 69.0% of revenue from one customer for sales of exclusively designed and manufactured smart wearable devices, and generated 33.1%, 27.8% and 31.0% 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.

F-20

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Revenue recognition - continued

The Group 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 behaviors 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, RMB1.72 to RMB10.62 per unit and RMB1.83 to RMB8.40 per unit for the years ended December 31, 2018, 2019 and 2020, respectively. 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 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 years ended December 31, 2018, 2019 and 2020, the Group generated 33.1%, 27.8% and 31.0% 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, 2018, 2019 and 2020, the Group generated 66.9%, 72.2% and 69.0% 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 21). Under the cooperation agreement with this customer, the Group produces and assembles final product for shipments of wearable devices to that customer, who are then responsible for commercial distribution and sale of the product. The arrangement includes 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.

F-21

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Revenue recognition - continued

Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimate of variable consideration which result from the Group’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

The Group periodically provides sales incentives to its customers for self-branded products, including reduced sales prices and volume-based discounts. Volume discounts are negotiated on a contract-by-contract basis with customers and the discount will increase depending upon the volume purchased over the period. The sales incentives are discounts to be applied to future sales to the customer which cannot be exchanged for cash. To the extent that the volume discount or sales incentive represents a material right or options to acquire additional goods or services at a discount in the future period, the material right is recognized as a separate performance obligation at the outset of the arrangement based on the most likely amount of incentive to be provided to the customer. Amounts allocated to a material right are recognized as revenue when those future goods are sold to the customers.

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.

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, 2018, 2019 and 2020, sales returns were insignificant.

F-22

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Cost of revenues

Cost of revenues consists primarily of material costs, salaries and benefits for staff engaged in production activities and related expenses 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 expenses are expensed as incurred and included in selling and marketing expenses. Total advertising expenses were RMB25,362, RMB72,269 and RMB136,974 for the years ended December 31, 2018, 2019 and 2020, respectively.

Government subsidies

Government subsidies represent government grants received from local government authorities to encourage the Group’s technology and innovations and also other subsidies for production.

The Group records such government subsidies as other income or reduction of expenses or cost of revenue when it has fulfilled all of its obligation related to the subsidy.

During the years ended December 31, 2018, 2019 and 2020, the Group recognized RMB9,679, RMB14,723 and RMB13,461 as subsidy income and recognized nil, nil, and RMB10,408 as reduction of expenses or cost of revenue, respectively. As of December 31, 2019 and 2020, subsidies of RMB26,098 and RMB26,158 were recorded as other current liabilities, RMB113,596 and RMB183,920 were recorded as other non-current liabilities as the Group has to meet certain performance conditions required by the government authorities.

F-23

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Income taxes

Current 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. The Group elects to recognize forfeitures when they occur.

Comprehensive income

Comprehensive income consists of two components, net income and other comprehensive income, net of tax. Other comprehensive income refers to revenue, expenses, and gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income. The Group’s other comprehensive income consists of foreign currency translation adjustments from its subsidiaries not using the RMB as their functional currency and the fair value change of available-for-sale investments of the Group. Comprehensive income is reported in the consolidated statements of comprehensive income.

Foreign currencies

The functional currency of the Company outside of the PRC is the US$. The 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.

F-24

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Foreign currencies - continued

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, 2018, 2019 and 2020, the transaction (losses) /gains amounted to RMB(7,588), RMB(14,231) and RMB27,451 and were recorded in general and administrative expenses.

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 RMB717,576 and RMB609,679 as of December 31, 2019 and 2020, 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, 2020 is solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.5250, representing the rate as certified by the statistical release of the Federal Reserve Board of United States on December 31, 2020. 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, 2020, 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.

F-25

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Concentration of credit risk

Financial instruments that potentially expose the Group to concentrations of credit risk consist primarily of cash and cash equivalents, term deposits, accounts receivable. The Group places its cash and cash equivalents with financial institutions with high credit ratings and quality.

The Group conducts credit evaluations of third-party customers and related parties, and generally does not require collateral or other security from its third-party customers and related parties. The Group establishes an allowance for doubtful accounts primarily based upon the age of the receivables and factors surrounding the credit risk of specific third-party customers and related parties.

Accounts receivable concentration of credit risk is as below:

	As of December 31,
	2019	2020
	RMB	RMB
Company A	13,495 (7.1)%	26,005 (8.7)%
Company B	50,567 (26.8)%	59,987 (20.1)%
Company C	80,024 (42.4)%	108,422 (36.4)%
Total	144,086 (76.3)%	194,414 (65.2)%

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

	As of December 31,
	2019	2020
	RMB	RMB
Company D	1,401,015 (98.6)%	830,871 (96.6)%
Total	1,401,015 (98.6)%	830,871 (96.6)%

Revenue generated from Company D accounted for 76.8%, 73.5% and 69.1% of total revenue during the years ended December 31, 2018, 2019 and 2020, respectively. Company D is subsidiary of a company controlled by one of the Group’s shareholders (see note 21).

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Company D	2,798,824(76.8)%	4,271,135(73.5)%	4,447,957(69.1)%
Total	2,798,824(76.8)%	4,271,135(73.5)%	4,447,957(69.1)%

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, 2019, 13.5% and 10.5% of its raw materials were purchased through Company E and F, respectively, and for the year ended December 31, 2020, 15.1% of its raw materials were purchased through Company E, but numerous alternate sources of supply are readily available on comparable terms.

F-26

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Newly adopted accounting pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 changes how entities assess and measure credit losses of certain financial instruments, including available-for-sale securities and accounts receivable. The Group adopted the new standard beginning January 1, 2020 using the modified retrospective transition approach. The adoption of the standard did not have a material impact on the Group's Consolidated Financial Statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangible – Goodwill and Other (Topic 350): Simplify the Test for Goodwill Impairment (“ASU 2017-04”) which simplifies the accounting for goodwill impairment. ASU 2017-04 removes “step two” of the goodwill impairment test, such that a goodwill impairment charge is now the amount by which a reporting unit's carrying value exceeds its fair value. ASU 2017-04 is applied prospectively and was effective for fiscal years, or any goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption was permitted for any impairment tests performed after January 1, 2017. The Company adopted ASU 2017-04 beginning January 1, 2020. The adoption did not 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 Group adopted ASU 2018-13 in the year ended December 31,2020 and the adoption did not have a material impact on the Group’s consolidated financial statements.

Recent accounting pronouncements not yet adopted

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The adoption of this standard is not expected to have a material impact on the Group's consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) (“ASU 2020-01”), which clarifies the interactions of the accounting for certain equity securities under ASC 321, investments accounted for under the equity method of accounting in ASC 323, and the accounting for certain forward contracts and purchased options accounted for under ASC 815. ASU 2020-01 could change how an entity accounts for (i) an equity security under the measurement alternative and (ii) a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with ASC 825. These amendments improve current U.S. GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2020. Early adoption is permitted. The Group is currently in the process of evaluating the impact of adopting ASU 2020-01 on its consolidated financial statements and related disclosure.

F-27

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

3. ACQUISITIONS

Business acquisition of PAI Health Inc. (“PAI”)

On June 12, 2020, the Group acquired 100% equity interest in PAI from Global Technology and Innovation Ltd (“GTI”) to expand the business of health-related software and algorithms development. The purchase consideration included a previously held 40.49% equity interest held in GTI which was previously accounted as an equity method investment by the Group for which the fair value approximated RMB87,716, cash of RMB1,370 and RMB13,711 of loan deemed effectively settled as a result of the acquisition. The fair value of previously held equity interest held in GTI was estimated by the Group with the assistance of an independent valuation appraiser by applying the income approach, market multiple approach and recent investment price approach.

The acquisition was recorded using the acquisition method of accounting. Accordingly, the acquired assets and liabilities assumed were recorded at their fair value at the date of acquisition. The purchase price allocation described below was determined by the Group with the assistance of an independent valuation appraiser. The acquired net assets were recorded at their estimated fair values on the acquisition date. The acquired goodwill is not deductible for tax purposes.

PAI constituted less than 1% of revenue and total assets of the consolidated financial statement as of and during the year ended December 31, 2020 and the results of operations attributable to PAI and pro forma results of operations for PAI have not been presented because they are not material to the consolidated statements of operations and comprehensive income for the years ended December 31, 2019 and 2020.

The purchase price was allocated as of June 12, 2020, the date of acquisition as follows:

	RMB	Amortization period
Cash	5,554
Other current assets	4,704
Property, plant and equipment	149	3 years
Intangible assets
Patents	42,495	5 years
Goodwill	67,856
Other non-current assets	261
Other current liabilities	(8,868)
Deferred tax liabilities	(6,374)
Other non-current liabilities	(2,980)
Total	102,797

The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under US GAAP, and comprise of (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of synergy effect from the acquisition.

Asset acquisition of Guoxu Insurance Brokerage Co., Ltd. (“Guoxu”)

In July, 2020, the Group entered into purchase agreements with shareholders of Guoxu to acquire 100% of Guoxu's equity ownership for a gross consideration of RMB67,914, of which RMB35,075 was related to the effective settlement of the selling shareholder's loan payable to Guoxu upon closing. This resulted in a net cash consideration of RMB32,839.

Guoxu holds an insurance brokerage license. As of the acquisition day, the Group terminated all the labor relationship with the employees of Guoxu and did not buy any material contracts. The Group evaluated the acquisition of the purchased assets under ASC 805-Business Combination (ASC 805), and concluded that as substantially all of the fair value of the gross assets acquired is concentrated in the insurance brokerage license, the transaction did not meet the requirements to be accounted for as a business combination and therefore was accounted for as an asset acquisition.

F-28

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

4. DISPOSAL OF SUBSIDIARIES

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

In December 2020, the Group sold 26.7% equity interest in Yunding to its founder for cash consideration of RMB22,500. The consideration also included a loan receivable from Yunding amounting to RMB24,514 to be repaid annually over three years for which the Group has a right to convert the unpaid balance into equity interest of Yunding after December 31, 2023. Yunding was previously part of the Group's self-branded products and others segment. Subsequent to this disposal, the Group remeasured its remaining 24.3% investment in Yunding at fair value and accounted for it as equity method investment because the Group retained the ability to exercise significant influence. The fair value of its remaining investment in Yunding was estimated by using recent financing transaction of Yunding. The Group recognized RMB56,522 gain from deconsolidation of a subsidiary which was recorded as part of gain from deconsolidation of a subsidiary in the consolidated statements of operations for the year ended December 31, 2020. The disposal of Yunding did not represent a strategic shift and did not have a major effect on the Group's operation.

5. INVENTORIES, NET

Inventories consisted of the following:

	As of December 31,
	2019	2020
	RMB	RMB
Raw materials	275,583	373,690
Work in process	176,417	233,274
Finished goods	441,806	610,573
Inventories, net	893,806	1,217,537

During the years ended December 31, 2018, 2019 and 2020, the Group recorded a provision for the excess and obsolete inventories amounting to nil, RMB23,799 and RMB4,371 and wrote off nil, RMB17,739 and RMB59,852 respectively.

6. SHORT-TERM INVESTMENTS

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

	As of December 31,
	2019	2020
	RMB	RMB
Convertible bonds:
Guangzhou Joyrun Technology Co., Ltd (“Joyrun”) (a)	11,591	12,433
Other (b)	5,596	5,997
Total:	17,187	18,430

(a)   In September 2018, the Group invested RMB10,500 to acquire a convertible bond issued by Joyrun with an 8% interest rate . The investment was classified as an available-for-sale investment and measured at fair value. The Group recognized RMB840 and RMB842 unrealized holding gains in other comprehensive income from the fair value changes in the investment during the years ended December 31, 2019 and 2020.

(b)  The other represents insignificant short-term investment in convertible bond which was classified as available-for-sales investment and measured at fair value. The Group recognized RMB400 and RMB401 unrealized gains from this investment in 2019 and 2020.

F-29

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

	As of December 31,
	2019	2020
	RMB	RMB
Value-added tax	43,595	100,686
Other receivables	10,252	21,060
Prepaid expenses	9,595	25,863
Advances to suppliers	2,129	874
Rental deposits	1,787	4,415
Total	67,358	152,898

8. PROPERTY, PLANT AND EQUIPMENT, NET

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

	As of December 31,
	2019	2020
	RMB	RMB
Software and electronic equipment	36,283	65,288
Buildings	19,342	19,342
Leasehold improvements	26,744	74,209
Total	82,369	158,839
Less: accumulated depreciation	(21,438)	(36,387)
Construction in progress	3,419	2,167
Property, plant and equipment, net	64,350	124,619

The Group has recorded depreciation expenses of RMB5,773, RMB9,409 and RMB14,949 during the years ended December 31, 2018, 2019 and 2020, respectively. No impairment was recorded during the years ended December 31, 2018, 2019 and 2020.

9. INTANGIBLE ASSETS, NET

Intangible assets, net, consisted of the following:

	As of December 31,
	2019	2020
	RMB	RMB
Intangible assets with indefinite lives:
Domain name	2,024	2,024
Insurance brokerage license and others	—	37,382
Intangible assets with finite lives:
Patents	92,165	126,423
Less: accumulated amortization	8,436	20,616
Intangible assets, net	85,753	145,213

Amortization expenses for the intangible assets for the years ended December 31, 2018, 2019 and 2020, were RMB443, RMB7,806 and RMB12,180, respectively. Future amortization expense relating to the existing intangible assets amounted to RMB16,645 per year for each of the next four years, RMB12,180 for the fifth year and RMB8,815 thereafter.

F-30

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

10. LONG-TERM INVESTMENTS

Long-term investments consisted of the following:

	As of December 31,
	2019	2020
	RMB	RMB
Equity securities without readily determinable fair value
Sifive, Inc. ("Sifive") (a)	20,445	22,279
AliveCor, Inc., (“Alivecor”) (b)	—	15,347
Hyperfine Research, Inc. (“Hyperfine”) (c)	—	32,625
Promaxo, Inc.("Promaxo") (d)	—	26,100
Other equity securities without readily determinable fair value (e)	71,133	67,684
Equity method investments:
Hefei Huaying Xingzhi Fund Partnership (limited partnership) (“Huaying Fund I”) (f)	55,557	53,105
Anhui Huaying Zhihui Wulian Fund Parnership(limited partnership)("Huaying Fund II") (g)	102,336	107,633
Global Technology and Innovation Ltd. (“GTI”) (Note 3)	93,289	—
Other equity method investments (h)	14,165	47,562
Available-for-sale investments (i)	49,174	71,651
Total	406,099	443,986

(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 nil and RMB3,304 gain from the fair value change of this investment during the years ended December 31, 2019 and 2020.

(b) In 2019, the Group invested USD1,000 in a convertible bond issued by Alivecor with 3% interest rate. In February 2020, the Group converted the bond to 0.56% equity interest and the equity interest is not considered in-substance common shares due to substantial liquidation rights owned by the Group. Accordingly, the investment in Alivecor was accounted for equity securities without readily determinable fair value. The Group recognized RMB7,728 gain from the fair value change of this investment based on a similar transaction during the year ended December 31, 2020.

(c) In 2020, the Group invested USD5,000 to acquire 2.27% equity interests in Hyperfine. Hyperfine is a private company engaging in the business of Magnetic Resonance (“MR”) technology. The equity interest is not considered in-substance common shares due to substantial liquidation preference rights. Accordingly, the investment in Hyperfine was accounted for as equity securities without readily determinable fair value. For the year ended December31, 2020, no fair value change was observed and recognized.

(d) In 2020, the Group invested USD4,000 to acquire 4.05% equity interests in Promaxo. Promaxo is a private company engaging in the business of MR technology. The equity interest is not considered in-substance common shares due to substantial liquidation preference rights. Accordingly, the investment in Promaxo was accounted for as equity securities without readily determinable fair value. For the year ended December 31, 2020, no fair value change was observed and recognized.

(e) These other investments represent certain insignificant investments in the 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-31

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

10. LONG-TERM INVESTMENTS - CONTINUED

(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. The Group recorded RMB1,823, RMB(1,342), and RMB(2,452) of income/(loss) from equity method investment during the years ended December 31, 2018, 2019 and 2020.

(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. The Group recorded RMB336 and RMB5,297 of income from equity method investment during the years ended December 31, 2019 and 2020.

(h) 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.

(i) Available-for-sale investments represent investments in debt securities and measured at fair value. Those investments mainly include investments in convertible bonds as well as investment with redemption features considered debt instruments.

11. FAIR-VALUE MEASUREMENT

As of December 31, 2019 and 2020, 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, 2019 and 2020 are as follows:

	As of December 31, 2019
	Quoted Prices in
	Active Market for	Significant Other	Significant
	Identical Assets	Observable Inputs	Unobservable
Description	Level 1	Level 2	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

F-32

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

11. FAIR-VALUE MEASUREMENT - CONTINUED

	As of December 31, 2020
	Quoted Prices in
	Active Market for	Significant Other	Significant
	Identical Assets	Observable Inputs	Unobservable
Description	Level 1	Level 2	Inputs Level 3	Total
	RMB	RMB	RMB	RMB
Short-term investments:
Convertible bonds	—	18,430	—	18,430
Long-term investments:
Convertible bonds	—	31,218	—	31,218
Redeemable preferred shares	—	38,499	1,934	40,433
Equity securities without readily determinable fair value	—	37,626	—	37,626
Total:	—	125,773	1,934	127,707

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 or based on the market approach when no recent transactions are available. Recent transactions include the purchase price agreed by an independent third party for an investment with similar terms. These investments are classified as level 2 measurement. When no recent transactions are available, a market approach will be used by the Company to measure fair value. The market approach takes into consideration a number of factors including market multiple and discount rates from traded companies in the industry and requires the Company to make certain assumptions and estimates regarding industry factors. Specifically, some of the significant unobservable inputs included the investee's historical earning, discount of lack of marketability, investee's time to initial public offering as well as related volatility. The Company has classified these as level 3 measurement. The assumptions are inherently uncertain and subjective. Changes in any unobservable inputs may have a significant impact on the fair values.

No transfers occurred between 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, 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 categorized 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, the COVID-19 impact and were categorized as Level 3 in the fair value hierarchy. During the years ended December 31, 2018, 2019 and 2020, the Group recognized an impairment loss of nil, RMB2,382 and nil for the equity securities without readily determinable fair value.

F-33

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

	As of December 31,
	2019	2020
	RMB	RMB
Accrued payroll and welfare	120,256	38,797
Deferred revenue	59,585	51,780
Product warranty	49,527	32,782
Current operating lease liabilities	32,799	48,120
Accrued expenses	17,688	14,979
Government subsidies	26,098	26,158
Other current liabilities	46,296	39,659
Total	352,249	252,275

Product warranty activities were as follows:

Product Warranty
	RMB
Balance as of January 1, 2018	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
Provided during the year	74,742
Utilized during the year	(91,487)
Balance at December 31, 2020	32,782

The warranty costs recorded in cost of revenue were RMB68,866, RMB80,048 and RMB74,742 during the years ended December 31, 2018, 2019 and 2020, respectively.

13. BANK BORROWING

In 2020, the Group borrowed approximately RMB1,207,793 in different currencies from several commercial banks and repaid RMB643,122. These bank loans have one-three years maturity and weighted average interest rate of 2.85%, and will be used for the daily operations of the Group.

F-34

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

14. REVENUE AND DEFERRED REVENUES

Disaggregation of revenue

All the revenues for the period was recognized from contracts with customers. For the years ended December 31, 2018, 2019 and 2020, 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	2020
	RMB	RMB	RMB
Xiaomi Wearable Products	2,439,534	4,193,665	4,438,081
Self-branded products and other	1,205,801	1,618,590	1,995,282
Total	3,645,335	5,812,255	6,433,363

During the years ended December 31, 2018, 2019 and 2020, 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,
	2019	2020
	RMB	RMB
Accounts Receivables	188,940	298,038
Amounts due from related parties	1,421,170	860,213
Deferred revenue	59,585	51,780
Refund liability (sales return)	582	366

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, 2019 and 2020, the amount due from related parties include the billed amount of RMB1,318,483 and RMB779,538, and unbilled amounted to RMB102,687 and RMB80,675, 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 during the years ended December 31, 2018, 2019 and 2020. 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.

F-35

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

14. REVENUE AND DEFERRED REVENUES - CONTINUED

During the years ended December 31, 2018, 2019 and 2020, the Group recognized RMB17,876, RMB41,863 and RMB59,585 of revenue previously included in deferred revenue as of January 1, 2018, December 31, 2018 and 2019, which mainly consist of revenue recognized related to its service subscription. Additionally, during the year ended December 31, 2018, 2019 and 2020, the Group billed RMB33,329, RMB33,279 and RMB102,687 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.

15. 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 Zepp 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 Zepp HK 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 Zepp Inc and HNA are located in the U.S. and are subject to an income tax rate of 21% for taxable income earned as determined in accordance with relevant tax rules and regulations in the U.S.

The Company’s PRC subsidiaries, the VIEs and VIEs’ subsidiaries are subject to the 25% standard enterprise income tax rate except for Anhui Huami and Huami Intelligent that qualify as a high and new technology enterprise (“HNTE”), which are 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, 2018, 2019 and 2020. Huami Intelligent qualify as a HNTE in August 2020 and was subject to a tax rate of 15% during the year ended December 31, 2020.

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

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Current tax expenses	84,931	105,663	42,257
Deferred tax benefits	(32,895)	(27,776)	(11,103)
Income tax expense	52,036	77,887	31,154

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

	As of December 31,
	2019	2020
	RMB	RMB
Deferred tax assets
Accrued expenses	50,644	60,823
Net operating loss carry forwards	53,989	62,945
Total deferred tax assets	104,633	123,768
Less: valuation allowance	(1,984)	(3,578)
Deferred tax assets, net	102,649	120,190

F-36

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

15. INCOME TAXES - CONTINUED

As of December 31, 2020, the Group had RMB276,137 operating losses deriving from entities in the PRC, HK, U.S. and Canada. The operating loss in PRC with amounted to RMB179,614 can be carried forward for five years and if not utilized and some will begin to expire in 2021. 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, 2019 and 2020, the Company recorded RMB1,984 and RMB3,578 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,
	2018	2019	2020
	RMB	RMB	RMB
Income before income tax	386,613	652,370	265,609
Tax expense at PRC enterprise income tax rate of 25%	96,653	163,093	66,402
Income tax on tax holidays	(58,327)	(72,396)	(41,869)
Tax effect of permanence differences	(22,733)	(31,088)	(20,001)
Effect of income tax rate differences in jurisdictions other than the PRC	36,443	16,270	21,625
Change in tax rate	—	—	3,460
Changes in valuation allowances	—	2,008	1,537
Income tax expense	52,036	77,887	31,154

If the tax holiday granted to Anhui Huami and Huami Intelligent was not available for the years ended December 31, 2018, 2019 and 2020, the increase in income tax expenses and the decrease in net income per share amounts would be as follows:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Increase in income tax expenses	58,327	72,396	41,869
Decrease in net income per share - basic	0.28	0.30	0.17
Decrease in net income per share - diluted	0.26	0.28	0.16

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.

F-37

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

15. INCOME TAXES - CONTINUED

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.

Aggregate undistributed earnings of the Company’s PRC subsidiaries and VIEs that are available for distribution amounted to RMB1,559,898 and RMB1,935,920 as of December 31, 2019 and 2020, 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, 2018, 2019 and 2020, 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$15 (RMB0.1 million) is specifically listed as a “special circumstance”). The statute of limitation for transfer pricing related issue is ten years. There is no statute of limitation in the case of tax evasion. Therefore, the Group’s PRC domiciled entities are subject to examination by the PRC tax authorities based on the above.

16. 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.

F-38

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

16. ORDINARY SHARES - CONTINUED

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.

17. SHARE-BASED PAYMENT

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, 2018, 2019 and 2020, the Group granted nil share options to certain personnel under the PRC Plan. The Group has recorded RMB40,449, RMB1,194 and RMB480 share-based compensation expense for the years ended December 31, 2018, 2019 and 2020 related to options in PRC Plan, respectively.

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. 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 years ended December 31, 2018, 2019 and 2020, the Group granted 6,988,469, 651,000 and 4,030,108 share options to certain personnel under the 2018 Plan. The weighted average exercise price of options granted during the years ended December 31, 2018, 2019 and 2020 was US$0.35 per share, US$0 per share and US$0 per share. During the years ended December 31, 2018, 2019 and 2020, the Group has recorded RMB9,523, RMB32,424 and RMB41,836 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, 2018, 2019 and 2020 are summarized in the following table:

	For the years ended December 31,
	2018		2019		2020
Risk-free interest rate	2.04%-2.83	%	2.14	%	0.67%-0.72	%
Expected volatility	36%-52.5	%	50.4	%	51.9%-52.0	%
Expected life of option (years)	1-10		10		10
Expected dividend yield	0.0	%	0.0	%	0.0	%
Fair value per ordinary share	15.03-16.85		12.65		21.60-23.10

F-39

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

17. SHARE-BASED PAYMENT – CONTINUED

2018 Share Incentive Plan - continued

(i) Risk-free interest rate

Risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the contractual term of the options.

(ii) Expected life of option (years)

Expected life of option (years) represents the expected years to vest the options.

(iii) Volatility

The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the contractual term of the options.

(iv) Dividend yield

The dividend yield was estimated by the Group based on its expected dividend policy over the contractual term of the options.

(v) Fair value of underlying ordinary shares

During the year ended December 31, 2018, 2019 and 2020, the fair value of the underlying ordinary shares is determined based on the closing market price of the share.

A summary of the stock option activity under the 2015 and 2018 Plan during the year ended December 31, 2020 is included in the table below.

		Weighted average
	Options granted	exercise price
	Share Number	per option
		US$
Outstanding at January 1, 2020	12,046,236	0.24
Granted	4,030,108	—
Exercised	(1,655,936)	—
Cancelled and forfeited	(139,594)	—
Outstanding at December 31, 2020	14,280,814	0.20

F-40

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

17. SHARE-BASED PAYMENT – CONTINUED

2018 Share Incentive Plan - continued

The following table summarizes information regarding the share options as of December 31, 2020:

	December 31, 2020
			Weighted-
			average remaining
		Weighted-	exercise
		average exercise	contractual	Aggregate
	Options Number	price per option	life (years)	intrinsic value
		US$
Options
Outstanding	14,280,814	0.20	7.45	39,387
Exercisable	7,879,179	0.23	6.45	21,512
Expected to vest	6,401,635	0.17	8.69	17,875

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, 2018, 2019 and 2020 amounted RMB6,858, RMB13,608 and RMB32,010, respectively.

The weighted average grant date fair value of options granted during the year ended December 31, 2018, 2019 and 2020 was RMB15.12, RMB12.65 and RMB22.42 per share, respectively.

During the years ended December 31, 2018, 2019 and 2020, the Group recorded share-based compensation expense of RMB49,972, RMB33,618 and RMB42,316 for the options granted under the 2015 Plan and 2018 Plan.

As of December 31, 2020, there was RMB96,596 of unrecognized compensation expenses related to the options.

Restricted Stock Units

During the years ended December 31, 2018, 2019 and 2020, the Company granted 658,056, 30,000 and 2,216,120 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 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 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 immediately. 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 RMB92,715. The weighted average grant-date fair value of non-vested shares was RMB21.38 for the year ended December 31, 2020. The fair value of the vested restricted stock units was RMB25,592, RMB79 and RMB21,020 during the years ended December 31, 2018, 2019 and 2020.

F-41

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

17. SHARE-BASED PAYMENT – CONTINUED

Restricted Stock Units - continued

During the years ended December 31, 2018, 2019 and 2020, the Group recorded compensation expense of RMB25,434, RMB3,598 and RMB22,838 for the restricted stock units, respectively.

As of December 31, 2020, there was RMB31,415 unrecognized compensation cost related to restricted stock units which is expected to be recognized over a weighted average vesting period of 2.86 years. The weighted average granted fair value of restricted stock units granted during the years ended December 31, 2018, 2019 and 2020 were RMB15.75 per RSU, RMB12.65 per RSU and RMB22.84 per RSU.

A summary of the restricted stock units activity during the year ended December 31, 2020 is presented below:

	RSUs
Unvested balance at January 1, 2020	587,684
Granted	2,216,120
Cancelled and forfeited	—
Vested	986,962
Unvested balance at December 31, 2020	1,816,842

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, 2018, 2019 and 2020 were RMB6,165, RMB2,758 and nil, respectively. The restricted shares have been fully vested in 2019 and no further grant activity in 2020. As of December 31, 2020, there was nil unrecognized compensation cost.

During the years ended December 31, 2018, 2019 and 2020, the Group recorded compensation expense of RMB3,992, RMB118 and nil for the restricted shares, respectively.

F-42

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

17. SHARE-BASED PAYMENT – CONTINUED

Restricted Share owned by the founders

As one of the conditions 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. The founder restricted shares have been fully vested in 2019 and no further grant activity in 2020:

The Group determined that the non-vested restricted shares are participating securities as the holders of the non-vested restricted shares have a non-forfeitable right to receive dividends with all ordinary shares but the non-vested restricted shares do not have a contractual obligation to fund or otherwise absorb the Group's losses. See Note 22 for details.

During the years ended December 31, 2018, 2019 and 2020, the Group recorded share-based compensation expense of RMB55,311, RMB17,794 and nil related to the unvested shares of the Founders respectively.

Total share-based compensation recognized was as follows:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
General and administrative	87,857	40,684	38,605
Research and development	42,167	11,191	23,978
Selling and marketing	4,271	3,198	2,571
Cost of revenues	414	55	—
Total stock-based compensation expense	134,709	55,128	65,154

18. MAINLAND CHINA CONTRIBUTION PLAN

Full time employees of the Group in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Group to accrue for these benefits based on certain percentages of the employees’ salaries. The total provisions for such employee benefits were RMB39,495, RMB63,799 and RMB64,734 during the years ended December 31, 2018, 2019 and 2020.

F-43

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

19. 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, 2018, 2019 and 2020, 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, 2018
	Xiaomi	Self-branded
	Wearable	products
	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	Self-branded
	Wearable	products
	Products	and others	Total
	RMB	RMB	RMB
Revenues	4,193,665	1,618,590	5,812,255
Cost of revenues	3,296,696	1,047,816	4,344,512
Gross Profit	896,969	570,774	1,467,743

	For the year ended December 31, 2020
	Xiaomi	Self-branded
	Wearable	products
	Products	and others	Total
	RMB	RMB	RMB
Revenues	4,438,081	1,995,282	6,433,363
Cost of revenues	3,706,495	1,394,203	5,100,698
Gross Profit	731,586	601,079	1,332,665

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

F-44

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

20. STATUTORY RESERVES AND RESTRICTED NET ASSETS

PRC legal restrictions permit payments of dividends by the Group’s PRC subsidiaries only out of their retained earnings, if any, determined in accordance with PRC regulations. Prior to payment of dividends, pursuant to the laws applicable to the PRC Domestic Enterprises and PRC Foreign Investment Enterprises, the PRC subsidiaries must make appropriations from after-tax profit to non-distributable statutory reserve funds as determined by the Board of Directors of the Group. Subject to certain cumulative limits including until the total amount set aside reaches 50% of its registered capital, the general reserve fund requires annual appropriations of not less than 10% of after-tax profit (as determined under accounting principles and financial regulations applicable to PRC enterprises at each year-end). These reserve funds can only be used for specific purposes and are not distributable as cash dividends. As of December 31, 2015, the 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, 2018. During the year ended December 31, 2019 and 2020, due to the new appropriable profit earned by certain PRC entities in the Group, the Group accrued an additional RMB92 and RMB5,997 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 RMB153,851, RMB153,943 and RMB180,981 as of December 31, 2018, 2019 and 2020, respectively.

21. 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
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 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
Shenzhen Yunding Information Technology Co., Ltd. (“Yunding”)	Significant influence by the Group
Gongqingcheng Yunding Ruiheng Investment Partnership (Limited Partnership). (“Gongqingcheng Yunding”)	Controlled by the founder of a company that the Group can exercise significant influence
Hefei Yizhi Electronic Technology Co., Ltd (“Hefei Yizhi”)	Controlled by one of the Company's shareholders

F-45

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

21. RELATED PARTY BALANCES AND TRANSACTIONS - CONTINUED

(1)Balances:

	As of December 31,
	2019	2020
	RMB	RMB
Amount due from related parties:
Xiaomi Communication (a)	1,401,015	830,871
Yunding (b)	—	2,064
Gongqingcheng Yunding (c)	—	22,500
Youpin Information (a)	9,845	2,278
Xiaomi Information (a)	7,669	—
Others	2,641	2,500
Total	1,421,170	860,213

	As of December 31,
	2019	2020
	RMB	RMB
Amount due to related parties, current:
Xiaomi Technology(d)	(14,186)	(10,293)
Others	(583)	(892)
Total	(14,769)	(11,185)

F-46

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

21. RELATED PARTY BALANCES AND TRANSACTIONS - CONTINUED

(2)Transactions:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Sales to related parties:
Xiaomi Communication	2,798,824	4,271,135	4,447,957
Xiaomi Information	17,859	9,870	—
Others	312	—	1,800
Total	2,816,995	4,281,005	4,449,757

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Others:
Loan provided to related parties (e)	5,143	—	—
Investments disposed to a related party (f)	3,061	—	—
Purchase from related parties (g)	—	12,183	12,000

(a) The amount due from Xiaomi represents receivables from the sales of products and services, which includes an unbilled amount of RMB80,675.

(b) The amount due from Yunding represents prepayment for the purchase of Yunding’ products.

(c) In December 2020, the Group sold 26.7% equity interest in Yunding for a cash consideration of RMB22,500 to Gongqingcheng Yunding, of which 20,000 has been received in January 2021.

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

(e) 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, which represented the principal plus accrued interest to date.

(f) The Group disposed five long-term investments and one long-term investment to Huaying Fund in 2018 and recorded RMB31 gain during the years ended December 31, 2018.

(g) During 2019, Purchase from related parties mainly included the intangible assets purchased from Hefei Huaheng which amounted to RMB11,321. During 2020, the Group made a prepayment of RMB12,000 to purchase a building owned by Hefei Yizhi.

22. NET INCOME PER SHARE

During the years ended 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.

F-47

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

22. NET INCOME PER SHARE - CONTINUED

However, undistributed loss is only allocated to ordinary shareholders because holders of preferred shares and nonvested restricted shares are not contractually obligated to share losses.

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Basic net income per share calculation Numerator:
Net income for the year attributable to the Company:	340,046	575,196	228,753
Less: Accretion of Series A Shares	177	—	—
Less: Accretion of Series B-1 Shares	368	—	—
Less: Accretion of Series B-2 Shares	4,049	—	—
Less: Deemed dividend to preferred shareholders	209,752	—	—
Less: Undistributed earnings allocated to Series A preferred shareholders	4,521	—	—
Less: Undistributed earnings allocated to Series B-1 preferred shareholders	126	—	—
Less: Undistributed earnings allocated to Series B-2 preferred shareholders	1,319	—	—
Less: Undistributed earnings allocated to participating nonvested restricted shares	6,244	2,450	—
Net income attributed to ordinary shareholders for computing net income per ordinary shares—basic	113,490	572,746	228,753
Denominator:
Weighted average ordinary shares outstanding used in computing net income per ordinary shares – basic	211,873,704	243,648,186	248,470,684
Net income per ordinary share attributable to ordinary shareholders—basic	0.54	2.35	0.92
Diluted net income per share calculation
Net income attributable to ordinary shareholders for computing net income per ordinary shares—basic	113,490	572,746	228,753
Add: adjustments to undistributed earnings to participating securities	648	117	—
Net income attributed to ordinary shareholders for computing net income per ordinary shares—dilute	114,138	572,863	228,753
Denominator:
Weighted average ordinary shares basic outstanding	211,873,704	243,648,186	248,470,684
Effect of potentially diluted stock options, restricted stocks and RSUs	13,160,946	12,310,986	11,881,310
Weighted average ordinary shares outstanding used in computing net income per ordinary shares—dilute	225,034,650	255,959,172	260,351,994
Net income per ordinary share attributable to ordinary shareholders—diluted	0.51	2.24	0.88

F-48

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

22. NET INCOME PER SHARE - CONTINUED

For the year ended December 31, 2018, 2019 and 2020, 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 years presented:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Shares issuable upon exercise of share options, restricted stocks and RSUs	705,407	294,352	89,165
Shares issuable upon vesting of nonvested restricted shares	11,657,620	1,042,234	—

23. LEASES

The Group's leases consist of operating leases for administrative office spaces in different cities in the PRC and overseas and financial lease which is immaterial. The Group determines if an arrangement is a lease at inception. Some lease agreements contain lease and non-lease components, which the Group chooses to account for as separate components. The allocation of the 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.

The following table represents lease costs recognized in the Group's consolidated statements of operation for the years ended December 31, 2019 and 2020. 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	2020
	RMB	RMB
Operating lease cost(1)	30,788	57,080
Sublease income	(1,382)	(537)
Total lease cost	29,406	56,543

(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 year ended December 31, 2018 was RMB11,423.

F-49

ZEPP HEALTH CORPORATION

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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

except for number of shares and per share data, or otherwise noted)

23. 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 and 2020.

	As of December 31,
	2019		2020
	RMB		RMB
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	26,733		42,313
Non-cash Right-of-use assets in exchange for new lease liabilities:
Operating leases	112,513		96,348
Weighted average remaining lease term
Operating leases	3.76 years		3.68 years
Weighted average discount rate
Operating leases	5.21	%	5.25	%

The following is a maturity analysis of the annual undiscounted cash flows for the year ended December 31, 2020:

Year ending December 31,	RMB
2021	49,628
2022	52,015
2023	46,114
2024	25,859
2025	8,354
Total lease payments	181,970
Less: imputed interest	17,850
Present value of lease liabilities	164,120

24. SUBSEQUENT EVENT

Purchase of a Minority Stake in Jiangsu Yitong High-Tech Co., Ltd

In January 2021, the Group entered into an agreement to acquired 29.99% of the outstanding shares of Jiangsu Yitong Hi-Tech Co., Ltd., (“Yitong” a listed entity on Shenzhen Stock Exchange) for an aggregate cash consideration of RMB959,680 in cash. Leveraging the Group's core capabilities, as well as Yitong's access to the Chinese domestic capital market, the Group and Yitong are expected to expand the healthcare ecosystem for Chinese market in the long term. The transaction was completed in February 2021, the Group is the process of assessing its accounting impact.

New Bank Borrowing loans

Subsequent to 2020 year-end, the Group paid back RMB439,688 loans and borrowed approximately RMB990,000 from several commercial banks. These bank loans are with one to seven years maturity and weighted average interest rate of 4.14%, of which RMB450,000 will be used for the daily operations of the Group and RMB540,000 will be used for the investment of Yitong.

F-50

ZEPP HEALTH 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,
	2019	2020	2020
	RMB	RMB	US$
			(Note2)
Assets
Current assets:
Cash and cash equivalents	398,604	204,637	31,362
Prepaid expenses and other current assets	402	335	51
Amount due from related parties	533,449	656,579	100,627
Total current assets	932,455	861,551	132,040
Investments in subsidiaries	1,594,844	1,895,011	290,423
Total assets	2,527,299	2,756,562	422,463
Liabilities
Current liabilities:
Accrued expense and other current liabilities	166	688	105
Amount due to related parties	26,383	24,727	3,790
Total current liabilities	26,549	25,415	3,895
Other non-current liabilities	—	889	136
Total liabilities	26,549	26,304	4,031
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, 2019 and 2020; 91,459,708 and 128,736,916 shares issued and outstanding as of December 31, 2019 and 2020, respectively)	57	81	12
Class B Ordinary shares(US$0.0001 par value; 200,000,000 and 200,000,000 shares authorized as of December 31, 2019 and 2020; 156,060,279 and 121,408,247 shares issued and outstanding as of December 31, 2019 and 2020, respectively)	98	76	12
Additional paid-in capital	1,478,902	1,552,109	237,871
Accumulated retained earnings	910,612	1,133,368	173,696
Accumulated other comprehensive income	111,081	44,624	6,841
Total equity	2,500,750	2,730,258	418,432
Total liabilities and equity	2,527,299	2,756,562	422,463

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

F-51

ZEPP HEALTH 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 years ended December 31,
	2018	2019	2020	2020
	RMB	RMB	RMB	US$
				(Note2)
Cost	414	55	—	—
Gross profit	414	55	—	—
Operating expenses:
Selling and marketing	4,271	3,198	2,571	394
General and administrative expenses	99,881	50,572	54,613	8,370
Research and development	42,167	11,191	23,978	3,675
Total operating expenses	146,319	64,961	81,162	12,439
Operating loss	(146,733)	(65,016)	(81,162)	(12,439)
Interest Income	2,185	6,868	1,337	205
Other loss	—	(699)	—	—
Equity in earnings of subsidiaries and VIEs	484,594	634,043	308,578	47,292
Net income	340,046	575,196	228,753	35,058

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

F-52

ZEPP HEALTH 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,
	2018	2019	2020	2020
	RMB	RMB	RMB	US$
				(Note2)
Net income	340,046	575,196	228,753	35,058
Other comprehensive income, net of tax
Foreign currency translation adjustment	75,041	13,940	(66,457)	(10,184)
Comprehensive income attributable to Zepp Health Corporation	415,087	589,136	162,296	24,874

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

F-53

ZEPP HEALTH 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 for number of shares and per share data, or otherwise noted)

	For the years ended December 31,
	2018	2019	2020	2020
	RMB	RMB	RMB	US$
				(Note2)
Cash Flow from Operating Activities
Net Cash used in Operating Activities	(2,232)	(764)	(12,791)	(1,962)
Cash Flow from Investing Activities
Amount due from related parties	(196,158)	(218,791)	(123,130)	(18,870)
Investment in subsidiaries	(10,056)	2,263	8,411	1,289
Other investment activities	(95,085)	97,976	—	—
Net Cash used in Investing Activities	(301,299)	(118,552)	(114,719)	(17,581)
Cash Flow from Financing Activities
Net Cash provided by Financing Activities	652,391	45,609	—	—
Net increase/(decrease) in cash and cash equivalent	348,860	(73,707)	(127,510)	(19,543)
Effect of exchange rate changes	75,041	13,940	(66,457)	(10,184)
Cash and cash equivalents at beginning of the year	34,470	458,371	398,604	61,089
Cash and cash equivalents at end of the year	458,371	398,604	204,637	31,362

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

F-54

ZEPP HEALTH 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, 2020 is solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.5250, representing the rate as certified by the statistical release of the Federal Reserve Board of United States on December 31, 2020. 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, 2020, 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-55

EX-4.18

Exhibit 4.18

THE SYMBOL “[***]” DENOTES PLACES WHERE CERTAIN IDENTIFIED INFORMATION HAS BEEN EXCLUDED FROM THE EXHIBIT BECAUSE IT IS BOTH (i) NOT MATERIAL, AND (ii) WOULD LIKELY CAUSE COMPETITIVE HARM TO THE COMPANY IF PUBLICLY DISCLOSED

Product-related Strategic Cooperation Agreement

Party A: Xiaomi Communications Co., Ltd.

Address: No. 019, F/9, Building 6, 33 Xi’erqi Middle Road, Haidian District, Beijing

Contact Person: ***

Tel: ***

Party B: Anhui Huami Information Technology Co., Ltd.

Address: Building H8, Innovation Industrial Park Phase II, 2800 Chuangxin Avenue, National High-tech Industry Development Zone, Hefei City, Anhui Province 230088

Contact Person: ***

Tel: ***

To protect the legitimate rights and interests of Party A and Party B (collectively, the “Parties” and, individually, a “Party”) and promote their common development, after friendly consultation, the Parties hereby agree as follows with respect to their strategic cooperation on product development in accordance with applicable Chinese laws and on the basis of equality, fairness, and mutual benefit:

Section 1 Definitions

As from the execution date of this Product-related Strategic Cooperation Agreement (this “Agreement”), the Parties will conduct Strategic Cooperation (as defined below) with each other on development and sales of products custom-made for Party A, namely smart band, smart watch (excluding kids’ watch and quartz watch), and smart scale (collectively, the “Products”). “Strategic Cooperation” referred to in this Agreement means that, with respect to the Products, Party A recognizes Party B as its preferred partner in the global market when the conditions for cooperation offered by Party A to Party B and to other potential partners of Party A are the same (hereinafter, “under the same conditions”), and when Party A intends to choose a partner to develop a new product, Party B will be Party A’s preferred choice under the same conditions.

Section 2 Party B’s Product Development Capabilities

Party B shall be capable of developing the Products independently or by integrating relevant resources and be able to quickly update or upgrade any Product or develop a new product when needed to meet a higher or new market demand.

1.     Party A will consult with Party B to determine a schedule for launching the Products in line with Party A’s actual needs. The period of the consultation shall not exceed sixty (60) calendar days starting from the date of notice from Party A to Party B and may be extended by the Parties as appropriate.

1

2.     Party B shall complete the development and ensure launching of the Products within the period agreed to by the Parties. If Party B fails to bring the Products to the market within the agreed period, or any Product fails to meet Party A’s requirements, Party A may unilaterally terminate this Agreement and the Strategic Cooperation.

3.     Quality targets for the Products

Party B shall be responsible for the quality of all products delivered by it, including the Products described in Section 1 hereof. Party B shall work towards the goal of zero defect by constantly improving its production processes and methods, enhancing product quality, and increasing the Products’ competitiveness and customer satisfaction. The specific targets of product quality are required in the agreement.

Product Name	Indicator	Target
Wristband	Monthly back repair rate	**
Smart Watch	Monthly back repair rate	**
Smart Scale	Monthly back repair rate	**

Note: “Back repair rate” means the proportion of the number of a Product that needs to be repaired due to a quality problem during a particular period to the total number of the same Product sold in the same period. For the avoidance of doubt, products returned for reasons other than quality problems under local customer protection laws or product return policies will not be counted into products that need to be repaired for quality reasons. Back repair rates shall be subject to the relevant after-sales data of Party A.

Party A may unilaterally terminate this Agreement and the Strategic Cooperation, if:

1.     Party B fails to achieve the quality targets set out in this Section for three consecutive (3) months; or

2.     Any Product developed by Party B has a serious quality problem, resulting in a mass recall.

Section 3 Sales Performance Targets

Provided that Party A has made its best efforts to promote and sell the Products, if the Products’ sales of a particular year is less than 80% of their sales of the previous year, or if, for two (2) consecutive years, the Products’ sales of a particular year is less than 120% of their sales of the previous year, then Party A may unilaterally terminate this Agreement and the Strategic Cooperation.

Section 4 Overseas Strategy

Where Party A’s business development needs entail an expansion into the international market, Party B shall provide strong assistance to Party A for matters needed in overseas sales, including but not limited to product certification, patent licensing, and special customization.

Party A may unilaterally terminate this Agreement and the Strategic Cooperation, if:

1.      Any Product developed by Party B fails to satisfy the requirements of a sales destination country, and such failure is not rectified. These requirements may include without limitation those for product specifications, product certification, product information safety, the product itself, packaging, and product software;

2.      Party B sells any Product in an overseas market without Party A’s written consent.

Section 5 Other Strategic Cooperation

1.     Except for the development and sales of the Products, both Parties agree to strategically cooperate with each other and form a preferred partnership in the field of chip development and algorithms regarding smart wearable technology on the basis of mutual benefit. Party B will provide Party A with algorithms developed by Party B and applied in the Products, and the Parties will otherwise negotiate the specific methods and details of the

2

cooperation.

2.     Party B undertakes that, upon Party A’s request, Party B will provide Party A with complete and accurate technical documents related to the Products, the processes thereof, among others, in a timely manner, including but not limited to 2D and 3D drawings, SOP, and specifications of the Products or related materials. Unless otherwise agreed between the Parties, Party A shall not provide any of those technical documents to any third party which manufactures a product identical to a Product.

3.     Both Parties acknowledge and agree that Party A has the right to access and use, for publicity or other particular purposes, the WeChat and Weibo official accounts registered specifically for promoting the Products, which include but are not limited to Mi Fit (“小米运动”) and Mi Band (“小米手环”), and Party B shall provide necessary assistance in this regard to meet Party A’s needs.

4.     Both Parties agree to further negotiate, and enter into a supplemental agreement as soon as possible, on matters including the ********** of the Mi Fit application (“小米运动”) and the ******** of the WeChat and Weibo official accounts.

5.     If the Parties fail to enter into a supplemental agreement by December 31, 2020 as set out in the preceding paragraph, or if Party B breaches any provision in this Section, Party A may unilaterally terminate this Agreement and the Strategic Cooperation.

Section 6 Miscellaneous

Both Parties understand and agree that they execute this Agreement on behalf of themselves and their respective affiliates, and each Party is obligated to procure and make sure that its affiliates will comply with and perform this Agreement.

This Agreement is made and executed by the Parties in Haidian District, Beijing and shall take effect from the date when sealed by both Parties. The term of this Agreement is three (3) years.

Xiaomi Communications Co., Ltd. (seal)	Anhui Huami Information Technology Co., Ltd. (seal)
Signed by:  /s/  Authorized Representative	Signed by: /s/  Authorized Representative
Authorized Representative	Authorized Representative
Date： October 19, 2020	Date：October 19, 2020

3

EX-4.19

Exhibit 4.19

Share Transfer Agreement

in Respect of Shares in

Jiangsu Yitong High-tech Co., Ltd.

between

Wang Zhenhong

and

Anhui Shunyuan Xinke Management Consulting Partnership (LP)

January 5, 2021

Table of Contents

1	Definitions	1
2	Share Transfer	3
3	Transfer Price	3
4	Payment of Security Deposit and First Installment of Transfer Price	4
5	Payment of the Second Installment and Ownership Transfer of the Shares	6
6	Payment of the Third Installment	7
7	Business Performance Commitment	7
8	Transitional Period	8
9	Conditions for Coming into Effect	10
10	Representations, Warranties, and Undertakings of the Transferor	10
11	Representations, Warranties, and Undertakings of the Transferee	17
12	Other Covenants	17
13	Waiver of Voting Rights	20
14	Information Disclosure for the Share Transfer	20
15	Liability for Breach of Contract	20
16	Force Majeure	23
17	Amendment and Termination of this Agreement	23
18	Dispute Resolution	24
19	Confidentiality	24
20	Notice	25
21	Headings	26
22	Waiver	26
23	Further Waiver	27
24	Invalidity	27
25	Expenses	27
26	Applicable Law	27
27	Supplemental Agreement	27
28	Counterpart	27
Appendix 1		1
Appendix 2		2
Appendix 3		3
Appendix 4		4

This Share Transfer Agreement in Respect of Shares in Jiangsu Yitong High-tech Co., Ltd. (this “Agreement”) is entered into in Hefei City, Anhui Province, China on January 5, 2021 by and between (i) Wang Zhenhong, whose ID number is *** and domicile is *** (“Transferor”); and (ii) Anhui Shunyuan Xinke Management Consulting Partnership (LP), with its unified social credit code being *** and registered address at 201-1, Building H8, Innovation Industrial Park Phase II, 2800 Chuangxin Avenue, National High-tech Industry Development Zone, Hefei City, Anhui Province, China (“Transferee”).

The Transferor and the Transferee are hereinafter referred to collectively as the “Parties” and individually as a “Party”.

Whereas:

1. Jiangsu Yitong High-tech Co., Ltd. (the “Company”) is a joint stock limited company (stock code: 300211) incorporated in China and has been approved by the China Securities Regulatory Commission to publicly offer A shares and listed on the ChiNext of the Shenzhen Stock Exchange;

2. The Transferor is a Chinese citizen and a shareholder of the Company, who legally holds 146,506,073 shares in the Company that account for 48.4% of its total share capital;

3. The Transferee is a limited partnership duly established and validly existing under the Chinese Laws, with its unified social credit code being ***;

4. The Transferee intends to purchase from the Transferor, and the Transferor agrees to transfer to the Transferee, 90,772,524 shares held by the Transferor in the Company (the “Shares”), which accounts for 29.99% of the Company’s total share capital.

Now therefore, after friendly consultation and in accordance with the Company Law of the People’s Republic of China and other applicable laws, rules, and regulations and based on the principles of voluntariness, fairness, and good faith, the Parties hereby agree as follow with respect to the Transferor’s transfer of the Shares to the Transferee:

1 Definitions

1.1 Unless otherwise required by the context, terms used in this Agreement, including its recital, shall have the meanings set out below:

“Agreement” means the Share Transfer Agreement in Respect of Shares in Jiangsu Yitong High-tech Co., Ltd. and all appendices hereto entered into by and between the Transferor and the Transferee;

“Transferor” means Wang Zhenhong;

“Transferee” means Anhui Shunyuan Xinke Management Consulting Partnership (LP);

“Company” means Jiangsu Yitong High-tech Co., Ltd.;

“Subsidiary” means any business actually controlled by the Company and included in the Company’s consolidated financial statements. For details of the

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subsidiaries, please refer to Appendix 4 hereto;

“Shares” means the 90,772,524 shares in, or 29.99% of the total share capital of, the Company, which are to be transferred by the Transferor to the Transferee under the terms and conditions of this Agreement;

“Share Transfer” means transfer of the Shares from the Transferor to the Transferee under the terms and conditions of this Agreement, which include the Transferor’s irrevocable waiver of his voting rights on the remaining shares that he will hold in the Company after the transfer;

“Transfer Price” means the consideration payable by the Transferee to the Transferor under Section 3;

“SZSE” means the Shenzhen Stock Exchange;

“Escrow Account” means the escrow account jointly designated by the Transferor and the Transferee and opened in the Transferee’s name for the Share Transfer;

“Escrow Bank” means the bank where the Escrow Account is opened;

“Laws” means any applicable laws, regulations, and other regulatory documents, among others;

“Transitional Period” means the period from the execution date of this Agreement to the Handover Date (as defined below);

“Closing Date” means the day when ownership transfer registration of all the Shares transferred hereunder is completed;

“Handover Date” means the day when the members of the Company’s board of directors and board of supervisors and its senior officers have been replaced in accordance with Section 6.2;

“Long Stop Date” means the expiry day of three months following the execution date hereof;

“Material Effect” means any effect valued RMB5 million or more on either Party or the Company;

“Material Adverse Effect” means a situation that may (i) deprive the Company of its qualification to continue its operations or current business; (ii) result in suspension of the Company’s current business for more than three (3) months or termination of the business; (iii) subject either Party or the Company to any heavy administrative or criminal penalty, severe regulatory measure, or investigation by any competent authority; or (iv) bring any adverse Material Effect on either Party or the Company, unless otherwise agreed herein; or a situation existing before the Closing Date and which may expose the Company to delisting risk warning or even delisting;

“RMB” means Renminbi yuan.

1.2 Unless otherwise expressly provided herein, the term “include” or any of its inflected forms, whether or not followed by “but not limited to”, shall be interpreted as “including but not limited to”.

1.3 “Above” referred to in this agreement shall include the amount as listed.

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1.4 “Shares” or “shares” referred to in this Agreement shall mean, as to a listed company, stocks in the company.

1.5 Any reference to a “Section” shall be construed as a reference to the entire section, instead of any subsection, paragraph, or subparagraph thereof, unless the reference is clearly made to a particular part of that Section.

1.6 The terms “written” or “in writing” refers to communication by hard copy letter, email, or fax.

1.7 Any reference to a Law shall be construed as the Law as amended or re-enacted and in force from time to time.

1.8 Any other transaction documents signed based on this Agreement and as needed for the Share Transfer shall be interpreted in line with the interpretation hereof.

2 Share Transfer

The Transferor agrees to transfer to the Transferee, and the Transferee agrees to purchase from the Transferor, the Shares under the terms and conditions of this Agreement, i.e., under the terms and conditions of this Agreement the Transferee purchases from the Transferor 90,772,524 shares held by the Transferor in the Company, which accounts for 29.99% of the Company’s total share capital.

3 Transfer Price

3.1 The Transfer Price for the Share Transfer is RMB959,680,000, or approximately RMB10.57 per Share.

3.2 The Transferee shall pay the Transfer Price to the Transferor in accordance with Sections 4 through 6 of this Agreement.

If the SZSE or any other securities regulator does not recognize the Transfer Price decided by both Parties, or the decided price does not meet the relevant requirement of the Chinese Laws, the Transferee shall purchase the Shares at the lowest price within the price range required by the Laws and the regulator, provided, however, that in case such lowest price is lower than the Transfer Price provided in Section 3.1 of this Agreement, the Transfer Price shall apply.

If the Parties adjust the Transfer Price in accordance with the preceding paragraph, the Transferor undertakes that he will bear and will not require the Transferee to pay any excess above RMB10.57 per share in the case of price increase so that the price eventually paid by the Transferee for the Share Transfer will not be higher than the RMB959,680,000; provided, however, that the Transferee shall bear any additional tax resulted from such price increase and pay the tax along with the release of funds under Section 4.3.

Notwithstanding the foregoing, if the lowest price per share as provided in the second paragraph of this Section is higher than RMB12.68, and the Parties fail to reach a consensus on that price within thirty (30) days, either Party may terminate this Agreement without being deemed in breach of this Agreement. In

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such case, the Transferee has the right to recover the funds it has deposited in the Escrow Account, and the Transferor shall, within three (3) working days upon such termination, inform the Escrow Bank of the termination by giving the bank a written notice in the required form, and the Escrow Bank will then return the funds in the Escrow Account to the Transferee.

3.3 Unless otherwise agreed in this Agreement, the Parties shall bear their own taxes and costs in relation to the Share Transfer in accordance with the applicable Laws.

4 Payment of Security Deposit and First Installment of Transfer Price

4.1 The Transferee shall pay a security deposit of RMB50,000,000 into the Escrow Account within two (2) working days after (i) the execution of this Agreement and (ii) the opening of the Escrow Account.

For the avoidance of doubt, upon satisfaction of all conditions set forth in Section 4.4, the security deposit will be automatically converted into the first installment of the Transfer Price in the same amount.

Within five (5) working days after the execution hereof, the Transferor shall submit a valid application to the Company for exemption of him from honoring his share lock-up commitment.

4.2 The first installment of the Transfer Price totals RMB287,904,000. Within three (3) working days upon satisfaction of all conditions set forth in Section 4.4, the Transferee shall pay the remaining amount of the first installment, namely RMB237,904,000, into the Escrow Account.

4.3 The first installment of the Transfer Price shall be used in the first place to pay for individual income tax, stamp duty, and other dues and taxes (if any, collectively “Taxes”) payable by the Transferor for the Share Transfer. Within the first working day after the Transferee pays the remaining amount of the first installment into the Escrow Account in accordance with Section 4.2, the Parties shall release the first installment from the Escrow Account to an account designated by the Transferor in advance (the “Transferor’s Account”). The Transferor shall pay the Taxes to the tax authorities on the day when the first installment reaches the Transferor’s Account and, within three (3) working day upon payment of the Taxes, obtain tax payment certificates issued by the tax authorities for the Share Transfer; provided, however, that, if the aggregate amount of the Taxes exceeds RMB287,904,000, the exceeding part shall be made available and paid by the Transferor on his own.

4.4 The Transferee will not perform its obligation set forth in Section 4.2 of this Agreement to pay the first installment of the Transfer Price unless and until all the following conditions precedent are satisfied (or waived in writing by the Transferee):

(1) There is no judgement, ruling, decision, or injunction under any Chinese Law or made by any court, arbitration commission, or governmental authority that restricts, prohibit, or cancels the Share Transfer, nor is

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there any pending or potential litigation, arbitration, judgement, ruling, decision, or injunction relating to the Share Transfer;

(2) All representations, warranties, and undertaking made by the Transferor in Sections 8 and 10 are true, accurate, complete, and not misleading as of the day when a confirmation letter is issued as required in Subsection 4.4(8) (“Date of the Confirmation Letter”). The Transferor has performed all matters he has undertaken to perform on or before the Date of the Confirmation Letter hereunder and has not committed any breach of this Agreement;

(3) There is no event, fact, condition, change, other situation that has a Material Adverse Effect on the assets, financial structure, liabilities, technologies, and normal operations of the Company or any of its Subsidiaries;

(4) The Parties have obtained a confirmation opinion issued by the SZSE on the compliance of the Share Transfer and ownership transfer of the Shares;

(5) The Shares are free of any pledge, freezing, or other encumbrance;

(6) With respect to any and all outstanding credit agreements, loan agreements, repurchase agreements, other financing agreements and guarantee agreements to which the Company or any of its Subsidiary is a party, the Transferor has caused the Company and the Subsidiaries to fulfill their obligations of notification and/or application for approval as agreed thereunder and has obtained the written consent of related financing providers to the Share Transfer.

(7) The Transferor has made public commitments with respect to the provision in Section 12.3; and

(8) The Transferor has issued a confirmation letter to the Transferee, confirming that all the foregoing conditions precedent have been satisfied. The confirmation letter shall be deemed delivered when its scanned copy is sent to the Transferee, and the Transferor shall send the original thereof at the same time of sending the scanned copy.

4.5 On the day when the first installment is released to the Transferor’s Account in accordance with Section 4.3 but before time of releasing, the Transferor shall provide the Transferee with a share inquiry report issued by China Securities Depository and Clearing Corporation to confirm that the Shares are free of any pledge, freezing, or other encumbrance as of the day of such release; if the Shares are found to be encumbered in any way, the Transferee may terminate this Agreement and take back the amount it has deposited in the Escrow Account. To that end, the Transferor shall deliver an agreement termination notice in the required form to the Escrow Bank within three (3) working days following the termination, instructing the Escrow Bank to return the funds in the Escrow Account to the Transferee.

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4.6 If any conditions precedent set forth in Section 4.4 for the Transferee’s payment of the first installment is not satisfied or, in the reasonable expectation of the Parties, cannot be satisfied before the Long Stop Date or within any extension period as may be agreed upon by both Parties in writing, the Transferee, or the Transferor (only in the case where the condition precedent set out in Subsection 4.4(4) is not or cannot be satisfied), may terminate this Agreement and relevant transaction documents and cease the Share Transfer at any time. In such case, neither Party will be held liable for breach of contract or bear any costs to the other Party, nor may either Party claim against the other Party for breach of contract or for compensation pursuant to any provision hereof. Upon termination of this Agreement as a result of the foregoing, the Transferee will take back the amount it has deposited in the Escrow Account. To that end, the Transferor shall deliver an agreement termination notice in the required form to the Escrow Bank within three (3) working days following the termination, instructing the Escrow Bank to return the funds in the Escrow Account to the Transferee.

5 Payment of the Second Installment and Ownership Transfer of the Shares

5.1 The Transferee shall pay the remaining RMB671,776,000 of the Transfer Price to the Escrow Account within three (3) working days after (i) the condition provided set out below is satisfied and (ii) the Transferor obtains the tax payment certificates in accordance with Section 4.3:

The Transferor shall provide the Transferee with a share inquiry report about the Shares, confirming that the Shares are free of any pledge, freezing, or other encumbrance.

5.2 On the date when the ownership transfer of the Shares is registered with the competent authority in accordance with Section 5.3, the Transferee shall instruct the Escrow Bank in writing to release RMB575,808,000 in the Escrow Account to the Transferor’s Account.

5.3 Within three (3) working days after the Transferor obtains the tax payment certificates provided in Section 4.3 and subject to the Transferee’s payment of the remaining amount of the Transfer Price in accordance with Section 5.1, the Transferor shall complete ownership transfer registration of the Shares to make the same registered under an A share account opened by the Transferee, and the Transferee shall provide assistance as necessary for such registration.

5.4 The Transferee is entitled to all interest accrued on the first and the second installments of the Transfer Price before these installments are released from the Escrow Account into the Transferor’s Account. The Transferee may use such interest as a part of the third installment.

5.5 The Transferor shall cause the Company to complete registration with the competent industrial and commercial authority and foreign investment information reporting, if applicable, as necessary for the Share Transfer.

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6 Payment of the Third Installment

6.1 The Transferee shall pay the third installment of the Transfer Price, i.e., RMB95,968,000, from the Escrow Account into the Transferor’s Account within three (3) working days upon satisfaction of all conditions precedent set forth in Section 6.2 below.

6.2 The Transferee will not perform its obligation set forth in Section 6.1 to pay the third installment of the Transfer Price unless and until all the following conditions precedent are satisfied (or waived in writing by the Transferee):

(1) With the cooperation of the Transferor, the Transferee has initiated a re-election of the board of directors and board of supervisors of the Company within three (3) working days after the RMB575,808,000 is released to the Transferor’s Account under Section 5.2, and the re-election has been completed within thirty (30) days upon its initiation. The Transferor’s cooperation also includes supporting the appointment of candidates nominated by the Transferee to the board of directors and board of supervisors of the Company by, among others, causing the incumbent directors and supervisor(s) to resign.

(2) With the efforts of the Transferor, the incumbent senior officers of the Company have resigned within three (3) working days after the amount specified in Section 5.2 is released to the Transferor’s Account in accordance therewith.

(3) The Transferee shall ensure that the candidates of directors, supervisors, and senior officers it nominates are qualified to hold the position as director, supervisor, or senior officer of a listed company.

7 Business Performance Commitment

7.1 Upon completion of the ownership transfer registration provided in Section 5.3, the Transferor shall make commitment to the Transferee on the Company’s performance in 2021 and 2022 (“Performance Commitment Period”) regarding its existing broadcasting and television business, which consists the R&D, production, and sales of broadcasting and television equipment operated by the Company before the execution date hereof (“Broadcasting and Television Business”), and the Transferee shall provide reasonable support for the operation of the Broadcasting and Television Business.

7.2 The Transferor undertakes that the revenue of the Broadcasting and Television Business in 2021 as audited by a professional auditing firm engaged by the Company shall not be less than its audited revenue of 2020 (“2020 Revenue”), and the revenue of the Broadcasting and Television Business in 2022 as audited by a professional auditing firm engaged by the Company shall not be less than half of the audited 2020 Revenue; and the receivables turnover ratio shall not be less than 106.51% (“Revenue Commitment”).

7.3 If the Broadcasting and Television Business in any year during the Performance Commitment Period fails to meet the Revenue Commitment for that year, the

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Parties shall, within thirty (30) days after the annual financial report of the Company for that year is publicly disclosed, consult with each on indemnity to the Company.

8 Transitional Period

8.1 During the Transitional Period, the Transferor shall duly perform his obligations as a shareholder and conform to all representations, warranties, and undertakings he makes in this Agreement without harming the interests of the Company. The Transferor shall also cause the Company to conduct business in accordance with applicable Chinese Laws and to avoid any material violation of any Laws.

8.2 Maintaining the Status Quo

During the Transitional Period, the Transferor shall cause the Company to operate normally and to make its best endeavor to maintain the integrity of its business organization and relationships with third parties, retain the existing workforce, and keep as they are all the assets and property that the Company owns or uses (except for normal wear and tear)

8.3 Further Investigation

During the Transitional Period, the Transferor shall, at normal business hours of the Company, make available any information and documents about the Company to the Transferee and its representatives as they may reasonably require. The Transferor undertakes that the Transferee may conduct prudent review of the finance, assets, and operations of the Company at any normal business hour during the Transitional Period. Further, the Transferor shall promptly notify the Transferee in writing of any breach or reasonably expected breach of this Agreement on the part of the Transferor or the Company.

8.4 Stable Operations

During the Transitional Period, to ensure stable operations of the Company in the proper way, the Transferor shall timely notify the Transferee in writing of:

(1) any change to the shareholding structure, financial condition, assets, liabilities, business, or operations of the Company, which has or may have any Material Effect on the Company;

(2) any agreement entered into outside the normal course of business and which contains any abnormal provision, including but not limited to any provision that sets forth any harsh condition and has a valid period of twelve (12) months or longer and any agreement, proposal, or intention involving the foregoing; and

(3) Any progress of the approval by or registration or record-filing with a competent authority, if applicable.

8.5 Third-party Transactions

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During the Transitional Period, the Transferor shall, and shall cause his spouse Wang Guizhen and his trustee(s) and authorized person(s) to: (i) handle matters relating to the Share Transfer with the Transferee and its affiliates exclusively; (ii) not engage in any transaction similar to or in conflict with the Share Transfer (“Third-party Transaction”); (iii) promptly terminate any ongoing discussion or negotiation and avoid conducting any discussion or negotiation in the future with any person regarding a Third-party Transaction, and not offer any information regarding a Third-party Transaction to any person; and (iv) not encourage making any inquiry or giving any advice regarding a possible Third-party Transaction or otherwise facilitate such inquiry or advice. If the Transferor or the Company receives any inquiry from a third party about a potential Third-party Transaction, whoever receives such inquiry shall promptly notify the Transferee of the same.

8.6 Limitation of Actions

During the Transitional Period, unless otherwise agreed in writing by the Transferee in advance, or unless the Share Transfer is involved, the Transferor shall procure that none of the Company and its Subsidiaries will:

(1) increase, decrease, distribute, issue, acquire, repay, transfer, pledge, or repurchase any registered capital, shares, or other securities convertible to shares;

(2) take any action that may dilute the Shares to be held by the Transferee on the Closing Date, including revision of its articles of association, restructuring, consolidation, merger, or sale of its share capital or assets, among other actions;

(3) sell, lease out, transfer, license, or assign any assets other than in the normal course of the Company’s main business;

(4) assume or incur debts, liabilities, obligations, or expenses valued more than RMB5 million (or any foreign currency equivalent) in aggregate other than in the normal course of the Company’s main business;

(5) create any mortgage, pledge, other form of security, or other encumbrance over any assets, or provide any security to a third party;

(6) declare, pay, or distribute any dividends;

(7) enter into any deal with an affiliate;

(8) conduct any acquisition or otherwise become a party to any acquisition;

(9) acquire any shares or other interests in any other entities;

(10) cease business operations, change the business scope or main business, expand business other than the main business, or conduct any business out of the normal course of business;

(11) terminate, restrict, or fail to renew or maintain as required under

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applicable Laws, any important permit, qualification, or license;

(12) change the standards for employees’ remunerations and benefits, unless so required under applicable Laws or by local authority; formulate or adopt any employee equity incentive plan of the Company; or issue or promise to issue any options/restricted stocks to employees; or

(13) agree or promise to take any of the foregoing actions, including but not limited to signing a letter of intent on investment, commitment letter, or consent letter.

8.7 Operation Management of the Target Company

After the ownership transfer registration of the Shares is completed, the Transferee may send observers to the Company, who have the right to know and track every aspect of the Company’s operations, with respect to which the Transferor shall cooperate when necessary.

9 Conditions for Coming into Effect

9.1 Except for obligations expressly stipulated in this Agreement to be performed from the execution date hereof, this Agreement shall come into effect upon satisfaction of all the following conditions:

(1) Each Party or the authorized representative thereof has signed and affixed the Party’s official seal on this Agreement, if applicable. If a Party has his/its authorized representative sign this Agreement, a power of attorney issued by the Party to the authorized representative shall be attached hereto as an appendix;

(2) The Transferor has obtained a valid exemption as adopted by the shareholders’ general meeting of the Company, freeing him from honoring his share lock-up commitment; and

(3) The Transferee has paid the security deposit into the Escrow Account in accordance with Section 4.1.

9.2 The Parties shall make their best endeavors to fulfil the foregoing conditions.

9.3 If any condition for coming into effect as stated above is not fulfilled within sixty (60) days following the execution date hereof, this Agreement will automatically terminate upon expiry of the sixty-day period, in which case neither Party shall bear liability for breach of contract. If, at that time, the Transferee has paid any amount into the Escrow Account, it may take back the amount paid. To that end, the Transferor shall deliver an agreement termination notice in the required form to the Escrow Bank within three (3) working days following the termination, instructing the Escrow Bank to return the funds in the Escrow Account to the Transferee.

10 Representations, Warranties, and Undertakings of the Transferor

In addition to matters disclosed in Appendix 3 to this Agreement, the Transferor

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represents, warrants, and undertakes as follows and guarantees that all these representations, warranties, and undertakings are true, complete, accurate, and up-to-date on the execution date of and the Handover Date under this Agreement. For the purpose of this Section 10, the Company referred to in this Section shall include the Company and the Subsidiaries.

10.1 The Transferor is a natural person with Chinese citizenship, who has the power to execute this Agreement and perform all his obligations hereunder and take actions such as transferring the Shares as agreed herein. The Transferor has the full capacity for civil rights and civil conduct to execute and perform this Agreement. Upon its execution, this Agreement becomes legally binding upon the Transferor.

10.2 The execution and performance of this Agreement does not contravene or conflict with any organizational documents, judgments, decisions, contracts, agreements, or other documents binding on the Transferor or the Company. The Transferor has obtained all third-party consent and authorization (excluding approval by the SZSE and exemption by the shareholders’ general meeting of the Company) necessary for the Share Transfer. No contract or agreement between the Company and any other entity will be terminated as a result of execution or performance of this Agreement or materially affected by this Agreement.

10.3 The Transferor legally owns the Shares, which are legal property that solely belongs to the Transferor. The Transferor is the registered owner and beneficial owner of the Shares and has a full right to the Shares. The Shares are free of any third-party right derived from a trust.

10.4 Except for matters disclosed in Appendix 2 hereto, the Shares are free of any mortgage, pledge, other form of security, any debt or dispute, or defect of right in any other form. The Shares are not subject to any coercive measures such as freezing or attachment and, to the Transferor’s knowledge, there are no circumstances that may lead to any such coercive measures.

10.5 The Transferor undertakes to the Transferee that, from the execution date hereof to the Closing Date, without the prior written consent of the Transferee, the Transferor will not transfer any Shares to a third party, contact or negotiate with a third party on transfer of any Shares, or create mortgage, pledge, or any third-party right on the Shares.

10.6 The Company is an entity duly incorporated and validly existing. Its registered capital has been duly paid in full in compliance with its articles of association and Chinese Laws without any payment failure, late payment, false registration, or unauthorized withdrawal. All previous changes in the shares in the Company and related formalities are clear and have been duly completed. All considerations and costs for any share transfers between its original shareholders and new shareholders have been settled, and all taxes arising from such transfers have been paid in full. The Company’s articles of association as amended from time to time have been legally and validly registered, if so required, and are valid and enforceable. The business scope of the Company described in its articles of association conforms to the requirements of

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applicable Chinese Laws. The Company has been conducting business in strict compliance with its business scope and applicable Chinese Laws. All licenses, approvals, and permits required by the Chinese Laws and necessary for the Company to conduct business have been duly applied for and obtained and remain in full force. The Company has passed all annual inspections conducted by competent authorities on its licenses and permits, if applicable. The Company’s documents, including meeting minutes of the board of directors, the board of supervisors, and the shareholders’ (general) meeting, and shareholder register, have been properly kept and accurately record all matters that these documents shall contain.

10.7 As of the Handover Date, no third party has any right to or interests in the shares, including partnership shares, directly or indirectly held by the Company in any investment businesses (“Investment Shares”), and no Investment Shares are (i) held by way of nominee shareholding, fiduciary shareholding, holding shares on trust, or any other arrangement of a similar nature; (ii) convertible securities that are subject to any preemptive right, option, or other right and interests; (iii) subject to any seizure, detention, freezing, or mandatory ownership transfer imposed by any judicial or administrative authority, (iv) encumbered by any mortgage, pledge, or any other security or third-party right or interests, or (v) in a situation that may affect, or cause a third party to directly or indirectly acquire, any shareholder’s right or interests to/in the Investment Shares.

10.8 As of September 30, 2020 (“Balance Sheet Date”) and thereafter, all books of account of the Company have been prepared in accordance with applicable Chinese Laws and truthfully, completely, and accurately reflect the financial and operational condition of the Company on the dates stated in these books, and the financial records and materials fully comply with requirements of applicable Chinese Laws and China’s generally accepted accounting standards. The Company has truthfully, accurately, and fully disclosed its financial condition and audit results under applicable Chinese Laws. All documents of the Company, including its books of account, records of shareholding changes, financial statements, and other records, have been maintained by and in the full custody of the Company in compliance with applicable Chinese Laws and business practice. All major transactions relating to the Company’s business have been recorded accurately in accordance with applicable standards. The Company has no such non-compliance issues as off-book cash sales revenue, off-book liabilities, appropriation of the Company’s funds by any existing shareholder, or material internal control breach.

10.9 The Company has no significant debts other than those reflected in its publicly disclosed balance sheets. For the avoidance of doubt, a significant debt is any single debt of more than RMB500,000, or an aggregate undisclosed debt of more than RMB2,000,000, with the exception of the RMB2,400,000 payable by the Company to advisors involved in its major asset restructuring. The Company has never provided any guarantee or other form of security to any party other than the Company or created any mortgage, pledge, or other form of security on its property.

10.10 From the Balance Sheet Date to the execution date hereof, the Company has not:

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(1) early repaid any debts undue;

(2) provided guarantee to or created mortgage, pledge, and any other form of security on its property for any third party;

(3) waived any claim or recourse against a third party;

(4) changed any existing contract or agreement evidently to its disadvantage;

(5) revised the employment agreement with any of its directors, supervisors, or senior officers;

(6) sustained any loss or change, including but not limited to any change to its relationship with any of its suppliers, customers, or employees, which would have any Material Adverse Effect on it;

(7) transferred or licensed any of its intellectual property to others;

(8) made any significant change to its sales practices, accounting methods, employment policies, or other internal rules;

(9) undergone any material adverse change in its financial condition or sustained any Material Adverse Effect caused by any of its transactions or actions;

(10) (i) sold, mortgaged, pledged, leased out, transferred, or otherwise disposed of any of its assets other than in the normal course of its main business; (ii) disposed of or agreed to the disposal or acquisition of any of its fixed assets, or waived its control over any of its assets, or entered into any contract that may result in any fixed assets expenditure; or (iii) incurred any expenditure of more than 5,000,000 in aggregate;

(11) split up, merged with a third party, or acquired shares in or assets or business of a third party;

(12) breached any representation, warranty or undertaking contained herein by action or omission.

10.11 The Company has (i) timely filed all tax returns that shall be filed with tax authorities on or before the execution date hereof; (ii) duly paid all taxes payable before the execution date hereof as stated in its tax returns, unless otherwise already disclosed; (iii) fulfilled all its tax obligations that it shall fulfill and set aside sufficient provisions that it shall set aside before the execution date hereof as required under applicable Chinese tax Laws, unless otherwise already disclosed; (iv) completed before the execution date hereof all tax matters arising from any transactions involving the Company or in relation to any period commencing on or before the execution date hereof that shall be completed before the execution date hereof; (v) not incurred any encumbrance on shares in or assets of it due to failure to pay any taxes; and (vi) not, before the execution date hereof, been involved in any pending or potential tax dispute or found involved in any matter that may give rise to any governmental tax investigation or tax dispute. Completion of the Share Transfer will not have any Material

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Adverse Effect on any tax preferential treatment that the Company is entitled to at the time when it enters into this Agreement. The Company has not entered into, become a party to, or otherwise become involved in any illegal transaction, plan, or arrangement to avoid or mitigate its tax obligations.

10.12 The Company has (i) full ownership of all its property and assets (including those contained in Appendix 1 hereto, the same below) without any encumbrance, and (ii) proper leasing rights and interests to/in the property or assets it has leased without any encumbrance. The Company owns or is entitled to use all tangible and intangible property and assets necessary for it to conduct its current business. The property and equipment used by the Company in its business operations are well run and maintained without any damage (except for normal wear and tear caused other than by negligence), suitable for their current purposes.

10.13 None of the Transferor, any directors, supervisors, senior officers, and employees of the Company, and any affiliates of the foregoing (i) has made any contract, undertaking, or any completed, ongoing, or contemplated transaction with the Company, with the exception of labor contract and employment contract, (ii) has directly or indirectly borne any debt for or undertaken to provide any loan or security to the Company, and/or vice versa, except for renumerations and reimbursements currently payable, or (iii) directly or indirectly owns any interests in or has any significant business relationship with the Company or any contract entered into by the Company, including purchasing, selling, licensing, authorizing the use of, and otherwise providing any products, intellectual property, or any other assets or services of the Company.

10.14 Each agreement or contract executed by the Company with a contract price of RMB1,000,000 or more that has not been fully performed is legal, valid, and enforceable, and neither the Company nor any other party thereto has committed any material breach thereunder.

The Company is not a party to or otherwise bound by any contract, agreement, or document that:

(1) is not formed on an arm’s length basis;

(2) cannot be fully performed even with reasonable efforts and expenditure;

(3) prevents the Company from conducting business normally; or

(4) should have been but failed to be disclosed to the Transferee, which has a significant impact on or will be significantly affected by the Share Transfer.

10.15 The Company is not involved in any litigation or arbitration that is ongoing or reasonably foreseen or in which the Company has not fulfilled its payment obligation, except for litigation or arbitration initiated by the Company.

10.16 There is no closed, pending, or reasonably foreseen litigation or other legal proceedings that will possibly have a Material Adverse Effect on the Company

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or the conclusion, validity, or enforceability of this Agreement or the Share Transfer.

10.17 Each and every activity conducted by the Company has been in all aspects in compliance with applicable Chinese Laws and requirements of government authorities in the past five (5) years prior to the execution date of this Agreement and will remain so thereafter until the Handover Date. There is no violation of any of the foregoing Laws or requirements on the part of the Company that has an adverse effect on the Company.

10.18 The Company has obtained all licenses, permits, authorizations, approvals, and consents necessary for it to conduct its current business in a way and at the location where it currently operates in accordance with the prevailing Laws and regulators’ requirements. These licenses, permits, authorizations, approvals, and consents are sufficient and will continue to be valid, and all important requirements thereunder have been fulfilled. There are no circumstances to indicate that any of such licenses, permits, authorizations, approvals, and consents will or will possibly be revoked or refused to be renewed in part or in whole. No violation of any Laws or standards has occurred or is reasonably expected to occur on the part of the Company’s assets or business, which, if occurs, would subject the Company’s assets or business to any governmental penalties or bans, thus causing serious damage thereto.

10.19 No business activities conducted by the Company within its scope of business are subject to any non-compete restriction, regardless of its nature or whichever entity it is against. To the knowledge of the Company, there is no agreement, judgment, injunction, order, or decree that is reasonably expected to restrict or have a Material Adverse Effect in any material aspect on the Company’s current or future business activities or its current or intended business.

10.20 With respect to employees of the Company,

(1) there is no pending labor dispute between the Company and any of its current or former employees, nor is there any potential labor dispute that the Company knows or should have known between it and any of its current or former employees;

(2) There is no overdue monetary compensation for termination of its employment relationship with any of its employees, nor does it have any obligation to pay any other similar compensation or damages related to employment;

(3) The Company has fully paid and/or withheld, in accordance with applicable Chinese Laws or requirements of local government, all social insurance premiums (including but not limited to those for pension, housing, medical, and unemployment insurance), employee welfare, and housing provident funds as required by applicable Chinese Laws or under relevant agreements and undertakings. There is no pending or potential dispute that the Company knows or should have known in relation to any such social insurance premiums, employee welfare, or housing provident funds;

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(4) Except for employee welfare, social and pension welfare, and monetary compensation for terminating employment contacts required to be paid under Chinese Laws, the Company has not paid or undertaken to pay its employees any other welfare or compensation regarding employment or unemployment, dismissal, retirement, or employee elderly care.

10.21 Since its initial public offering, the Company has been complying with all applicable Laws and regulators’ requirements regarding information disclosure by listed companies. All information disclosed by the Company is true, complete, and accurate, free of any falsity, misleading statement, or major omission, and there is no violation of any of the above Laws or requirements. No governmental investigation, administrative penalties, or regulatory measures have been or are reasonably expected to be imposed on the Company by any regulator for any reason related to any of the foregoing matters in this Subsection.

10.22 The Company has not been subject to any administrative or criminal punishment in the past five (5) years and is not reasonably expected to be subject to any such punishment. If any above representation or warranty proves to be not true, thus creating any obstacle to the Share Transfer or the Company’s future capital operation, the Transferor undertakes to communicate with relevant authorities and procure a legal compliance certificate or a certificate of no material violation of law issued by such authorities.

10.23 The Transferor agrees to fully indemnify the Transferee, as per the Transferee’s reasonable request, for all losses, expenses, and costs (including costs for engaging advisors) that the Transferee may incur due to any error, false information, or major omission in any of the Transferor’s representations, warranties, and undertakings.

10.24 No warranty, representation, or undertaking made by the Transferor will prejudice any other warranty, representation, or undertaking made by it. Unless otherwise provided herein, nothing in this Agreement poses any restriction on the scope or application of the Transferor’s warranties.

10.25 If the Transferor becomes aware of any violation or threatened violation of any of its representations, warranties, or undertakings, he shall immediately notify the Transferee in writing of the violation and provide the details of and the reason for the violation as well as any possible impact on the Share Transfer.

10.26 Before this Agreement is executed, the Transferor has provided the Transferee with the originals or true copies of all important documents and materials necessary for conducting legal, financial, and business due diligence for the Share Transfer (“Due Diligence Documents”). All the Due Diligence Documents provided by the Transferor are authentic, true, complete, and accurate, free of any major omission, misleading or false representation, information, or document that is reasonably expected to materially affect the Transferee’s decision-making regarding whether to proceed with the Share Transfer in accordance with this Agreement.

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11 Representations, Warranties, and Undertakings of the Transferee

11.1 The Transferee is a legal person duly incorporated and validly existing under Chinese Laws and has the right, power, and capability to execute and perform this Agreement and possesses the qualification required by Chinese Laws to be a shareholder of a listed company. Upon its execution, this Agreement will constitute a legal, valid, and binding agreement on the Transferee.

11.2 Execution of this Agreement does not contravene any organizational document, judgment, ruling, contract, agreement, or other document binding upon the Transferee.

11.3 The Transferee has enough funds to pay the Transfer Price in full amount and on schedule, and the funds so used come from lawful sources.

11.4 The Transferee undertakes to pay the Transfer Price and other amounts payable by it under this Agreement in such amount and at such time as provided in this Agreement.

11.5 The Transferee represents, warrants, and undertakes to the Transferor that all warranties and undertakings made by the Transferee are true and accurate on both the execution date and the effective date of this Agreement.

11.6 The Transferee agrees to fully indemnify the Transferor, as per the Transferor’s reasonable request, for all losses, expenses, and costs (including legal costs) that the Transferor may incur due to any error, false information, or major omission in any of the Transferee’s representations, warranties, and undertakings.

11.7 No warranty or undertaking made by the Transferee will prejudice any other warranty or undertaking made by it. Unless otherwise provided herein, nothing in this Agreement poses any restriction on the scope or application of the Transferor’s warranties.

11.8 If the Transferee becomes aware of any violation or threatened violation of any of its representations, warranties, or undertakings, it shall immediately notify the Transferor in writing of the violation and provide the details of and the reason for the violation as well as any possible impact on the Share Transfer.

12 Other Covenants

12.1 If the Company’s listing is canceled for any reason set out below, the Transferee may terminate this Agreement. Within fifteen (15) working days after receiving a written notice sent by the Transferee on termination of this Agreement, the Transferor shall refund the Transferee the Transfer Price already paid by the Transferee and, in addition, pay the Transferee liquidated damages equal to 10% of the paid Transfer Price. If, at that time, the Transferee has already acquired all or part of the Shares, the Transferee shall transfer these Shares back to the Transferor within three (3) working days after the Transferor refunds the Transfer Price paid by the Transferee and pays the liquidated damages:

(1)The Company has conducted a fraudulent offering, violated its material information disclosure obligation, or committed any other violation of

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Laws that has seriously disrupted the order of the securities market before the Shares are transferred to the Transferee, having a significant adverse impact on its listing; or

(2)The Company has seriously violated any Laws involving, among others, national security, public security, ecological safety, production safety, and public health and safety, posing a substantial hazard to national or public interests or having a significant adverse impact on its listing.

12.2 If the Company suffers any non-operating losses, or is required to pay additional taxes, or is punished or otherwise adversely affected due to any matter before the Handover Date, including without limitation any finance, tax, human resources, or social insurance matter, or due to continuous operation of the Company’s original business (which means the entire business that the Company has been operating prior to the execution date of this Agreement) and handling of financial, tax, and social insurance matters (only within the Performance Commitment Period) in the same way as before the Handover Date, the Transferor shall, within three (3) working days, indemnify the Company for all losses suffered therefrom.

12.3 From the execution date of this Agreement until the expiry of an eighteen-month period following the Closing Date, the Transferor shall hold no less than 25,727,457 shares (excluding the Shares) in the Company.

12.4Within three (3) years from the Closing Date, without the Transferee’s written consent, the Transferor shall not, and shall procure his direct relatives not to, directly or indirectly engage or participate, in any way, in any business or activity that is identical or similar to, competes with, or has an upstream or downstream relationship with, the business of the Company or any Subsidiary (“Competing Business”) or directly or indirectly hold any interests or position (including but not limited to the position of director, senior officer, employee, partner, investor, or agent) in any entity that conducts any Competing Business or carry out any other activities as described below that are harmful to the interests of the Company or any Subsidiary. These activities include without limitation the following:

(1)Hold a controlling or minority stake in or indirectly control any company or other organization engaged in any Competing Business, except for publicly traded shares in a listed company that are acquired from the public capital market and account for no more than 1% of the total shares in the listed company;

(2)Provide any loan, customer information, or other form of assistance to any company or organization engaged in any Competing Business;

(3)Directly or indirectly benefit from any Competing Business or any company or other organization engaged in any Competing Business;

(4)Solicit in any way any customer relating to the business conducted by the Company or any Subsidiary or trade or attempt to trade with any customer relating to the production or sales business of the Company or any Subsidiary, regardless of whether the business relationship between the customer and the Company or Subsidiary is formed before or after the Closing Date;

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(5)Recruit in any way any former employee of the Company or any Subsidiary who leaves the Company or Subsidiary on or after the Closing Date, and such recruitment is conducted through any individual or organization directly or indirectly controlled by or constituting an interested party of the Transferor; or

(6)Solicit in any way any employee then employed by the Company or any Subsidiary.

12.5After the Share Transfer is completed, the Transferor shall not, and shall cause his spouse Wang Guizhen not to, directly or indirectly increase his/her shareholding in the Company for purpose of controlling the Company, or intervene or affect the Transferee’s control over the Company or the normal production and operations of the Company using his/her shareholding status or influence, or increase his/her shareholding ratio and/or voting power by proxy, agreement, action in concert, or any other method, nor shall the Transferor or his spouse, solely or jointly with any other shareholders or potential shareholders of the Company and their affiliates or persons acting in concert, assist any third party to obtain the actual control over the Company by proxy, voting solicitation, agreement, alliance, agreement to act in concert or voting proxy agreement, waiver of voting right, or any other method. If the Transferee, including its affiliates, is no longer the controlling shareholder of the Company, this Section will not apply.

If the Transferor transfers his shares in the Company by agreement, the Transferor shall, and shall procure that his spouse Wang Guizhen will, cause the transferee(s) of those shares to succeed and keep performing the obligations set forth in the preceding paragraph. To that end, the Transferor shall, and shall procure that his spouse will, set in the share transfer agreement to be executed by him with such transferee(s) the foregoing undertakings as a condition precedent to the share transfer.

12.6Except for the liabilities included in the Company’s financial statements as of November 30, 2020, if the Company has any other liabilities (that cause any loss to the Company), contingent liabilities, or encumbrance that have not been disclosed to the Transferee, the Transferor shall indemnify the Company for such liabilities in an equivalent amount within five (5) working days after the liabilities are confirmed.

12.7If the previous or continuous operation of the Company’s original business leads to violation of the export control laws of the U.S. by the Company, the Transferee and/or any of its affiliates, which further subjects it/them to any administrative or criminal investigation or penalty imposed by the U.S. government, the Transferor shall cause the Company to immediately terminate the said business.

12.8The Transferor undertakes that, when the re-elections of the board of directors, the board of supervisors, and senior officers provided in Section 6.2 are completed, the aggregate amount of monetary funds and trading financial assets held by the Company shall be no less than RMB240,000,000, otherwise the Transferor shall make up the shortfall within three (3) working days.

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13 Waiver of Voting Rights

13.1 The Transferor confirms that, from the date when the ownership transfer of the Shares is registered in accordance with Section 5.3 of this Agreement to the date when the Transferee, including its affiliates, ceases to be the controlling shareholders of the Company, the Transferor will unconditionally and irrevocably waive his voting rights regarding all shares held by him in the Company after completion of the Share Transfer (“Waived Shares”) until both Parties agree in writing to end the waiver.

13.2 The Transferor’s waiver of his rights with respect to the Waived Shares shall also be subject to the following provisions:

(1)The Transferor shall waive his voting, proposing, and nominating rights attached to the Waived Shares regarding all matters required to be discussed and decided by the shareholders’ general meeting of the Company under applicable Laws or the articles of associations of the Company;

(2)The Transferor hereby acknowledges that this Agreement contains valid and binding provisions regarding the Waived Shares. If any Waived Shares are gifted to or inherited by a third party during the period when the voting rights thereon are waived, the provisions in this Section 13 shall continue to bind such third party; and

(3)The Parties acknowledge that the Transferor’s waiver of the foregoing rights will not affect his property rights to the Waived Shares, including the right to earnings and right to transfer shares, as well as the right to know and query and other rights that the Transferor is entitled to as a shareholder of the Company.

13.3 The number and percentage of Waived Shares shall be calculated against the number of existing shares in the Company. If the total number of shares in the Company is changed for any reason, the number of Waived Shares shall be changed accordingly.

14 Information Disclosure for the Share Transfer

Both Parties agree to communicate with each other on information disclosure matters relating to the Share Transfer and coordinate with the Company to make sure that information about the Share Transfer and subsequent related arrangements will be disclosed in accordance with applicable Laws and regulatory rules.

15 Liability for Breach of Contract

15.1 Both Parties will fully, properly, and timely perform their respective obligations under this Agreement. Each of the following events shall constitute a breach of this Agreement:

(1) Either Party breaches any provision of this Agreement;

(2) Either Party fails to perform, properly perform, or fully perform any of

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its obligations or undertakings set forth in this Agreement;

(3) Any representation, statement, warranty, or undertaking made by either Party in this Agreement is untrue, inaccurate, or incomplete in any material aspect, or contains any false information, misleading statement, or major omission at the time of execution or during the performance of this Agreement.

15.2 In case of a breach of this Agreement, unless otherwise specially provided, the non-breaching Party may suspend the performance of its/his obligations set forth in this Agreement regarding payment and ownership transfer registration of the Shares and require the breaching Party to rectify and remedy the breach within fifteen (15) working days. If, upon expiry of the fifteen-working-day period, the breaching Party still fails to fully rectify and remedy the breach, the non-breaching Party may terminate this Agreement and claim indemnification against the breaching Party for the breach.

15.3 If, due to the Transferor’s breach of this Agreement, the ownership transfer of the Shares fails to be registered in accordance with Section 5.3, the Transferor and the Transferee shall consult with each other to solve the problem. If no agreement is reached within seven (7) working days through such consultation, the Transferee may:

(1) terminate this Agreement and related transaction documents and cease its acquisition of the Shares. Within fifteen (15) working days following the termination, the Transferor shall refund the Transferee the Transfer Price already paid by the Transferee and further pay the Transferee liquidated damages equal to 20% of the Transfer Price to be refunded; or

(2) proceed with its acquisition of the Shares, provided that, for each day of delay, the Transferor shall pay the Transferee liquidated damages equal to 0.1% of the Transfer Price already paid by the Transferee, until the ownership of the Shares is duly transferred to the Transferee. If the ownership transfer is not completed within twenty (20) working days after the Transferee elects to proceed with the acquisition, the Transferee may terminate this Agreement and related transaction documents, cease the acquisition, and require the Transferor to indemnify it in accordance with the preceding paragraph.

15.4 If, due to the Transferee’s breach of this Agreement, the ownership transfer of the Shares fails to be registered in accordance with Section 5.3, the Transferor and the Transferee shall consult with each other to solve the problem. If no agreement is reached within seven (7) working days through such consultation , the Transferor may:

(1) terminate this Agreement and related transaction documents and cease the Share Transfer. Within fifteen (15) working days following the termination, the Transferee shall pay the Transferor liquidated damages equal to 20% of the Transfer Price already paid by the Transferee; or

- 21 -

(2) proceed with the Share Transfer, provided that, for each day of delay, the Transferee shall pay the Transferor liquidated damages equal to 0.1% of the Transfer Price already paid by the Transferee, until the ownership of the Shares is duly transferred to the Transferee. If the ownership transfer is not completed within twenty (20) working days after the Transferor elects to proceed with the Share Transfer, the Transferor may terminate this Agreement and related transaction documents, cease the Share Transfer, and require the Transferee to indemnify him in accordance with the preceding paragraph.

15.5 If, due to the Transferee’s breach of this Agreement, any amount of the Transfer Price fails to be paid into the Escrow Account or any assistance necessary for releasing funds into the Transferor’s Account fails to be provided as agreed herein, then for each day of delay, the Transferee shall pay the Transferor liquidated damages equal to 0.1% of such unpaid or unreleased amount until the same is fully paid or released or this Agreement is terminated.

15.6 If, due to the Transferor’s breach of this Agreement, any amount of the Transfer Price fails to be paid into the Escrow Account or any assistance necessary for releasing funds into the Transferor’s Account fails to be provided as required herein, then for each day of delay, the Transferor shall pay the Transferee liquidated damages equal to 0.1% of such unpaid or unreleased amount until the same is fully paid or released or this Agreement is terminated.

15.7 If any of the representations, warranties, or undertakings made by the Transferor in Section 10 is untrue, causing any loss or extra cost to or having any other adverse effect on the Company, the Transferor shall indemnify the Company for such losses in full amount within five (5) working days thereafter.

15.8 If the Transferee fails to pay the security deposit into the Escrow Account in accordance with this Agreement, the Transferor may terminate this Agreement. This Section 15 takes effect upon the execution of this Agreement.

15.9 The rights and remedies provided in this Agreement are cumulative and in addition to any other rights or remedies provided under any applicable Laws.

15.10 No waiver by either Party of the other Party’s breach of this Agreement shall be valid unless it is made in writing. No failure or delay by a Party in exercising any right or remedy under this Agreement shall operate as a waiver of such right or remedy, nor shall any partial exercise of any right or remedy by a Party prevent him/it from exercising any other right or remedy.

15.11 Upon termination of this Agreement, unless otherwise agreed by the Parties, each Party shall, under the principles of fairness, reasonableness, and good faith, return any consideration obtained from the other Party under this Agreement so as to restore everything to its original state prior to the execution of this Agreement. At the same time, all rights and obligations of the Parties under this Agreement will terminate. For the avoidance of doubt, the termination of this Agreement will not affect the right of either Party to claim damages in accordance with this Agreement. If the Agreement is terminated for any reason attributable to the Transferor, the Transferee may immediately take back any

- 22 -

amount deposited in the Escrow Account. To that end, the Transferor shall deliver an agreement termination notice in the required form to the Escrow Bank within three (3) working days following the termination.

16 Force Majeure

16.1 In case of an earthquake, typhoon, flood, fire, military action, strike, riot, war, or any other event unforeseen by and beyond the reasonable control of a Party (each, a “Force Majeure Event”), which materially restricts such Party’s ability to perform this Agreement, the Party shall promptly inform the other Party of such event and provide the other Party with relevant materials and proofs in detail within fifteen (15) days after the notice is sent, explaining the specifics of the event and the reason for its/his failure or delay in performance of its/his obligations in whole or in part under this Agreement. The Parties shall thereafter consult with each other to find a solution acceptable to both of them and act on such solution.

16.2 In case of a Force Majeure Event, the Party affected by the event will not be liable for any loss, additional cost, or damage incurred by the other Party due to the first Party’s failure or delay in performance of any obligations hereunder because of the Force Majeure Event, and such failure or delay in performance shall not be regarded as a breach of this Agreement. The Party claiming force majeure shall take appropriate measures to reduce or eliminate the impact of the Force Majeure Event and shall make every effort to resume its performance of the obligations affected by the Force Majeure Event as soon as possible, otherwise, if the impact of the Force Majeure Event is thus expanded, the Party shall not request for an extension of time for or exemption from performance of these obligations to the extent of such expansion.

16.3 In case of a Force Majeure Event, the Parties shall make every effort to perform their respective obligations under this Agreement until the Agreement is terminated in accordance with this Section. However, if the Force Majeure Event lasts for more than three (3) months, then at any time after the three-month period expires, the Party affected by the Force Majeure Event may terminate this Agreement by sending a written notice to the other Party, and this Agreement will terminate with immediate effect upon the other Party’s receipt of the said notice. The termination of the Agreement in accordance with this Subsection will not affect any right that either Party has against the other Party due to the other Party’s breach of the Agreement or indemnification obligation arising hereunder prior to the termination hereof.

17 Amendment and Termination of this Agreement

17.1 This Agreement is irrevocable upon execution by both Parties. Unless otherwise expressly provided herein, no amendment to or termination of this Agreement shall be valid unless and until it is made in writing in the form of a contract and executed by both Parties.

17.2 Subject to the satisfaction of all conditions precedent provided in Section 9, any amendment to this Agreement shall be made in writing and take effect after being signed and sealed by both Parties.

- 23 -

17.3 If any provision of this Agreement needs to be amended due to any change in applicable Laws or policies or as required by any government authorities, the Parties shall make every effort to agree on such amendment and execute an agreement therefor for the purpose of maintaining and confirming the rights and obligations that the Parties enjoy or assume under this Agreement without violating the requirements of the Laws or policies.

17.4 Unless otherwise agreed in this Agreement, no amendment to or termination of this Agreement will affect the Parties’ rights to claim damages. If either Party suffers any loss due to any amendment to or termination of this Agreement, the Party liable for the amendment or termination shall bear such loss or indemnify the other Party for the loss, unless exempted from liability by the applicable Laws or this Agreement.

18 Dispute Resolution

18.1 Any dispute arising from or in connection with this Agreement shall be settled by the Parties through friendly consultation or mediation. If the dispute fails to be settled through such consultation or mediation within thirty (30) days after the dispute arises, either Party may submit the dispute to the people’s courts of the place where the plaintiff is located.

18.2 A dispute referred to in this Section means any dispute between the Parties over the validity, interpretation, performance, breach, amendment, termination, or rescission, among other things, of this Agreement.

18.3 This Section 18 is independent of any other section of this Agreement. This Section takes effect upon execution of this Agreement and will survive the termination hereof.

19 Confidentiality

19.1 General obligations

Unless otherwise agreed in writing by both Parties in advance or otherwise provided by this Agreement or any applicable Laws, neither Party may or may allow any of its directors, employees, representatives, agents, consultants, or attorneys to directly or indirectly disclose or use any of the following confidential information:

(1) Any provision of this Agreement;

(2) Any discussion or agreement between the Parties about the execution or performance of this Agreement or any other information concerning the Share Transfer;

(3) Any non-public information known to a Party about the other Party or any of its affiliates during the course of negotiations on the Share Transfer or performance of this Agreement.

19.2 Special Exemption

- 24 -

A Party shall be exempted from its confidentiality obligations with respect to any confidential information hereunder, if the confidential information:

(1) is disclosed by the Party to any of its employees, representatives, agents, consultants, accountants, attorneys, or other personnel who need to know the information due to their participation in the Share Transfer, provided that such personnel shall keep confidential the information so disclosed.

(2) enters the public domain upon disclosure by a third party for any reason not attributable to the Party; or

(3) has been or is disclosed by the Party as required under any applicable Laws and/or by the securities regulator, relevant stock exchange, or record-filing or approval authorities.

19.3 Remedy

Both Parties agree that any violation of the confidentiality obligations under this Section 19 will be considered a breach of this Agreement and the non-breaching Party is entitled to hold the breaching Party liable for the breach. The non-breaching Party may also initiate any proceedings to end the breach or seek any other remedies to stop it from developing any further.

19.4 Unless otherwise provided by any applicable Laws or required by competent government authorities, without the prior written consent of the other Party (such consent shall not be unreasonably withheld), neither Party may allow any person to make any public comment, opinion, or report on any matter related to or ancillary to this Agreement.

19.5 Survival

The confidentiality obligations set forth in this Section 19 will survive the termination of this Agreement.

20 Notice

20.1 Any notice or other correspondence between the Transferor and the Transferee in relation to this Agreement (a “Notice”) shall be made in written form, including in the case of delivery in person, by fax, express courier, mail, and email.

20.2 A Notice shall be delivered in person, by fax, express courier, mail, or email and will be deemed received:

(1) when the recipient signs to acknowledge its receipt of the Notice, if delivered in person. The Notice shall be deemed received without the recipient’s signature;

(2) forty-eight (48) hours after being handed over to the courier or deposited in the mail, if delivered by express courier or mail, in each case, registered mail or express mail must be used. In case the forty-eight-

- 25 -

hour period ends on a weekend or public holiday, the Notice will be deemed received on the first working day following the weekend or public holiday; or

(3) upon a transmission confirmation is obtained after the notice is sent, if delivered by fax or email; provided that if the Notice is sent on a weekend or public holiday, the Notice will be deemed received on the first working day following the weekend or public holiday.

20.3 A Notice required to be given hereunder shall not be deemed as a valid Notice unless it is sent to the receiving Party at its/his mail address or contact number set out below and clearly indicates the name of its/his contact person:

Transferee:

Contact Person: ***

Address: Building B2, Zhong’an Chuanggu Technology Park, 900 Wangjiang West Road, National High-tech Industry Development Zone, Hefei City, Anhui Province

Postcode: ***

Tel: ***

Fax: ***

Email: ***

Transferor

Contact Person: ***

Address: ***

Postcode: ***

Tel: ***

Fax: ***

Email: ***

20.4 In case a Party’s mail address or contact number is changed, the Party shall notify the other Party within two (2) days after such change occurs.

21 Headings

21.1 All headings in this Agreement are inserted for reference only and shall not be used to interpret any provision hereof. The meaning of each provision shall be subject to the main body of the provision.

22 Waiver

22.1 No failure or delay in exercise or partial exercise of any right hereunder by a Party shall be construed as a waiver of such right or any other right hereunder. No waiver of a breach or of its/his right to claim against a breach by a Party

- 26 -

shall be construed as a waiver by the Party of the same breach or its/his right to claim against a breach in the future.

23 Further Waiver

23.1 Upon reasonable request by the Transferee from time to time, the other Party shall take or cause to be taken all such further actions and execute or cause to be executed all such other documents as necessary for granting all rights, powers, and remedies that the Transferee is entitled to hereunder.

24 Invalidity

24.1 If any one or more provisions hereof or other document related thereto is/are held invalid, illegal, or unenforceable under any applicable Law: (1) the validity, legality, and enforceability of the remaining provisions will not be affected or prejudiced, and such remaining provisions shall remain in full effect; and (2) the Parties shall consult with each other in good faith to amend this Agreement or execute a supplemental agreement hereto based on the relevant circumstances to reflect the original intent of this Agreement and the rights or obligations that the Parties enjoy or assume as originally agreed in this Agreement.

25 Expenses

25.1 The Parties shall bear their own expenses and costs arising from negotiations on and drafting, execution, and performance of this Agreement and pay their own taxes in accordance with the applicable Laws.

25.2 The Transfer Price is inclusive of tax.

26 Applicable Law

26.1 This Agreement is governed by the Laws of the People’s Republic of China.

27 Supplemental Agreement

27.1 The Parties may enter into one or more supplemental agreements upon consultation with each other to lay down anything not covered or clearly stated in this Agreement.

28 Counterpart

28.1 This Agreement shall be made and executed in six (6) copies, with each Party holding one (1) copy, and the rest four (4) copies will be submitted to relevant authorities for procedural purposes. Each copy has the same legal effect.

(The remainder of this page is intentionally left blank)

- 27 -

Appendix 1

List of Major Assets Directly or Indirectly Owned or Held by the Target Company

- 1 -

Appendix 2

Encumbrances on the Shares

- 2 -

Appendix 3

Letter of Disclosure

- 3 -

Appendix 4

List of Subsidiaries

- 4 -

(Signature page of the Share Transfer Agreement in Respect of Shares in Jiangsu Yitong High-tech Co., Ltd., and no text on this page)

Transferee (seal): Anhui Shunyuan Xinke Management Consulting Partnership (LP)

/seal/ Anhui Shunyuan Xinke Management Consulting Partnership (LP)

Signed by:
	Managing Partner or his/her Authorized Representative

Date: January 5, 2021

- 5 -

(Signature page of the Share Transfer Agreement in Respect of Shares in Jiangsu Yitong High-tech Co., Ltd., and no text on this page)

Transferor (signature): /s/ Wang Zhenhong

Date: January 5, 2021

- 6 -

EX-8.1

Exhibit 8.1

List of Subsidiaries and Consolidated Variable Interest Entities of Zepp Health Corporation

Subsidiaries	Place of Incorporation
ZEPP Inc.	United States
Huami North America Inc.	United States
Zepp Investment Platform I Ltd.	United States
ZEPP Inc. (Canada)	Canada
Galaxy Trading Platform Limited	British Virgin Islands
Zepp Europe Holding B.V.	Netherlands
Hong Kong Zepp Holding Limited	Hong Kong
Beijing Shunyuan Kaihua Technology Co., Ltd.	People’s Republic of China
Anhui Huami Health 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
Huzhou Huayuan Chuangxu Management Consulting Partnership (L.P.)	People’s Republic of China
Anhui Shunyuan Xinke Management Consulting Partnership (L.P.)	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
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	People’s Republic of China

1

EX-12.1

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 Zepp Health 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(s) 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(s) 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 19, 2021
By:	/s/Wang Huang
Name:	Wang Huang
Title:	Chief Executive Officer

1

EX-12.2

EXHIBIT 12.2

Certification by the Principal Financial Officer

Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Leon Cheng Deng, certify that:

1. I have reviewed this annual report on Form 20-F of Zepp Health 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(s) 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(s) 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 19, 2021
By:	/s/ Leon Cheng Deng
Name:	Leon Cheng Deng
Title:	Chief Financial Officer

1

EX-13.1

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 Zepp Health Corporation (the “Company”) on Form 20-F for the fiscal year ended December 31, 2020 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; 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 19, 2021
By:	/s/Wang Huang
Name:	Wang Huang
Title:	Chief Executive Officer

1

EX-13.2

EXHIBIT 13.2

Certification by the Principal Financial Officer

Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

In connection with the Annual Report of Zepp Health Corporation (the “Company”) on Form 20-F for the fiscal year ended December 31, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leon Cheng Deng, 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; 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 19, 2021
By:	/s/ Leon Cheng Deng
Name:	Leon Cheng Deng
Title:	Chief Financial Officer

1

EX-15.1

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 19, 2021, relating to the financial statements of Zepp Health Corporation (formerly, Huami Corporation) appearing in this Annual Report on Form 20-F for the year ended December 31, 2020.

/s/ Deloitte Touche Tohmatsu Certified Public Accountants LLP

Beijing, the People’s Republic of China

April 19, 2021

EX-15.2

Exhibit 15.2

CONSENT LETTER

To          Zepp Health Corporation

Huami Global Innovation Center

Building B2, Zhong’an Chuanggu Technology Park

No. 900 Wangjiang West Road, Hefei, 230088

People’s Republic of China

April 19, 2021

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 Zepp Health Corporation’s Annual Report on Form 20-F for the year ended December 31, 2020 (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 Zepp Health 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.

[The remainder of this page is intentionally left blank.]

[Signature Page]

Yours faithfully,

/s/ Zhong Lun Law Firm

XML

Document and Entity Information	12 Months Ended
	Dec. 31, 2020 shares
Document Information
Document Type	20-F
Document Registration Statement	false
Document Annual Report	true
Document Transition Report	false
Document Shell Company Report	false
Document Period End Date	Dec. 31, 2020
Entity File Number	001-38369
Entity Registrant Name	Zepp Health Corp
Entity Central Index Key	0001720446
Entity Incorporation, State or Country Code	E9
Entity Address, Address Line One	Building B2, Zhong’an Chuanggu Technology Park
Entity Address, Address Line Two	No. 900 Wangjiang West Road
Entity Address, City or Town	Hefei
Entity Address, Postal Zip Code	230088
Entity Address, Country	CN
Title of 12(b) Security	American depositary shares (each representing four Class A ordinary shares Class A ordinary shares, par value US$0.0001 per share)
Trading Symbol	ZEPP
Security Exchange Name	NYSE
Entity Well-known Seasoned Issuer	No
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Entity Filer Category	Accelerated Filer
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Document Accounting Standard	U.S. GAAP
Entity Shell Company	false
Document Fiscal Year Focus	2020
Document Fiscal Period Focus	FY
Current Fiscal Year End Date	--12-31
Amendment Flag	false
ICFR Auditor Attestation Flag	false
Business Contact
Document Information
Entity Address, Address Line One	Building B2, Zhong’an Chuanggu Technology Park
Entity Address, Address Line Two	No. 900 Wangjiang West Road
Entity Address, City or Town	Hefei
Entity Address, Postal Zip Code	230088
City Area Code	+86 010
Local Phone Number	5940 3268
Entity Address, Country	CN
Contact Personnel Name	Leon Cheng Deng
Contact Personnel Email Address	ir@zepp.com
Class A Ordinary Shares
Document Information
Entity Common Stock, Shares Outstanding	128,736,916
Class B Ordinary Shares
Document Information
Entity Common Stock, Shares Outstanding	121,408,247

XML

CONSOLIDATED BALANCE SHEETS ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)
Current assets:
Cash and cash equivalents	¥ 2,273,349	$ 348,406	¥ 1,803,117
Restricted cash	2,401	368	874
Term deposit	5,000	766
Accounts receivable (net of allowance of nil and nil as of December 31, 2019 and 2020, respectively)	298,038	45,676	188,940
Amounts due from related parties (net of allowance of nil and nil as of December 31, 2019 and 2020, respectively)	860,213	131,833	1,421,170
Inventories, net	1,217,537	186,596	893,806
Short-term investments	18,430	2,825	17,187
Prepaid expenses and other current assets	152,898	23,433	67,358
Total current assets	4,827,866	739,903	4,392,452
Property, plant and equipment, net	124,619	19,099	64,350
Intangible assets, net	145,213	22,255	85,753
Long-term investments	443,986	68,044	406,099
Deferred tax assets	120,190	18,420	102,649
Operating lease right-of-use assets	151,165	23,167	108,682
Goodwill	62,515	9,581	5,930
Other non-current assets	28,165	4,316	8,828
Total assets	5,903,719	904,785	5,174,743
Current liabilities:
Accounts payable (including accounts payable of the consolidated VIEs without recourse to the Group of RMB1,996,010 and RMB1,945,731 as of December 31, 2019 and 2020, respectively)	1,951,335	299,055	1,999,951
Advance from customers (including advance from customers of the consolidated VIEs without recourse to the Group of RMB44,380 and RMB41,312 as of December 31, 2019 and 2020, respectively)	42,502	6,514	44,793
Amount due to related parties (including amount due to related parties of the consolidated VIEs without recourse to the Group of RMB14,769 and RMB892 as of December 31, 2019 and 2020, respectively)	11,185	1,714	14,769
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Group of RMB236,708 and RMB175,747 as of December 31, 2019 and 2020, respectively)	252,275	38,663	352,249
Income tax payables of the consolidated VIEs without recourse to the Group	27,706	4,246	67,854
Notes payable of the consolidated VIEs without recourse to the Group			2,184
Short-term bank borrowings of the consolidated VIEs without recourse to the Group	504,671	77,344
Total current liabilities	2,789,674	427,536	2,481,800
Deferred tax liabilities (including deferred tax liabilities of the consolidated VIEs without recourse to the Group of RMB5,399 and RMB17,171 as of December 31, 2019 and 2020, respectively)	22,374	3,429	5,399
Other non-current liabilities (including other non-current liabilities of the consolidated VIEs without recourse to the Group of RMB113,596 and RMB183,920 as of December 31, 2019 and 2020, respectively)	185,168	28,378	113,596
Long-term borrowing of the consolidated VIEs without recourse to the Group	60,000	9,195
Noncurrent operating lease liabilities (including Noncurrent operating lease liabilities of the consolidated VIEs without recourse to the Group of RMB 64,300 and RMB48,650 as of December 31, 2019 and 2020, respectively)	116,245	17,815	76,360
Total liabilities	3,173,461	486,353	2,677,155
Equity
Additional paid-in capital	1,552,109	237,871	1,478,902
Accumulated retained earnings	1,133,368	173,696	910,612
Accumulated other comprehensive income	44,624	6,841	111,081
Total Zepp Health Corporation shareholders' equity	2,730,258	418,432	2,500,750
Noncontrolling interest			(3,162)
Total equity	2,730,258	418,432	2,497,588
Total liabilities and equity	5,903,719	904,785	5,174,743
Class A Ordinary Shares
Equity
Ordinary shares	81	12	57
Class B Ordinary Shares
Equity
Ordinary shares	¥ 76	$ 12	¥ 98

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CONSOLIDATED BALANCE SHEETS (Parenthetical) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥) shares	Dec. 31, 2019 CNY (¥) shares
Allowance for doubtful accounts	¥ 0	¥ 0
Amounts due from related parties, allowance	0	0
Accounts payable	1,951,335	1,999,951
Advance from customers	42,502	44,793
Amount due to related parties	11,185	14,769
Accrued expenses and other current liabilities	252,275	352,249
Deferred tax liabilities	22,374	5,399
Other non-current liabilities	185,168	113,596
Noncurrent operating lease liabilities	¥ 116,245	¥ 76,360
Class A Ordinary Shares
Ordinary shares, authorized | shares	9,800,000,000	9,800,000,000
Ordinary shares, issued | shares	128,736,916	91,459,708
Ordinary shares, outstanding | shares	128,736,916	91,459,708
Class B Ordinary Shares
Ordinary shares, authorized | shares	200,000,000	200,000,000
Ordinary shares, issued | shares	121,408,247	156,060,279
Ordinary shares, outstanding | shares	121,408,247	156,060,279
Variable Interest Entities
Accounts payable	¥ 1,945,731	¥ 1,996,010
Advance from customers	41,312	44,380
Amount due to related parties	892	14,769
Accrued expenses and other current liabilities	175,747	236,708
Deferred tax liabilities	17,171	5,399
Other non-current liabilities	183,920	113,596
Noncurrent operating lease liabilities	¥ 48,650	¥ 64,300

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CONSOLIDATED STATEMENTS OF OPERATIONS ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥) ¥ / shares shares	Dec. 31, 2020 USD ($) $ / shares shares	Dec. 31, 2019 CNY (¥) ¥ / shares shares	Dec. 31, 2018 CNY (¥) ¥ / shares shares
Revenues (including RMB2,816,995, RMB4,281,005 and RMB4,449,757 with related parties for the years ended December 31, 2018, 2019 and 2020, respectively)	¥ 6,433,363	$ 985,956	¥ 5,812,255	¥ 3,645,335
Cost of revenues (including RMB2,141,123, RMB3,342,084 and RMB3,713,536 with related parties for the years ended December 31, 2018, 2019 and 2020, respectively)	5,100,698	781,716	4,344,512	2,705,885
Gross profit	1,332,665	204,240	1,467,743	939,450
Operating expenses
Selling and marketing	358,655	54,966	181,975	96,538
General and administrative	261,805	40,123	248,462	213,973
Research and development	538,009	82,453	430,822	263,220
Total operating expenses	1,158,469	177,542	861,259	573,731
Operating income	174,196	26,698	606,484	365,719
Other income and expenses
Interest income	46,118	7,068	33,478	11,595
Realized gain from investments			1,822	261
Gain from deconsolidation of a subsidiary	56,522	8,663
Gain from fair value change of long-term investments	12,325	1,888		7,860
Impairment loss from long-term investments			(2,600)	(7,590)
Other income (expense), net	(23,552)	(3,610)	13,186	8,768
Income before income tax and income/(loss) from equity method investments	265,609	40,707	652,370	386,613
Provision for income taxes	(31,154)	(4,775)	(77,887)	(52,036)
Income before income/(loss) from equity method investments	234,455	35,932	574,483	334,577
Income/(loss) from equity method investments	(4,749)	(728)	(1,112)	1,743
Net income	229,706	35,204	573,371	336,320
Less: Net (loss) income attributable to noncontrolling interest	953	146	(1,825)	(3,726)
Net income attributable to Zepp Health Corporation	228,753	35,058	575,196	340,046
Less: Deemed dividend to preferred shareholders				209,752
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares			2,450	12,210
Net income attributable to ordinary shareholders of Zepp Health Corporation	¥ 228,753	$ 35,058	¥ 572,746	¥ 113,490
Net income per share attributable to ordinary shareholders of Zepp Health Corporation
Basic income per ordinary share | (per share)	¥ 0.92	$ 0.14	¥ 2.35	¥ 0.54
Diluted income per ordinary share | (per share)	¥ 0.88	$ 0.13	¥ 2.24	¥ 0.51
Weighted average number of shares used in computing net income per share
Ordinary share - basic | shares	248,470,684	248,470,684	243,648,186	211,873,704
Ordinary share - diluted | shares	260,351,994	260,351,994	255,959,172	225,034,650
Series A Preferred Shares
Other income and expenses
Less: Accretion of Preferred Shares				¥ 177
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares				4,521
Series B-1 Preferred Shares
Other income and expenses
Less: Accretion of Preferred Shares				368
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares				126
Series B-2 Preferred Shares
Other income and expenses
Less: Accretion of Preferred Shares				4,049
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares				¥ 1,319

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CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
CONSOLIDATED STATEMENTS OF OPERATIONS
Revenue from related parties	¥ 4,449,757	¥ 4,281,005	¥ 2,816,995
Cost of revenue related parties	¥ 3,713,536	¥ 3,342,084	¥ 2,141,123

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Net income	¥ 229,706	$ 35,204	¥ 573,371	¥ 336,320
Other comprehensive income/(loss) net of tax
Foreign currency translation adjustment	(45,117)	(6,914)	11,274	60,357
Unrealized gain on available-for-sale investments and others, (net of tax effect of RMB2,250, RMB620 and RMB4,017 for years ended December 31, 2018, 2019 and 2020, respectively)	(21,340)	(3,270)	2,666	14,684
Comprehensive income	163,249	25,020	587,311	411,361
Less: Net (loss) income attributable to noncontrolling interest	953	146	(1,825)	(3,726)
Comprehensive income attributable to Zepp Health Corporation	¥ 162,296	$ 24,874	¥ 589,136	¥ 415,087

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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Parenthetical) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Unrealized gain on available-for-sale investments and others, tax effect	¥ 4,017	¥ 620	¥ 2,250

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CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY ¥ in Thousands, $ in Thousands	Ordinary Shares Series A Preferred Shares CNY (¥) shares	Ordinary Shares Initial Public Offering CNY (¥) shares	Ordinary Shares CNY (¥) shares	Additional Paid-in Capital Series A Preferred Shares CNY (¥)	Additional Paid-in Capital Series B Preferred Shares CNY (¥)	Additional Paid-in Capital Initial Public Offering CNY (¥)	Additional Paid-in Capital CNY (¥)	Accumulated Other Comprehensive Income CNY (¥)	Accumulated Retained Earnings CNY (¥)	Total Huami Corporation Shareholders' (Deficit)/Equity Series A Preferred Shares CNY (¥)	Total Huami Corporation Shareholders' (Deficit)/Equity Series B Preferred Shares CNY (¥)	Total Huami Corporation Shareholders' (Deficit)/Equity Initial Public Offering CNY (¥)	Total Huami Corporation Shareholders' (Deficit)/Equity CNY (¥)	Noncontrolling Interest CNY (¥)	Series A Preferred Shares CNY (¥)	Series B Preferred Shares CNY (¥)	Initial Public Offering CNY (¥)	CNY (¥)	USD ($)
Beginning Balance at Dec. 31, 2017			¥ 56				¥ 72,427	¥ 22,100	¥ 131,192				¥ 225,775	¥ 2,389				¥ 228,164
Beginning Balance, shares at Dec. 31, 2017 | shares			91,304,327
Accretion of preferred shares				¥ (177)	¥ (4,417)					¥ (177)	¥ (4,417)				¥ (177)	¥ (4,417)
Issuance of ordinary shares		¥ 26				¥ 657,035						¥ 657,061					¥ 657,061
Issuance of ordinary shares, shares | shares		41,600,000
Conversion of participating convertible redeemable preferred shares to ordinary shares upon initial public offering			¥ 60				354,152						354,212					354,212
Conversion of participating convertible redeemable preferred shares to ordinary shares upon initial public offering, shares | shares			94,537,315
Exercise of option and restricted shares			¥ 2				3,484						3,486					3,486
Exercise of option and restricted shares, shares | shares			2,661,305
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							(8,157)						(8,157)					(8,157)
Repurchase of ordinary shares | shares			(488,000)
Unrealized loss on available-for-sale investments								14,684					14,684					14,684
Deemed dividend related to issuance of ordinary shares to preferred shareholders			¥ 7				164,521		(164,521)				7					7
Deemed dividend related to issuance of ordinary shares to preferred shareholders, Shares | shares			12,064,825
Ending Balance (Cumulative effect adjustment for adoption of ASC 606) at Dec. 31, 2018									33,329				33,329					33,329
Ending Balance at Dec. 31, 2018			¥ 151				1,373,577	97,141	340,046				1,810,915	(1,337)				1,809,578
Ending Balance, shares at Dec. 31, 2018 | shares			241,679,772
Issuance of ordinary shares		¥ 2				¥ 49,174						¥ 49,176					¥ 49,176
Issuance of ordinary shares, shares | shares		3,174,600
Exercise of option and restricted shares	¥ 2			¥ 931						¥ 933					¥ 933
Exercise of option and restricted shares, shares | shares	2,665,615
Net income									575,196				575,196	(1,825)				573,371
Foreign currency translation adjustment								11,274					11,274					11,274
Share-based compensation							55,128						55,128					55,128
Unrealized loss on available-for-sale investments								2,666					2,666					2,666
Deemed dividend to shareholders									(4,538)				(4,538)					(4,538)
Statutory reserve							92		(92)
Ending Balance at Dec. 31, 2019			¥ 155				1,478,902	111,081	910,612				2,500,750	(3,162)				2,497,588
Ending Balance, shares at Dec. 31, 2019 | shares			247,519,987
Exercise of option and restricted shares			¥ 2				(2)
Exercise of option and restricted shares, shares | shares			2,625,176
Net income									228,753				228,753	953				229,706	$ 35,204
Foreign currency translation adjustment								(45,117)					(45,117)					(45,117)	(6,914)
Share-based compensation							67,212						67,212					67,212
Unrealized loss on available-for-sale investments								(21,340)					(21,340)					(21,340)	(3,270)
Statutory reserve							5,997		(5,997)
Deconsolidation of a subsidiary														¥ (2,209)				(2,209)
Ending Balance at Dec. 31, 2020			¥ 157				¥ 1,552,109	¥ 44,624	¥ 1,133,368				¥ 2,730,258					¥ 2,730,258	$ 418,432
Ending Balance, shares at Dec. 31, 2020 | shares			250,145,163

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CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (Parenthetical) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2019 USD ($)	Dec. 31, 2018 USD ($)
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
Offering costs	$ 434	$ 10,512

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CONSOLIDATED STATEMENTS OF CASH FLOWS ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
Cash Flows from Operating Activities
Net income	¥ 229,706	$ 35,204	¥ 573,371	¥ 336,320
Adjustment to reconcile net income to net cash provided by operating activities:
Non-cash lease expense	48,191	7,386	27,683
Depreciation and amortization	27,129	4,158	17,215	6,216
Provision and write off for excess and obsolete inventories	64,223	9,843	23,799
Share-based compensation	65,154	9,985	55,128	134,709
Share of results of equity method investment	4,749	728	1,112	(1,743)
Loss on disposal of property, plant and equipment	7,406	1,135	767	26
Gain from fair value change of long-term investments	(12,325)	(1,888)		(7,860)
Deferred income taxes	(10,442)	(1,600)	(27,800)	(32,895)
Gain from deconsolidation of a subsidiary	(56,522)	(8,663)
Write-off of short-term loans			5,640	5,500
Impairment loss from long-term investments			2,600	7,590
Realized gain from investments			(1,822)	(261)
Others				295
Changes in operating assets and liabilities
Accounts receivable	(131,215)	(20,110)	(130,015)	(26,058)
Inventories	(410,691)	(62,941)	(432,983)	(234,887)
Prepaid expenses and other current assets	(79,957)	(12,257)	(32,444)	(5,748)
Amount due from related parties	583,457	89,419	(770,976)	(45,116)
Other non-current assets	(33,049)	(5,065)	(2,678)	(3,150)
Amount due to related parties	(3,584)	(549)	4,074	5,757
Accounts payable	(9,761)	(1,496)	935,845	356,324
Notes payable	(2,184)	(335)	(16,752)	13,693
Advance from customers	(2,189)	(335)	38,850	(4,740)
Income tax payable	(40,148)	(6,153)	13,817	32,437
Accrued expense and other current liabilities	(149,385)	(22,894)	86,221	119,887
Other non-current liability	68,739	10,535	57,347	51,309
Net Cash provided by Operating Activities	157,302	24,107	427,999	707,605
Cash Flows from Investing Activities
Purchase of property, plant and equipment	(83,554)	(12,805)	(34,276)	(17,136)
Purchase of intangible assets	(1,220)	(187)	(11,845)	(52,017)
Purchase of term deposits	(212,065)	(32,500)		(385,028)
Proceeds from maturity of term deposits	207,065	31,734	96,969	288,771
Loans provided to related parties				(5,000)
Loans provided to third-parties	(480)	(74)		(8,920)
Proceeds received from loan repayment			6,772	5,578
Purchase of short-term investments				(41,300)
Purchase of long-term investments	(82,221)	(12,600)	(180,927)	(109,854)
Disposal of long-term investments			10,461
Acquisition of businesses and assets, net of cash acquired of RMB7,497	(26,713)	(4,094)
Deconsolidation of a subsidiary	(7,701)	(1,180)
Other investing activities	9	1	143	65
Net Cash Used in Investing Activities	(206,880)	(31,705)	(112,703)	(324,841)
Cash Flows from Financing Activities
Loans repaid to related party				(3,221)
Exercise of share options and restricted shares			933	3,486
Bank borrowings	1,207,793	185,102		20,000
Repayment of bank borrowing	(643,122)	(98,563)	(20,000)	(30,000)
Net proceeds from initial public offering				657,062
Repurchase of ordinary shares				(8,157)
Net proceeds from the secondary offering			49,214
Deemed dividend to shareholders			(4,538)
Net Cash Provided by Financing Activities	564,671	86,539	25,609	639,170
Net increase in cash and cash equivalents and restricted cash	515,093	78,941	340,905	1,021,934
Effect of exchange rate changes	(43,334)	(6,641)	11,274	60,357
Cash and cash equivalents and restricted cash at beginning of year	1,803,991	276,474	1,451,812	369,521
Cash and cash equivalents and restricted cash at end of the year	2,275,750	348,774	1,803,991	1,451,812
Supplemental disclosure of cash flow information
Income tax paid	82,406	12,629	91,732	52,063
Interest paid	14,858	2,277	286	1,310
Non-cash investing and financing activity
Payable for long-term investment				275
Payable for Intangible asset	1,641	251	16
Receivable from the disposal of a subsidiary	22,500	3,448
Conversion from convertible bond to equity interest investment	8,393	1,286	15,800
Disposal of previous equity interest in exchange for acquisition	87,716	13,443
Forgiveness of loan related to acquisition	13,711	2,101
Non-monetary exchange of convertible bond to intangible assets			8,019	7,104
Non-monetary transaction of exchanging loan for Intangible assets			9,957
Payable for property, plant and equipment	¥ 173	$ 27	¥ 351	15
Conversion of preferred shares to ordinary shares				354,212
Deemed dividend related to issuance of ordinary shares to preferred shareholders				¥ 209,752

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CONSOLIDATED STATEMENTS OF CASH FLOWS (Parenthetical) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)
CONSOLIDATED STATEMENTS OF CASH FLOWS
Purchase of business, cash acquired	¥ 7,497

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ORGANIZATION AND PRINCIPAL ACTIVITIES

12 Months Ended

Dec. 31, 2020

ORGANIZATION AND PRINCIPAL ACTIVITIES

ORGANIZATION AND PRINCIPAL ACTIVITIES

1. ORGANAZATION AND PRINCIPAL ACTIVITIES

Zepp Health Corporation (the “Company”), formerly known as Huami Corporation, 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”), Anhui Huami's subsidiaries and Beijing Huami's subsidiaries, are collectively referred to as the “Group”.

The Group primarily engages in the business of developing, manufacturing and selling smart, wearable technological devices in the People’s Republic of China (“PRC”). During the years ended December 31, 2018, 2019 and 2020, the Group derived 66.9%, 72.2% and 69.0% 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, 2020, details of the Company’s major subsidiaries and major VIEs were as follows:

		Date of	Percentage
	Place of incorporation	incorporation/acquisition	of ownership
Major subsidiaries of the Company:
Hong Kong Zepp Holding Limited (“Zepp HK”)	Hong Kong (“HK”)	December 23, 2014	100%
ZEPP, INC. (“Zepp Inc”)	United States of America (“U.S.”)	January 15, 2015	100%
Beijing ShunYuan KaiHua Technology Co., Ltd. (“Shun Yuan”)	PRC	February 25, 2015	100%
Huami (Shenzhen) Information Technology Co., Ltd.	PRC	December 7, 2015	100%
Anhui Huami Intelligent Technology Co., Ltd. (“Huami Intelligent”)	PRC	December 28, 2015	100%
Huami North America Inc. ("HNA")	U.S.	June 16, 2016	100%
Galaxy Trading Platform Limited ("Galaxy")	HK	May 8, 2019	100%
Zepp Europe Holding B.V.	Netherlands	June 11, 2020	100%
Variable interest entities of the Company:
Anhui Huami	PRC	December 27, 2013	Consolidated VIE
Beijing Huami	PRC	July 11, 2014	Consolidated VIE
Major subsidiaries of Anhui Huami:
Anhui Huami Healthcare Co., Ltd.	PRC	December 5, 2016	VIE’s subsidiary

The VIE arrangements

The Company conducts substantially all of its smart, wearable and technological devices business in the PRC through contractual arrangements with its VIEs, Anhui Huami and 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.

1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

VIE Arrangements between the VIEs and the Company’s PRC subsidiary

The Company, through Shun Yuan, a wholly-owned subsidiary of the Company in the PRC (the “WFOE”) has entered into the following contractual arrangements with Anhui Huami, Beijing Huami and their shareholders that enable the Company to (1) have power to direct the activities that most significantly affects the economic performance of the VIEs, and (2) receive the economic benefits of the VIEs that could be significant to the VIEs. Accordingly, the Company is considered the primary beneficiary of the VIEs and has consolidated the VIEs’ financial results of operations, assets and liabilities in the Company’s consolidated financial statements. In making the conclusion that the Company is the primary beneficiary of the VIEs, the Company believes the Company’s rights under the terms of the purchase option agreement provide it with a substantive kick-out right. More specifically, the Company believes the terms of the purchase option agreement are valid, binding and enforceable under PRC laws and regulations currently in effect. The Company also believes that the consideration which is the minimum amount permitted by the applicable PRC law to exercise the option does not represent a financial barrier or disincentive for the Company to currently exercise its rights under the purchase option agreement.

A simple majority vote of the Company’s board of directors is required to pass a resolution to exercise the Company’s rights under the purchase option agreement, for which Mr. Wang Huang’s, the chief executive officer (“CEO”) 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.

1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

Equity pledge agreement - continued

On March 20, 2020, due to the change of the nominee shareholders in the VIEs, the Group updated the registration of its equity pledge for Anhui Huami and Beijing Huami. The equity pledge agreement for Anhui Huami and Beijing Huami was amended and restated with the same terms as before.

Exclusive purchase option agreement

Pursuant to the exclusive purchase option agreements entered into on April 29, 2015 and amended on November 3, 2017 among Shun Yuan, Anhui Huami, Beijing Huami and their shareholders, the shareholders of Anhui Huami and Beijing Huami are obligated to sell 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.

1. ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

Risks in relation to VIE structure

The Company believes that the contractual arrangements with its VIEs and their respective shareholders are in compliance with PRC laws and regulations and are legally enforceable. However, uncertainties in the PRC legal system could limit the Company’s ability to enforce the contractual arrangements. If the legal structure and contractual arrangements were found to be in violation of PRC laws and regulations, the PRC government could:

● revoke the business and operating licenses of the Company’s PRC subsidiaries and VIEs;

● discontinue or restrict the operations of any related-party transactions between the Company’s PRC subsidiaries and VIEs;

● limit the Group’s business expansion in China by way of entering into contractual arrangements;

● impose fines or other requirements with which the Company’s PRC subsidiaries and VIEs may not be able to comply;

● impose additional conditions or requirements with which the Group may not be able to comply;

● take other regulatory or enforcement actions against the Group that could be harmful to the Group’s business or

● require the Company or the Company’s PRC subsidiaries or VIEs to restructure the relevant ownership structure or operations.

The Company’s ability to conduct its business may be negatively affected if the PRC government were to carry out any of the aforementioned actions. As a result, the Company may not be able to consolidate its VIEs in its consolidated financial statements as it may lose the ability to exert effective control over the VIEs and their respective shareholders and it may lose the ability to receive economic benefits from the VIEs. The Company, however, does not believe such actions would result in the liquidation or dissolution of the Company, its PRC subsidiaries or VIEs.

The VIE agreements were amended on November 3, 2017 and March 20, 2020 with no significant differences.

Mr. Huang is the largest shareholder of Anhui Huami and Beijing Huami, and Mr. Huang is also the largest beneficiary owner of the Company. The interests of Mr. Huang as the largest beneficiary owner of the VIEs may differ from the interests of the Company as a whole, since Mr. Huang is only one of the beneficiary shareholders of the Company, holding 27.8% of the total common shares as of December 31, 2020. 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.

1.ORGANAZATION AND PRINCIPAL ACTIVITIES - CONTINUED

Risks in relation to VIE structure - continued

In addition, most of the current shareholders of Anhui Huami and Beijing Huami are also beneficial owners of the Company and therefore have no current interest in seeking to act contrary to the contractual arrangements. However, to further protect the investors’ interest from any risk that the shareholders of Anhui Huami and Beijing Huami may act contrary to the contractual arrangements, the Company, through Shun Yuan, entered into an irrevocable power of attorney with all of the shareholders of Anhui Huami and Beijing Huami on April 29, 2015 and November 3, 2017. Through the power of attorney, all shareholders of Anhui Huami and Beijing Huami have entrusted the person designated by Shun Yuan as its proxy to exercise their rights as the shareholders of Anhui Huami and Beijing Huami with respect to an aggregate of 100% of the equity interests in Anhui Huami and Beijing Huami.

The following financial statement 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,
	2019	2020
	RMB	RMB
Total current assets	3,828,544	3,675,394
Total non-current assets	466,774	593,603
Total assets	4,295,318	4,268,997
Total current liabilities	2,361,906	2,696,059
Total non-current liabilities	183,295	309,741
Total liabilities	2,545,201	3,005,800

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Revenues	3,638,560	5,801,405	6,297,534
Net income	643,239	987,672	751,803

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Net cash provided by operating activities	712,210	478,806	165,512
Net cash used in investing activities	(72,862)	(126,887)	(728,797)
Net cash provided by/(used in) financing activities	(13,221)	(20,000)	564,671

The intercompany payable between Anhui Huami and Shunyuan were RMB43,971 and RMB153,190 as of December 31, 2019 and 2020, respectively. Those were eliminated by the Company upon consolidation.

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SIGNIFICANT ACCOUNTING POLICIES

12 Months Ended

Dec. 31, 2020

SIGNIFICANT ACCOUNTING POLICIES

SIGNIFICANT ACCOUNTING POLICIES

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.

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Reclassifications

Certain reclassifications have been made to the prior years’ consolidated financial statements to conform to the current year’s presentation. These reclassifications had no impact on net income, shareholders’ equity, or cash flows as previously reported.

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the consolidated financial statements and accompanying notes. Significant accounting estimates reflected in the Group’s consolidated financial statements include allowance for doubtful accounts, inventory valuation, the useful lives of long-lived assets, impairment of long-lived assets, impairment of goodwill, incremental borrowing rate for leases, product warranties, fair value measurement of long-term available-for-sale investments and long-term investments of non-marketable equity securities with fair value change through profit or loss, share-based compensation, the valuation allowance for deferred tax assets and income tax. Actual results could differ from those estimates, and such differences may be material to the consolidated financial statements.

Fair value

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:

Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

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, 2019 and 2020.

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Measured fair value on a nonrecurring basis

The Group measured acquired intangible assets using the income approach-discounted cash flow method when events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. The fair values were determined using models with significant unobservable inputs (Level 3 inputs). The Group did not recognize any impairment loss related to acquired intangible assets arising from acquisitions during the years ended December 31, 2018, 2019 and 2020.

The Group measured the fair value of the intangible assets acquired through non-monetary exchange at fair value. The fair values were 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 19% was used for the fair value measurement of intangible assets during 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 the reporting unit is determined using discounted cash flows. The Group did not recognize any impairment loss related to goodwill during the years ended December 31, 2018, 2019 and 2020.

For equity investments without readily determinable fair values for which the Company elected to use the measurement alternative, the equity investment is measured at fair value on a nonrecurring basis when there is an orderly transaction for identical or similar investments of the same issuer.

Fair value of financial instruments

The Group'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 long-term bank borrowing. 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. The carrying amounts of long-term borrowing approximates its fair value as the interest rates are based on the prevailing interest rates in the market.

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.

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

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 require the Group to make a deposit for 40% or 60% of the face value of the bank acceptance notes issued as collateral. Restricted cash also consists of cash pledged for bank loan facility. The deposits for unsettled bank acceptance notes and cash pledged for bank loan facility are recorded as restricted cash in the consolidated balance sheet as of December 31, 2019 and 2020.

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. Beginning on January 1, 2020, the Group evaluates its accounts receivable for expected credit losses on a regular basis. The Group maintains an estimated allowance for credit losses to reduce its accounts receivable to the amount that it believes will be collected. The Group uses the creditworthiness of customers, aging of the receivables, past transaction history with customers and their current condition, changes in customer payment terms, specific facts and circumstances, and the overall economic climate in the industries the Group serves to monitor the Group's receivables within the scope of expected credit losses model and use these as a basis to develop the Group's expected loss estimates. As of December 31, 2019 and 2020, 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.

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. The Group recorded RMB2,335, RMB(848), and RMB1,243 unrealized gains/(losses) in accumulated other comprehensive income on its available-for-sale investments during the years ended December 31, 2018, 2019 and 2020, respectively.

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

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, an insurance brokerage license, trademark and patents.

The domain name and insurance brokerage license are recognized as an intangible asset with indefinite life and evaluated for impairment at least annually or if events or changes in circumstances indicate that the asset might be impaired. Such impairment test compares the fair values of the asset with its carrying value amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair value. The estimates of values of the intangible asset not subject to amortization are determined using discounted cash flow valuation approach. Significant assumptions are inherent in this process, including estimates of discount rates and cash flow.

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 5 to10 years.

Leases

The Group leases administrative office spaces in different cities in the PRC, and in the United States and Canada under operating leases. The Group determines whether an arrangement constitutes a lease and records lease liabilities and right-of-use assets on its consolidated balance sheets at the lease commencement. The Group measures its lease liabilities based on the present value of the total lease payments not yet paid discounted based on its incremental borrowing rate, which is the estimated rate the Group would be required to pay for a collateralized borrowing equal to the total lease payments over the term of the lease. The Group estimates its incremental borrowing rate based on an analysis of publicly traded debt securities of companies with credit and financial profiles similar to its own. The Group measures right-of-use assets based on the corresponding lease liability adjusted for payments made to the lessor at or before the commencement date, and 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.

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Leases - continued

For short-term leases with lease term less than one year, 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, determination of the Group's weighted average cost of capital and consideration of the impact of COVID-19. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.

Prior to January 1, 2020 the Group performed a two-step goodwill impairment test. The first step compared the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeded its carrying amount, goodwill was not considered impaired and the second step was not be required. If the carrying amount of a reporting unit exceeded its fair value, the second step compared the implied fair value of the affected reporting unit's goodwill to the carrying value of that goodwill. An impairment loss was recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

The Group adopted ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) on January 1, 2020, and used the one-step method for the goodwill impairment assessment for the year ended December 31, 2020. The guidance removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment is now the amount by which a reporting unit's carrying value exceeds its fair value, not the difference between the implied fair value and carrying amount of goodwill which was the step 2 test before.

During the years ended December 31, 2018, 2019 and 2020, 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

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Long-term investments - continued

The Group accounts for equity investments that do not have a readily determinable fair value under the measurement alternative prescribed within Accounting Standards Update (“ASU”) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, to the extent such investments are not subject to consolidation or the equity method. Under the measurement alternative, these financial instruments are carried at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for an identical or similar investment of the same issuer.

The Group reviews its equity securities without readily determinable fair value for impairment at each reporting period by considering factors including, but not limited to, current economic and market conditions and the impact of COVID-19, the operating performance of the companies including current earning trends and other company specific information.

(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, the determination of the weighted average cost of capital and the consideration of COVID-19 impact. The Group recorded RMB4,133, RMB218 and nil impairment losses on its equity method investments during the years ended December 31, 2018, 2019 and 2020.

(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 recorded RMB12,349, RMB3,514, and RMB(22,583) unrealized gains/(losses) in accumulated other comprehensive income on its available-for-sale investments during the years ended December 31, 2018, 2019 and 2020, respectively.

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Long-term investments - continued

The Group evaluates each individual investment periodically for impairment. For investments where the Group does not intend to sell, the Company evaluates whether a decline in fair value is due to deterioration in credit risk. Credit-related impairment losses, not to exceed the amount that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses on the consolidated balance sheet with corresponding adjustment in the consolidated statements of operations and comprehensive income. Subsequent increases in fair value due to credit improvement are recognized through reversal of the credit loss and corresponding reduction in the allowance for credit loss. Any decline in fair value that is non-credit related is recorded in accumulated other comprehensive income as a component of shareholder's equity. As of December 31, 2020, there were no investments held by the Group that had been in continuous unrealized loss position.

Notes payable

The Group endorses bank acceptance notes (“Notes”) to suppliers in the PRC in the normal course of business. The Group may endorse these Notes with its suppliers to clear its accounts payable. When the Notes are endorsed by the Group, the Group is jointly liable with other endorsers in the Notes. Notes that have been presented to banks or endorsed with suppliers are derecognized from the consolidated balance sheets when the Notes are settled with banks or when the obligations as endorser are discharged.

Revenue recognition

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 years ended December 31, 2018, 2019 and 2020, the Group generated 66.9%, 72.2% and 69.0% of revenue from one customer for sales of exclusively designed and manufactured smart wearable devices, and generated 33.1%, 27.8% and 31.0% 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.

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Revenue recognition - continued

The Group allocates the transaction price to all performance obligations based on their relative standalone selling prices. The standalone selling prices are determined based on the expected cost plus margin as the Group determined that no observable price is available for any of its performance obligation. The Group considered multiple factors in the process of determining its cost plus margin including consumer behaviors 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, RMB1.72 to RMB10.62 per unit and RMB1.83 to RMB8.40 per unit for the years ended December 31, 2018, 2019 and 2020, respectively. 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 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 years ended December 31, 2018, 2019 and 2020, the Group generated 33.1%, 27.8% and 31.0% 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, 2018, 2019 and 2020, the Group generated 66.9%, 72.2% and 69.0% 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 21). Under the cooperation agreement with this customer, the Group produces and assembles final product for shipments of wearable devices to that customer, who are then responsible for commercial distribution and sale of the product. The arrangement includes 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.

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Revenue recognition - continued

Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimate of variable consideration which result from the Group’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

The Group periodically provides sales incentives to its customers for self-branded products, including reduced sales prices and volume-based discounts. Volume discounts are negotiated on a contract-by-contract basis with customers and the discount will increase depending upon the volume purchased over the period. The sales incentives are discounts to be applied to future sales to the customer which cannot be exchanged for cash. To the extent that the volume discount or sales incentive represents a material right or options to acquire additional goods or services at a discount in the future period, the material right is recognized as a separate performance obligation at the outset of the arrangement based on the most likely amount of incentive to be provided to the customer. Amounts allocated to a material right are recognized as revenue when those future goods are sold to the customers.

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.

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, 2018, 2019 and 2020, sales returns were insignificant.

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Cost of revenues

Cost of revenues consists primarily of material costs, salaries and benefits for staff engaged in production activities and related expenses 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 expenses are expensed as incurred and included in selling and marketing expenses. Total advertising expenses were RMB25,362, RMB72,269 and RMB136,974 for the years ended December 31, 2018, 2019 and 2020, respectively.

Government subsidies

Government subsidies represent government grants received from local government authorities to encourage the Group’s technology and innovations and also other subsidies for production.

The Group records such government subsidies as other income or reduction of expenses or cost of revenue when it has fulfilled all of its obligation related to the subsidy.

During the years ended December 31, 2018, 2019 and 2020, the Group recognized RMB9,679, RMB14,723 and RMB13,461 as subsidy income and recognized nil, nil, and RMB10,408 as reduction of expenses or cost of revenue, respectively. As of December 31, 2019 and 2020, subsidies of RMB26,098 and RMB26,158 were recorded as other current liabilities, RMB113,596 and RMB183,920 were recorded as other non-current liabilities as the Group has to meet certain performance conditions required by the government authorities.

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. The Group elects to recognize forfeitures when they occur.

Comprehensive income

Comprehensive income consists of two components, net income and other comprehensive income, net of tax. Other comprehensive income refers to revenue, expenses, and gains and losses that are recorded as an element of shareholders’ equity but are excluded from net income. The Group’s other comprehensive income consists of foreign currency translation adjustments from its subsidiaries not using the RMB as their functional currency and the fair value change of available-for-sale investments of the Group. Comprehensive income is reported in the consolidated statements of comprehensive income.

Foreign currencies

The functional currency of the Company outside of the PRC is the US$. The 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.

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Foreign currencies - continued

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, 2018, 2019 and 2020, the transaction (losses) /gains amounted to RMB(7,588), RMB(14,231) and RMB27,451 and were recorded in general and administrative expenses.

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 RMB717,576 and RMB609,679 as of December 31, 2019 and 2020, 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, 2020 is solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.5250, representing the rate as certified by the statistical release of the Federal Reserve Board of United States on December 31, 2020. 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, 2020, 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.

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

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. 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.

Accounts receivable concentration of credit risk is as below:

	As of December 31,
	2019	2020
	RMB	RMB
Company A	13,495 (7.1)%	26,005 (8.7)%
Company B	50,567 (26.8)%	59,987 (20.1)%
Company C	80,024 (42.4)%	108,422 (36.4)%
Total	144,086 (76.3)%	194,414 (65.2)%

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

	As of December 31,
	2019	2020
	RMB	RMB
Company D	1,401,015 (98.6)%	830,871 (96.6)%
Total	1,401,015 (98.6)%	830,871 (96.6)%

Revenue generated from Company D accounted for 76.8%, 73.5% and 69.1% of total revenue during the years ended December 31, 2018, 2019 and 2020, respectively. Company D is subsidiary of a company controlled by one of the Group’s shareholders (see note 21).

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Company D	2,798,824(76.8)%	4,271,135(73.5)%	4,447,957(69.1)%
Total	2,798,824(76.8)%	4,271,135(73.5)%	4,447,957(69.1)%

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, 2019, 13.5% and 10.5% of its raw materials were purchased through Company E and F, respectively, and for the year ended December 31, 2020, 15.1% of its raw materials were purchased through Company E, but numerous alternate sources of supply are readily available on comparable terms.

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Newly adopted accounting pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). ASU 2016-13 changes how entities assess and measure credit losses of certain financial instruments, including available-for-sale securities and accounts receivable. The Group adopted the new standard beginning January 1, 2020 using the modified retrospective transition approach. The adoption of the standard did not have a material impact on the Group's Consolidated Financial Statements.

In January 2017, the FASB issued Accounting Standards Update No. 2017-04, Intangible – Goodwill and Other (Topic 350): Simplify the Test for Goodwill Impairment (“ASU 2017-04”) which simplifies the accounting for goodwill impairment. ASU 2017-04 removes “step two” of the goodwill impairment test, such that a goodwill impairment charge is now the amount by which a reporting unit's carrying value exceeds its fair value. ASU 2017-04 is applied prospectively and was effective for fiscal years, or any goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption was permitted for any impairment tests performed after January 1, 2017. The Company adopted ASU 2017-04 beginning January 1, 2020. The adoption did not 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 Group adopted ASU 2018-13 in the year ended December 31,2020 and the adoption did not have a material impact on the Group’s consolidated financial statements.

Recent accounting pronouncements not yet adopted

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes, as part of its initiative to reduce complexity in accounting standards. The amendments in the ASU are effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The adoption of this standard is not expected to have a material impact on the Group's consolidated financial statements.

In January 2020, the FASB issued ASU No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815 (a consensus of the FASB Emerging Issues Task Force) (“ASU 2020-01”), which clarifies the interactions of the accounting for certain equity securities under ASC 321, investments accounted for under the equity method of accounting in ASC 323, and the accounting for certain forward contracts and purchased options accounted for under ASC 815. ASU 2020-01 could change how an entity accounts for (i) an equity security under the measurement alternative and (ii) a forward contract or purchased option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting or the fair value option in accordance with ASC 825. These amendments improve current U.S. GAAP by reducing diversity in practice and increasing comparability of the accounting for these interactions. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 31, 2020. Early adoption is permitted. The Group is currently in the process of evaluating the impact of adopting ASU 2020-01 on its consolidated financial statements and related disclosure.

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ACQUISITIONS

12 Months Ended

Dec. 31, 2020

ACQUISITIONS

ACQUISITIONS

3. ACQUISITIONS

Business acquisition of PAI Health Inc. (“PAI”)

On June 12, 2020, the Group acquired 100% equity interest in PAI from Global Technology and Innovation Ltd (“GTI”) to expand the business of health-related software and algorithms development. The purchase consideration included a previously held 40.49% equity interest held in GTI which was previously accounted as an equity method investment by the Group for which the fair value approximated RMB87,716, cash of RMB1,370 and RMB13,711 of loan deemed effectively settled as a result of the acquisition. The fair value of previously held equity interest held in GTI was estimated by the Group with the assistance of an independent valuation appraiser by applying the income approach, market multiple approach and recent investment price approach.

The acquisition was recorded using the acquisition method of accounting. Accordingly, the acquired assets and liabilities assumed were recorded at their fair value at the date of acquisition. The purchase price allocation described below was determined by the Group with the assistance of an independent valuation appraiser. The acquired net assets were recorded at their estimated fair values on the acquisition date. The acquired goodwill is not deductible for tax purposes.

PAI constituted less than 1% of revenue and total assets of the consolidated financial statement as of and during the year ended December 31, 2020 and the results of operations attributable to PAI and pro forma results of operations for PAI have not been presented because they are not material to the consolidated statements of operations and comprehensive income for the years ended December 31, 2019 and 2020.

The purchase price was allocated as of June 12, 2020, the date of acquisition as follows:

	RMB	Amortization period
Cash	5,554
Other current assets	4,704
Property, plant and equipment	149	3 years
Intangible assets
Patents	42,495	5 years
Goodwill	67,856
Other non-current assets	261
Other current liabilities	(8,868)
Deferred tax liabilities	(6,374)
Other non-current liabilities	(2,980)
Total	102,797

The goodwill is mainly attributable to intangible assets that cannot be recognized separately as identifiable assets under US GAAP, and comprise of (a) the assembled work force and (b) the expected but unidentifiable business growth as a result of synergy effect from the acquisition.

Asset acquisition of Guoxu Insurance Brokerage Co., Ltd. (“Guoxu”)

In July, 2020, the Group entered into purchase agreements with shareholders of Guoxu to acquire 100% of Guoxu's equity ownership for a gross consideration of RMB67,914, of which RMB35,075 was related to the effective settlement of the selling shareholder's loan payable to Guoxu upon closing. This resulted in a net cash consideration of RMB32,839.

Guoxu holds an insurance brokerage license. As of the acquisition day, the Group terminated all the labor relationship with the employees of Guoxu and did not buy any material contracts. The Group evaluated the acquisition of the purchased assets under ASC 805-Business Combination (ASC 805), and concluded that as substantially all of the fair value of the gross assets acquired is concentrated in the insurance brokerage license, the transaction did not meet the requirements to be accounted for as a business combination and therefore was accounted for as an asset acquisition.

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DISPOSAL OF SUBSIDIARIES

12 Months Ended

Dec. 31, 2020

DISPOSAL OF SUBSIDIARIES

DISPOSAL OF SUBSIDIARIES

4. DISPOSAL OF SUBSIDIARIES

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

In December 2020, the Group sold 26.7% equity interest in Yunding to its founder for cash consideration of RMB22,500. The consideration also included a loan receivable from Yunding amounting to RMB24,514 to be repaid annually over three years for which the Group has a right to convert the unpaid balance into equity interest of Yunding after December 31, 2023. Yunding was previously part of the Group's self-branded products and others segment. Subsequent to this disposal, the Group remeasured its remaining 24.3% investment in Yunding at fair value and accounted for it as equity method investment because the Group retained the ability to exercise significant influence. The fair value of its remaining investment in Yunding was estimated by using recent financing transaction of Yunding. The Group recognized RMB56,522 gain from deconsolidation of a subsidiary which was recorded as part of gain from deconsolidation of a subsidiary in the consolidated statements of operations for the year ended December 31, 2020. The disposal of Yunding did not represent a strategic shift and did not have a major effect on the Group's operation.

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INVENTORIES, NET

12 Months Ended

Dec. 31, 2020

INVENTORIES, NET

INVENTORIES, NET

5. INVENTORIES, NET

Inventories consisted of the following:

	As of December 31,
	2019	2020
	RMB	RMB
Raw materials	275,583	373,690
Work in process	176,417	233,274
Finished goods	441,806	610,573
Inventories, net	893,806	1,217,537

During the years ended December 31, 2018, 2019 and 2020, the Group recorded a provision for the excess and obsolete inventories amounting to nil, RMB23,799 and RMB4,371 and wrote off nil, RMB17,739 and RMB59,852 respectively.

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SHORT-TERM INVESTMENTS

12 Months Ended

Dec. 31, 2020

SHORT-TERM INVESTMENTS

SHORT-TERM INVESTMENTS

6. SHORT-TERM INVESTMENTS

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

	As of December 31,
	2019	2020
	RMB	RMB
Convertible bonds:
Guangzhou Joyrun Technology Co., Ltd (“Joyrun”) (a)	11,591	12,433
Other (b)	5,596	5,997
Total:	17,187	18,430

(a)   In September 2018, the Group invested RMB10,500 to acquire a convertible bond issued by Joyrun with an 8% interest rate . The investment was classified as an available-for-sale investment and measured at fair value. The Group recognized RMB840 and RMB842 unrealized holding gains in other comprehensive income from the fair value changes in the investment during the years ended December 31, 2019 and 2020.

(b)  The other represents insignificant short-term investment in convertible bond which was classified as available-for-sales investment and measured at fair value. The Group recognized RMB400 and RMB401 unrealized gains from this investment in 2019 and 2020.

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PREPAID EXPENSES AND OTHER CURRENT ASSETS

12 Months Ended

Dec. 31, 2020

PREPAID EXPENSES AND OTHER CURRENT ASSETS

PREPAID EXPENSES AND OTHER CURRENT ASSETS

7. PREPAID EXPENSES AND OTHER CURRENT ASSETS

	As of December 31,
	2019	2020
	RMB	RMB
Value-added tax	43,595	100,686
Other receivables	10,252	21,060
Prepaid expenses	9,595	25,863
Advances to suppliers	2,129	874
Rental deposits	1,787	4,415
Total	67,358	152,898

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PROPERTY, PLANT AND EQUIPMENT, NET

12 Months Ended

Dec. 31, 2020

PROPERTY, PLANT AND EQUIPMENT, NET

PROPERTY, PLANT AND EQUIPMENT, NET

8. PROPERTY, PLANT AND EQUIPMENT, NET

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

	As of December 31,
	2019	2020
	RMB	RMB
Software and electronic equipment	36,283	65,288
Buildings	19,342	19,342
Leasehold improvements	26,744	74,209
Total	82,369	158,839
Less: accumulated depreciation	(21,438)	(36,387)
Construction in progress	3,419	2,167
Property, plant and equipment, net	64,350	124,619

The Group has recorded depreciation expenses of RMB5,773, RMB9,409 and RMB14,949 during the years ended December 31, 2018, 2019 and 2020, respectively. No impairment was recorded during the years ended December 31, 2018, 2019 and 2020.

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INTANGIBLE ASSETS, NET

12 Months Ended

Dec. 31, 2020

INTANGIBLE ASSETS, NET

INTANGIBLE ASSETS, NET

9. INTANGIBLE ASSETS, NET

Intangible assets, net, consisted of the following:

	As of December 31,
	2019	2020
	RMB	RMB
Intangible assets with indefinite lives:
Domain name	2,024	2,024
Insurance brokerage license and others	—	37,382
Intangible assets with finite lives:
Patents	92,165	126,423
Less: accumulated amortization	8,436	20,616
Intangible assets, net	85,753	145,213

Amortization expenses for the intangible assets for the years ended December 31, 2018, 2019 and 2020, were RMB443, RMB7,806 and RMB12,180, respectively. Future amortization expense relating to the existing intangible assets amounted to RMB16,645 per year for each of the next four years, RMB12,180 for the fifth year and RMB8,815 thereafter.

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LONG-TERM INVESTMENTS

12 Months Ended

Dec. 31, 2020

LONG-TERM INVESTMENTS

LONG-TERM INVESTMENTS

10. LONG-TERM INVESTMENTS

Long-term investments consisted of the following:

	As of December 31,
	2019	2020
	RMB	RMB
Equity securities without readily determinable fair value
Sifive, Inc. ("Sifive") (a)	20,445	22,279
AliveCor, Inc., (“Alivecor”) (b)	—	15,347
Hyperfine Research, Inc. (“Hyperfine”) (c)	—	32,625
Promaxo, Inc.("Promaxo") (d)	—	26,100
Other equity securities without readily determinable fair value (e)	71,133	67,684
Equity method investments:
Hefei Huaying Xingzhi Fund Partnership (limited partnership) (“Huaying Fund I”) (f)	55,557	53,105
Anhui Huaying Zhihui Wulian Fund Parnership(limited partnership)("Huaying Fund II") (g)	102,336	107,633
Global Technology and Innovation Ltd. (“GTI”) (Note 3)	93,289	—
Other equity method investments (h)	14,165	47,562
Available-for-sale investments (i)	49,174	71,651
Total	406,099	443,986

(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 nil and RMB3,304 gain from the fair value change of this investment during the years ended December 31, 2019 and 2020.

(b) In 2019, the Group invested USD1,000 in a convertible bond issued by Alivecor with 3% interest rate. In February 2020, the Group converted the bond to 0.56% equity interest and the equity interest is not considered in-substance common shares due to substantial liquidation rights owned by the Group. Accordingly, the investment in Alivecor was accounted for equity securities without readily determinable fair value. The Group recognized RMB7,728 gain from the fair value change of this investment based on a similar transaction during the year ended December 31, 2020.

(c) In 2020, the Group invested USD5,000 to acquire 2.27% equity interests in Hyperfine. Hyperfine is a private company engaging in the business of Magnetic Resonance (“MR”) technology. The equity interest is not considered in-substance common shares due to substantial liquidation preference rights. Accordingly, the investment in Hyperfine was accounted for as equity securities without readily determinable fair value. For the year ended December31, 2020, no fair value change was observed and recognized.

(d) In 2020, the Group invested USD4,000 to acquire 4.05% equity interests in Promaxo. Promaxo is a private company engaging in the business of MR technology. The equity interest is not considered in-substance common shares due to substantial liquidation preference rights. Accordingly, the investment in Promaxo was accounted for as equity securities without readily determinable fair value. For the year ended December 31, 2020, no fair value change was observed and recognized.

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

10. LONG-TERM INVESTMENTS - CONTINUED

(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. The Group recorded RMB1,823, RMB(1,342), and RMB(2,452) of income/(loss) from equity method investment during the years ended December 31, 2018, 2019 and 2020.

(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. The Group recorded RMB336 and RMB5,297 of income from equity method investment during the years ended December 31, 2019 and 2020.

(h) 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.

(i) Available-for-sale investments represent investments in debt securities and measured at fair value. Those investments mainly include investments in convertible bonds as well as investment with redemption features considered debt instruments.

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FAIR-VALUE MEASUREMENT

12 Months Ended

Dec. 31, 2020

FAIR-VALUE MEASUREMENT

FAIR-VALUE MEASUREMENT

11. FAIR-VALUE MEASUREMENT

As of December 31, 2019 and 2020, 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, 2019 and 2020 are as follows:

	As of December 31, 2019
	Quoted Prices in
	Active Market for	Significant Other	Significant
	Identical Assets	Observable Inputs	Unobservable
Description	Level 1	Level 2	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

11. FAIR-VALUE MEASUREMENT - CONTINUED

	As of December 31, 2020
	Quoted Prices in
	Active Market for	Significant Other	Significant
	Identical Assets	Observable Inputs	Unobservable
Description	Level 1	Level 2	Inputs Level 3	Total
	RMB	RMB	RMB	RMB
Short-term investments:
Convertible bonds	—	18,430	—	18,430
Long-term investments:
Convertible bonds	—	31,218	—	31,218
Redeemable preferred shares	—	38,499	1,934	40,433
Equity securities without readily determinable fair value	—	37,626	—	37,626
Total:	—	125,773	1,934	127,707

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 or based on the market approach when no recent transactions are available. Recent transactions include the purchase price agreed by an independent third party for an investment with similar terms. These investments are classified as level 2 measurement. When no recent transactions are available, a market approach will be used by the Company to measure fair value. The market approach takes into consideration a number of factors including market multiple and discount rates from traded companies in the industry and requires the Company to make certain assumptions and estimates regarding industry factors. Specifically, some of the significant unobservable inputs included the investee's historical earning, discount of lack of marketability, investee's time to initial public offering as well as related volatility. The Company has classified these as level 3 measurement. The assumptions are inherently uncertain and subjective. Changes in any unobservable inputs may have a significant impact on the fair values.

No transfers occurred between 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, 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 categorized 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, the COVID-19 impact and were categorized as Level 3 in the fair value hierarchy. During the years ended December 31, 2018, 2019 and 2020, the Group recognized an impairment loss of nil, RMB2,382 and nil for the equity securities without readily determinable fair value.

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ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

12 Months Ended

Dec. 31, 2020

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

12. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

	As of December 31,
	2019	2020
	RMB	RMB
Accrued payroll and welfare	120,256	38,797
Deferred revenue	59,585	51,780
Product warranty	49,527	32,782
Current operating lease liabilities	32,799	48,120
Accrued expenses	17,688	14,979
Government subsidies	26,098	26,158
Other current liabilities	46,296	39,659
Total	352,249	252,275

Product warranty activities were as follows:

Product Warranty
	RMB
Balance as of January 1, 2018	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
Provided during the year	74,742
Utilized during the year	(91,487)
Balance at December 31, 2020	32,782

The warranty costs recorded in cost of revenue were RMB68,866, RMB80,048 and RMB74,742 during the years ended December 31, 2018, 2019 and 2020, respectively.

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BANK BORROWING

12 Months Ended

Dec. 31, 2020

BANK BORROWING

BANK BORROWING

13. BANK BORROWING

In 2020, the Group borrowed approximately RMB1,207,793 in different currencies from several commercial banks and repaid RMB643,122. These bank loans have one-three years maturity and weighted average interest rate of 2.85%, and will be used for the daily operations of the Group.

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REVENUE AND DEFERRED REVENUES

12 Months Ended

Dec. 31, 2020

REVENUE AND DEFERRED REVENUES

REVENUE AND DEFERRED REVENUES

14. REVENUE AND DEFERRED REVENUES

Disaggregation of revenue

All the revenues for the period was recognized from contracts with customers. For the years ended December 31, 2018, 2019 and 2020, 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	2020
	RMB	RMB	RMB
Xiaomi Wearable Products	2,439,534	4,193,665	4,438,081
Self-branded products and other	1,205,801	1,618,590	1,995,282
Total	3,645,335	5,812,255	6,433,363

During the years ended December 31, 2018, 2019 and 2020, 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,
	2019	2020
	RMB	RMB
Accounts Receivables	188,940	298,038
Amounts due from related parties	1,421,170	860,213
Deferred revenue	59,585	51,780
Refund liability (sales return)	582	366

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, 2019 and 2020, the amount due from related parties include the billed amount of RMB1,318,483 and RMB779,538, and unbilled amounted to RMB102,687 and RMB80,675, 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 during the years ended December 31, 2018, 2019 and 2020. 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.

14. REVENUE AND DEFERRED REVENUES - CONTINUED

During the years ended December 31, 2018, 2019 and 2020, the Group recognized RMB17,876, RMB41,863 and RMB59,585 of revenue previously included in deferred revenue as of January 1, 2018, December 31, 2018 and 2019, which mainly consist of revenue recognized related to its service subscription. Additionally, during the year ended December 31, 2018, 2019 and 2020, the Group billed RMB33,329, RMB33,279 and RMB102,687 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.

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INCOME TAXES

12 Months Ended

Dec. 31, 2020

INCOME TAXES

15. 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 Zepp 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 Zepp HK 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 Zepp Inc and HNA are located in the U.S. and are subject to an income tax rate of 21% for taxable income earned as determined in accordance with relevant tax rules and regulations in the U.S.

The Company’s PRC subsidiaries, the VIEs and VIEs’ subsidiaries are subject to the 25% standard enterprise income tax rate except for Anhui Huami and Huami Intelligent that qualify as a high and new technology enterprise (“HNTE”), which are 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, 2018, 2019 and 2020. Huami Intelligent qualify as a HNTE in August 2020 and was subject to a tax rate of 15% during the year ended December 31, 2020.

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

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Current tax expenses	84,931	105,663	42,257
Deferred tax benefits	(32,895)	(27,776)	(11,103)
Income tax expense	52,036	77,887	31,154

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

	As of December 31,
	2019	2020
	RMB	RMB
Deferred tax assets
Accrued expenses	50,644	60,823
Net operating loss carry forwards	53,989	62,945
Total deferred tax assets	104,633	123,768
Less: valuation allowance	(1,984)	(3,578)
Deferred tax assets, net	102,649	120,190

15. INCOME TAXES - CONTINUED

As of December 31, 2020, the Group had RMB276,137 operating losses deriving from entities in the PRC, HK, U.S. and Canada. The operating loss in PRC with amounted to RMB179,614 can be carried forward for five years and if not utilized and some will begin to expire in 2021. 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, 2019 and 2020, the Company recorded RMB1,984 and RMB3,578 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,
	2018	2019	2020
	RMB	RMB	RMB
Income before income tax	386,613	652,370	265,609
Tax expense at PRC enterprise income tax rate of 25%	96,653	163,093	66,402
Income tax on tax holidays	(58,327)	(72,396)	(41,869)
Tax effect of permanence differences	(22,733)	(31,088)	(20,001)
Effect of income tax rate differences in jurisdictions other than the PRC	36,443	16,270	21,625
Change in tax rate	—	—	3,460
Changes in valuation allowances	—	2,008	1,537
Income tax expense	52,036	77,887	31,154

If the tax holiday granted to Anhui Huami and Huami Intelligent was not available for the years ended December 31, 2018, 2019 and 2020, the increase in income tax expenses and the decrease in net income per share amounts would be as follows:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Increase in income tax expenses	58,327	72,396	41,869
Decrease in net income per share - basic	0.28	0.30	0.17
Decrease in net income per share - diluted	0.26	0.28	0.16

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.

15. INCOME TAXES - CONTINUED

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.

Aggregate undistributed earnings of the Company’s PRC subsidiaries and VIEs that are available for distribution amounted to RMB1,559,898 and RMB1,935,920 as of December 31, 2019 and 2020, 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, 2018, 2019 and 2020, 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$15 (RMB0.1 million) is specifically listed as a “special circumstance”). The statute of limitation for transfer pricing related issue is ten years. There is no statute of limitation in the case of tax evasion. Therefore, the Group’s PRC domiciled entities are subject to examination by the PRC tax authorities based on the above.

Parent Company

INCOME TAXES

4. INCOME TAXES

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

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ORDINARY SHARES

12 Months Ended

Dec. 31, 2020

ORDINARY SHARES

ORDINARY SHARES

16. 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.

16. ORDINARY SHARES - CONTINUED

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.

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SHARE-BASED PAYMENT

12 Months Ended

Dec. 31, 2020

SHARE-BASED PAYMENT

SHARE-BASED PAYMENT

17. SHARE-BASED PAYMENT

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, 2018, 2019 and 2020, the Group granted nil share options to certain personnel under the PRC Plan. The Group has recorded RMB40,449, RMB1,194 and RMB480 share-based compensation expense for the years ended December 31, 2018, 2019 and 2020 related to options in PRC Plan, respectively.

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. 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 years ended December 31, 2018, 2019 and 2020, the Group granted 6,988,469, 651,000 and 4,030,108 share options to certain personnel under the 2018 Plan. The weighted average exercise price of options granted during the years ended December 31, 2018, 2019 and 2020 was US$0.35 per share, US$0 per share and US$0 per share. During the years ended December 31, 2018, 2019 and 2020, the Group has recorded RMB9,523, RMB32,424 and RMB41,836 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, 2018, 2019 and 2020 are summarized in the following table:

	For the years ended December 31,
	2018		2019		2020
Risk-free interest rate	2.04%-2.83	%	2.14	%	0.67%-0.72	%
Expected volatility	36%-52.5	%	50.4	%	51.9%-52.0	%
Expected life of option (years)	1-10		10		10
Expected dividend yield	0.0	%	0.0	%	0.0	%
Fair value per ordinary share	15.03-16.85		12.65		21.60-23.10

17. SHARE-BASED PAYMENT – CONTINUED

2018 Share Incentive Plan - continued

(i) Risk-free interest rate

Risk-free interest rate was estimated based on the yield to maturity of China international government bonds with a maturity period close to the contractual term of the options.

(ii) Expected life of option (years)

Expected life of option (years) represents the expected years to vest the options.

(iii) Volatility

The volatility of the underlying ordinary shares during the life of the options was estimated based on the historical stock price volatility of comparable listed companies over a period comparable to the contractual term of the options.

(iv) Dividend yield

The dividend yield was estimated by the Group based on its expected dividend policy over the contractual term of the options.

(v) Fair value of underlying ordinary shares

During the year ended December 31, 2018, 2019 and 2020, the fair value of the underlying ordinary shares is determined based on the closing market price of the share.

A summary of the stock option activity under the 2015 and 2018 Plan during the year ended December 31, 2020 is included in the table below.

		Weighted average
	Options granted	exercise price
	Share Number	per option
		US$
Outstanding at January 1, 2020	12,046,236	0.24
Granted	4,030,108	—
Exercised	(1,655,936)	—
Cancelled and forfeited	(139,594)	—
Outstanding at December 31, 2020	14,280,814	0.20

17. SHARE-BASED PAYMENT – CONTINUED

2018 Share Incentive Plan - continued

The following table summarizes information regarding the share options as of December 31, 2020:

	December 31, 2020
			Weighted-
			average remaining
		Weighted-	exercise
		average exercise	contractual	Aggregate
	Options Number	price per option	life (years)	intrinsic value
		US$
Options
Outstanding	14,280,814	0.20	7.45	39,387
Exercisable	7,879,179	0.23	6.45	21,512
Expected to vest	6,401,635	0.17	8.69	17,875

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, 2018, 2019 and 2020 amounted RMB6,858, RMB13,608 and RMB32,010, respectively.

The weighted average grant date fair value of options granted during the year ended December 31, 2018, 2019 and 2020 was RMB15.12, RMB12.65 and RMB22.42 per share, respectively.

During the years ended December 31, 2018, 2019 and 2020, the Group recorded share-based compensation expense of RMB49,972, RMB33,618 and RMB42,316 for the options granted under the 2015 Plan and 2018 Plan.

As of December 31, 2020, there was RMB96,596 of unrecognized compensation expenses related to the options.

Restricted Stock Units

During the years ended December 31, 2018, 2019 and 2020, the Company granted 658,056, 30,000 and 2,216,120 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 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 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 immediately. 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 RMB92,715. The weighted average grant-date fair value of non-vested shares was RMB21.38 for the year ended December 31, 2020. The fair value of the vested restricted stock units was RMB25,592, RMB79 and RMB21,020 during the years ended December 31, 2018, 2019 and 2020.

17. SHARE-BASED PAYMENT – CONTINUED

Restricted Stock Units - continued

During the years ended December 31, 2018, 2019 and 2020, the Group recorded compensation expense of RMB25,434, RMB3,598 and RMB22,838 for the restricted stock units, respectively.

As of December 31, 2020, there was RMB31,415 unrecognized compensation cost related to restricted stock units which is expected to be recognized over a weighted average vesting period of 2.86 years. The weighted average granted fair value of restricted stock units granted during the years ended December 31, 2018, 2019 and 2020 were RMB15.75 per RSU, RMB12.65 per RSU and RMB22.84 per RSU.

A summary of the restricted stock units activity during the year ended December 31, 2020 is presented below:

	RSUs
Unvested balance at January 1, 2020	587,684
Granted	2,216,120
Cancelled and forfeited	—
Vested	986,962
Unvested balance at December 31, 2020	1,816,842

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, 2018, 2019 and 2020 were RMB6,165, RMB2,758 and nil, respectively. The restricted shares have been fully vested in 2019 and no further grant activity in 2020. As of December 31, 2020, there was nil unrecognized compensation cost.

During the years ended December 31, 2018, 2019 and 2020, the Group recorded compensation expense of RMB3,992, RMB118 and nil for the restricted shares, respectively.

17. SHARE-BASED PAYMENT – CONTINUED

Restricted Share owned by the founders

As one of the conditions 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. The founder restricted shares have been fully vested in 2019 and no further grant activity in 2020:

The Group determined that the non-vested restricted shares are participating securities as the holders of the non-vested restricted shares have a non-forfeitable right to receive dividends with all ordinary shares but the non-vested restricted shares do not have a contractual obligation to fund or otherwise absorb the Group's losses. See Note 22 for details.

During the years ended December 31, 2018, 2019 and 2020, the Group recorded share-based compensation expense of RMB55,311, RMB17,794 and nil related to the unvested shares of the Founders respectively.

Total share-based compensation recognized was as follows:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
General and administrative	87,857	40,684	38,605
Research and development	42,167	11,191	23,978
Selling and marketing	4,271	3,198	2,571
Cost of revenues	414	55	—
Total stock-based compensation expense	134,709	55,128	65,154

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MAINLAND CHINA CONTRIBUTION PLAN

12 Months Ended

Dec. 31, 2020

MAINLAND CHINA CONTRIBUTION PLAN

MAINLAND CHINA CONTRIBUTION PLAN

18. MAINLAND CHINA CONTRIBUTION PLAN

Full time employees of the Group in the PRC participate in a government-mandated multi-employer defined contribution plan pursuant to which certain pension benefits, medical care, unemployment insurance, employee housing fund and other welfare benefits are provided to employees. Chinese labor regulations require the Group to accrue for these benefits based on certain percentages of the employees’ salaries. The total provisions for such employee benefits were RMB39,495, RMB63,799 and RMB64,734 during the years ended December 31, 2018, 2019 and 2020.

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SEGMENT INFORMATION

12 Months Ended

Dec. 31, 2020

SEGMENT INFORMATION

SEGMENT INFORMATION

19. 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, 2018, 2019 and 2020, 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, 2018
	Xiaomi	Self-branded
	Wearable	products
	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	Self-branded
	Wearable	products
	Products	and others	Total
	RMB	RMB	RMB
Revenues	4,193,665	1,618,590	5,812,255
Cost of revenues	3,296,696	1,047,816	4,344,512
Gross Profit	896,969	570,774	1,467,743

	For the year ended December 31, 2020
	Xiaomi	Self-branded
	Wearable	products
	Products	and others	Total
	RMB	RMB	RMB
Revenues	4,438,081	1,995,282	6,433,363
Cost of revenues	3,706,495	1,394,203	5,100,698
Gross Profit	731,586	601,079	1,332,665

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

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STATUTORY RESERVES AND RESTRICTED NET ASSETS

12 Months Ended

Dec. 31, 2020

STATUTORY RESERVES AND RESTRICTED NET ASSETS

STATUTORY RESERVES AND RESTRICTED NET ASSETS

20. STATUTORY RESERVES AND RESTRICTED NET ASSETS

PRC legal restrictions permit payments of dividends by the Group’s PRC subsidiaries only out of their retained earnings, if any, determined in accordance with PRC regulations. Prior to payment of dividends, pursuant to the laws applicable to the PRC Domestic Enterprises and PRC Foreign Investment Enterprises, the PRC subsidiaries must make appropriations from after-tax profit to non-distributable statutory reserve funds as determined by the Board of Directors of the Group. Subject to certain cumulative limits including until the total amount set aside reaches 50% of its registered capital, the general reserve fund requires annual appropriations of not less than 10% of after-tax profit (as determined under accounting principles and financial regulations applicable to PRC enterprises at each year-end). These reserve funds can only be used for specific purposes and are not distributable as cash dividends. As of December 31, 2015, the 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, 2018. During the year ended December 31, 2019 and 2020, due to the new appropriable profit earned by certain PRC entities in the Group, the Group accrued an additional RMB92 and RMB5,997 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 RMB153,851, RMB153,943 and RMB180,981 as of December 31, 2018, 2019 and 2020, respectively.

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RELATED PARTY BALANCES AND TRANSACTIONS

12 Months Ended

Dec. 31, 2020

RELATED PARTY BALANCES AND TRANSACTIONS

RELATED PARTY BALANCES AND TRANSACTIONS

21. 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
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 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
Shenzhen Yunding Information Technology Co., Ltd. (“Yunding”)	Significant influence by the Group
Gongqingcheng Yunding Ruiheng Investment Partnership (Limited Partnership). (“Gongqingcheng Yunding”)	Controlled by the founder of a company that the Group can exercise significant influence
Hefei Yizhi Electronic Technology Co., Ltd (“Hefei Yizhi”)	Controlled by one of the Company's shareholders

21. RELATED PARTY BALANCES AND TRANSACTIONS - CONTINUED

(1)Balances:

	As of December 31,
	2019	2020
	RMB	RMB
Amount due from related parties:
Xiaomi Communication (a)	1,401,015	830,871
Yunding (b)	—	2,064
Gongqingcheng Yunding (c)	—	22,500
Youpin Information (a)	9,845	2,278
Xiaomi Information (a)	7,669	—
Others	2,641	2,500
Total	1,421,170	860,213

	As of December 31,
	2019	2020
	RMB	RMB
Amount due to related parties, current:
Xiaomi Technology(d)	(14,186)	(10,293)
Others	(583)	(892)
Total	(14,769)	(11,185)

21. RELATED PARTY BALANCES AND TRANSACTIONS - CONTINUED

(2)Transactions:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Sales to related parties:
Xiaomi Communication	2,798,824	4,271,135	4,447,957
Xiaomi Information	17,859	9,870	—
Others	312	—	1,800
Total	2,816,995	4,281,005	4,449,757

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Others:
Loan provided to related parties (e)	5,143	—	—
Investments disposed to a related party (f)	3,061	—	—
Purchase from related parties (g)	—	12,183	12,000

(a) The amount due from Xiaomi represents receivables from the sales of products and services, which includes an unbilled amount of RMB80,675.

(b) The amount due from Yunding represents prepayment for the purchase of Yunding’ products.

(c) In December 2020, the Group sold 26.7% equity interest in Yunding for a cash consideration of RMB22,500 to Gongqingcheng Yunding, of which 20,000 has been received in January 2021.

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

(e) 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, which represented the principal plus accrued interest to date.

(f) The Group disposed five long-term investments and one long-term investment to Huaying Fund in 2018 and recorded RMB31 gain during the years ended December 31, 2018.

(g) During 2019, Purchase from related parties mainly included the intangible assets purchased from Hefei Huaheng which amounted to RMB11,321. During 2020, the Group made a prepayment of RMB12,000 to purchase a building owned by Hefei Yizhi.

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NET INCOME PER SHARE

12 Months Ended

Dec. 31, 2020

NET INCOME PER SHARE

NET INCOME PER SHARE

22. NET INCOME PER SHARE

During the years ended 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.

22. NET INCOME PER SHARE - CONTINUED

However, undistributed loss is only allocated to ordinary shareholders because holders of preferred shares and nonvested restricted shares are not contractually obligated to share losses.

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Basic net income per share calculation Numerator:
Net income for the year attributable to the Company:	340,046	575,196	228,753
Less: Accretion of Series A Shares	177	—	—
Less: Accretion of Series B-1 Shares	368	—	—
Less: Accretion of Series B-2 Shares	4,049	—	—
Less: Deemed dividend to preferred shareholders	209,752	—	—
Less: Undistributed earnings allocated to Series A preferred shareholders	4,521	—	—
Less: Undistributed earnings allocated to Series B-1 preferred shareholders	126	—	—
Less: Undistributed earnings allocated to Series B-2 preferred shareholders	1,319	—	—
Less: Undistributed earnings allocated to participating nonvested restricted shares	6,244	2,450	—
Net income attributed to ordinary shareholders for computing net income per ordinary shares—basic	113,490	572,746	228,753
Denominator:
Weighted average ordinary shares outstanding used in computing net income per ordinary shares – basic	211,873,704	243,648,186	248,470,684
Net income per ordinary share attributable to ordinary shareholders—basic	0.54	2.35	0.92
Diluted net income per share calculation
Net income attributable to ordinary shareholders for computing net income per ordinary shares—basic	113,490	572,746	228,753
Add: adjustments to undistributed earnings to participating securities	648	117	—
Net income attributed to ordinary shareholders for computing net income per ordinary shares—dilute	114,138	572,863	228,753
Denominator:
Weighted average ordinary shares basic outstanding	211,873,704	243,648,186	248,470,684
Effect of potentially diluted stock options, restricted stocks and RSUs	13,160,946	12,310,986	11,881,310
Weighted average ordinary shares outstanding used in computing net income per ordinary shares—dilute	225,034,650	255,959,172	260,351,994
Net income per ordinary share attributable to ordinary shareholders—diluted	0.51	2.24	0.88

22. NET INCOME PER SHARE - CONTINUED

For the year ended December 31, 2018, 2019 and 2020, 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 years presented:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Shares issuable upon exercise of share options, restricted stocks and RSUs	705,407	294,352	89,165
Shares issuable upon vesting of nonvested restricted shares	11,657,620	1,042,234	—

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LEASES

12 Months Ended

Dec. 31, 2020

LEASES

LEASES

23. LEASES

The Group's leases consist of operating leases for administrative office spaces in different cities in the PRC and overseas and financial lease which is immaterial. The Group determines if an arrangement is a lease at inception. Some lease agreements contain lease and non-lease components, which the Group chooses to account for as separate components. The allocation of the 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.

The following table represents lease costs recognized in the Group's consolidated statements of operation for the years ended December 31, 2019 and 2020. 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	2020
	RMB	RMB
Operating lease cost(1)	30,788	57,080
Sublease income	(1,382)	(537)
Total lease cost	29,406	56,543

(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 year ended December 31, 2018 was RMB11,423.

23. 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 and 2020.

	As of December 31,
	2019		2020
	RMB		RMB
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	26,733		42,313
Non-cash Right-of-use assets in exchange for new lease liabilities:
Operating leases	112,513		96,348
Weighted average remaining lease term
Operating leases	3.76 years		3.68 years
Weighted average discount rate
Operating leases	5.21	%	5.25	%

The following is a maturity analysis of the annual undiscounted cash flows for the year ended December 31, 2020:

Year ending December 31,	RMB
2021	49,628
2022	52,015
2023	46,114
2024	25,859
2025	8,354
Total lease payments	181,970
Less: imputed interest	17,850
Present value of lease liabilities	164,120

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SUBSEQUENT EVENT

12 Months Ended

Dec. 31, 2020

SUBSEQUENT EVENT

SUBSEQUENT EVENT

24. SUBSEQUENT EVENT

Purchase of a Minority Stake in Jiangsu Yitong High-Tech Co., Ltd

In January 2021, the Group entered into an agreement to acquired 29.99% of the outstanding shares of Jiangsu Yitong Hi-Tech Co., Ltd., (“Yitong” a listed entity on Shenzhen Stock Exchange) for an aggregate cash consideration of RMB959,680 in cash. Leveraging the Group's core capabilities, as well as Yitong's access to the Chinese domestic capital market, the Group and Yitong are expected to expand the healthcare ecosystem for Chinese market in the long term. The transaction was completed in February 2021, the Group is the process of assessing its accounting impact.

New Bank Borrowing loans

Subsequent to 2020 year-end, the Group paid back RMB439,688 loans and borrowed approximately RMB990,000 from several commercial banks. These bank loans are with one to seven years maturity and weighted average interest rate of 4.14%, of which RMB450,000 will be used for the daily operations of the Group and RMB540,000 will be used for the investment of Yitong.

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FINANCIAL STATEMENT SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

12 Months Ended

Dec. 31, 2020

FINANCIAL STATEMENT SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY

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,
	2019	2020	2020
	RMB	RMB	US$
			(Note2)
Assets
Current assets:
Cash and cash equivalents	398,604	204,637	31,362
Prepaid expenses and other current assets	402	335	51
Amount due from related parties	533,449	656,579	100,627
Total current assets	932,455	861,551	132,040
Investments in subsidiaries	1,594,844	1,895,011	290,423
Total assets	2,527,299	2,756,562	422,463
Liabilities
Current liabilities:
Accrued expense and other current liabilities	166	688	105
Amount due to related parties	26,383	24,727	3,790
Total current liabilities	26,549	25,415	3,895
Other non-current liabilities	—	889	136
Total liabilities	26,549	26,304	4,031
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, 2019 and 2020; 91,459,708 and 128,736,916 shares issued and outstanding as of December 31, 2019 and 2020, respectively)	57	81	12
Class B Ordinary shares(US$0.0001 par value; 200,000,000 and 200,000,000 shares authorized as of December 31, 2019 and 2020; 156,060,279 and 121,408,247 shares issued and outstanding as of December 31, 2019 and 2020, respectively)	98	76	12
Additional paid-in capital	1,478,902	1,552,109	237,871
Accumulated retained earnings	910,612	1,133,368	173,696
Accumulated other comprehensive income	111,081	44,624	6,841
Total equity	2,500,750	2,730,258	418,432
Total liabilities and equity	2,527,299	2,756,562	422,463

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

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,
	2018	2019	2020	2020
	RMB	RMB	RMB	US$
				(Note2)
Cost	414	55	—	—
Gross profit	414	55	—	—
Operating expenses:
Selling and marketing	4,271	3,198	2,571	394
General and administrative expenses	99,881	50,572	54,613	8,370
Research and development	42,167	11,191	23,978	3,675
Total operating expenses	146,319	64,961	81,162	12,439
Operating loss	(146,733)	(65,016)	(81,162)	(12,439)
Interest Income	2,185	6,868	1,337	205
Other loss	—	(699)	—	—
Equity in earnings of subsidiaries and VIEs	484,594	634,043	308,578	47,292
Net income	340,046	575,196	228,753	35,058

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

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,
	2018	2019	2020	2020
	RMB	RMB	RMB	US$
				(Note2)
Net income	340,046	575,196	228,753	35,058
Other comprehensive income, net of tax
Foreign currency translation adjustment	75,041	13,940	(66,457)	(10,184)
Comprehensive income attributable to Zepp Health Corporation	415,087	589,136	162,296	24,874

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

STATEMENTS OF CASH FLOW

(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	2020	2020
	RMB	RMB	RMB	US$
				(Note2)
Cash Flow from Operating Activities
Net Cash used in Operating Activities	(2,232)	(764)	(12,791)	(1,962)
Cash Flow from Investing Activities
Amount due from related parties	(196,158)	(218,791)	(123,130)	(18,870)
Investment in subsidiaries	(10,056)	2,263	8,411	1,289
Other investment activities	(95,085)	97,976	—	—
Net Cash used in Investing Activities	(301,299)	(118,552)	(114,719)	(17,581)
Cash Flow from Financing Activities
Net Cash provided by Financing Activities	652,391	45,609	—	—
Net increase/(decrease) in cash and cash equivalent	348,860	(73,707)	(127,510)	(19,543)
Effect of exchange rate changes	75,041	13,940	(66,457)	(10,184)
Cash and cash equivalents at beginning of the year	34,470	458,371	398,604	61,089
Cash and cash equivalents at end of the year	458,371	398,604	204,637	31,362

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

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BASIS FOR PREPARATION

12 Months Ended

Dec. 31, 2020

Parent Company

BASIS FOR PREPARATION

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.

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CONVENIENCE TRANSLATION

12 Months Ended

Dec. 31, 2020

CONVENIENCE TRANSLATION

CONVENIENCE TRANSLATION

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, 2020 is solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.5250, representing the rate as certified by the statistical release of the Federal Reserve Board of United States on December 31, 2020. 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, 2020, or at any other rate

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INVESTMENTS IN SUBSIDIARIES AND VIEs

12 Months Ended

Dec. 31, 2020

Parent Company

INVESTMENTS IN SUBSIDIARIES AND VIEs

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.

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SIGNIFICANT ACCOUNTING POLICIES (Policies)

12 Months Ended

Dec. 31, 2020

SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and principle of consolidation

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

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 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

Fair value is the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

Authoritative literature provides a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The level in the hierarchy within which the fair value measurement in its entirety falls is based upon the lowest level of input that is significant to the fair value measurement as follows:

Level 1

Level 1 applies to assets or liabilities for which there are quoted prices in active markets for identical assets or liabilities.

Level 2

Level 2 applies to assets or liabilities for which there are inputs other than quoted prices included within Level 1 that are observable for the asset or liability such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which significant inputs are observable or can be derived principally from, or corroborated by, observable market data.

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, 2019 and 2020.

2. SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Measured fair value on a nonrecurring basis

The Group measured acquired intangible assets using the income approach-discounted cash flow method when events or changes in circumstances indicate that the carrying amount of an asset may no longer be recoverable. The fair values were determined using models with significant unobservable inputs (Level 3 inputs). The Group did not recognize any impairment loss related to acquired intangible assets arising from acquisitions during the years ended December 31, 2018, 2019 and 2020.

The Group measured the fair value of the intangible assets acquired through non-monetary exchange at fair value. The fair values were 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 19% was used for the fair value measurement of intangible assets during 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 the reporting unit is determined using discounted cash flows. The Group did not recognize any impairment loss related to goodwill during the years ended December 31, 2018, 2019 and 2020.

For equity investments without readily determinable fair values for which the Company elected to use the measurement alternative, the equity investment is measured at fair value on a nonrecurring basis when there is an orderly transaction for identical or similar investments of the same issuer.

Fair value of financial instruments

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 long-term bank borrowing. 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. The carrying amounts of long-term borrowing approximates its fair value as the interest rates are based on the prevailing interest rates in the market.

Cash and cash equivalents

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

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 require the Group to make a deposit for 40% or 60% of the face value of the bank acceptance notes issued as collateral. Restricted cash also consists of cash pledged for bank loan facility. The deposits for unsettled bank acceptance notes and cash pledged for bank loan facility are recorded as restricted cash in the consolidated balance sheet as of December 31, 2019 and 2020.

Term deposit

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

Accounts receivable represents those receivables derived in the ordinary course of business, net of allowance for doubtful accounts.

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. Beginning on January 1, 2020, the Group evaluates its accounts receivable for expected credit losses on a regular basis. The Group maintains an estimated allowance for credit losses to reduce its accounts receivable to the amount that it believes will be collected. The Group uses the creditworthiness of customers, aging of the receivables, past transaction history with customers and their current condition, changes in customer payment terms, specific facts and circumstances, and the overall economic climate in the industries the Group serves to monitor the Group's receivables within the scope of expected credit losses model and use these as a basis to develop the Group's expected loss estimates. As of December 31, 2019 and 2020, the Company recorded nil allowance for doubtful account.

Inventories, net

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.

Short-term investments

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. The Group recorded RMB2,335, RMB(848), and RMB1,243 unrealized gains/(losses) in accumulated other comprehensive income on its available-for-sale investments during the years ended December 31, 2018, 2019 and 2020, respectively.

Prepaid expenses and other current assets

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, 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

Intangible assets, net

Acquired intangible assets other than goodwill consist of the domain name for the Company's website www.huami.com, an insurance brokerage license, trademark and patents.

The domain name and insurance brokerage license are recognized as an intangible asset with indefinite life and evaluated for impairment at least annually or if events or changes in circumstances indicate that the asset might be impaired. Such impairment test compares the fair values of the asset with its carrying value amounts and an impairment loss is recognized if and when the carrying amounts exceed the fair value. The estimates of values of the intangible asset not subject to amortization are determined using discounted cash flow valuation approach. Significant assumptions are inherent in this process, including estimates of discount rates and cash flow.

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 5 to10 years.

Goodwill

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, determination of the Group's weighted average cost of capital and consideration of the impact of COVID-19. The estimates used to calculate the fair value of a reporting unit change from year to year based on operating results and market conditions. Changes in these estimates and assumptions could materially affect the determination of fair value and goodwill impairment for the reporting unit.

Prior to January 1, 2020 the Group performed a two-step goodwill impairment test. The first step compared the fair values of each reporting unit to its carrying amount, including goodwill. If the fair value of a reporting unit exceeded its carrying amount, goodwill was not considered impaired and the second step was not be required. If the carrying amount of a reporting unit exceeded its fair value, the second step compared the implied fair value of the affected reporting unit's goodwill to the carrying value of that goodwill. An impairment loss was recognized for any excess in the carrying value of goodwill over the implied fair value of goodwill.

The Group adopted ASU 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) on January 1, 2020, and used the one-step method for the goodwill impairment assessment for the year ended December 31, 2020. The guidance removes step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. Goodwill impairment is now the amount by which a reporting unit's carrying value exceeds its fair value, not the difference between the implied fair value and carrying amount of goodwill which was the step 2 test before.

During the years ended December 31, 2018, 2019 and 2020, the Group recognized nil impairment loss on goodwill.

Notes payable

The Group evaluates each individual investment periodically for impairment. For investments where the Group does not intend to sell, the Company evaluates whether a decline in fair value is due to deterioration in credit risk. Credit-related impairment losses, not to exceed the amount that fair value is less than the amortized cost basis, are recognized through an allowance for credit losses on the consolidated balance sheet with corresponding adjustment in the consolidated statements of operations and comprehensive income. Subsequent increases in fair value due to credit improvement are recognized through reversal of the credit loss and corresponding reduction in the allowance for credit loss. Any decline in fair value that is non-credit related is recorded in accumulated other comprehensive income as a component of shareholder's equity. As of December 31, 2020, there were no investments held by the Group that had been in continuous unrealized loss position.

Notes payable

The Group endorses bank acceptance notes (“Notes”) to suppliers in the PRC in the normal course of business. The Group may endorse these Notes with its suppliers to clear its accounts payable. When the Notes are endorsed by the Group, the Group is jointly liable with other endorsers in the Notes. Notes that have been presented to banks or endorsed with suppliers are derecognized from the consolidated balance sheets when the Notes are settled with banks or when the obligations as endorser are discharged.

Revenue recognition

Revenue recognition

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 years ended December 31, 2018, 2019 and 2020, the Group generated 66.9%, 72.2% and 69.0% of revenue from one customer for sales of exclusively designed and manufactured smart wearable devices, and generated 33.1%, 27.8% and 31.0% 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.

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Revenue recognition - continued

The Group allocates the transaction price to all performance obligations based on their relative standalone selling prices. The standalone selling prices are determined based on the expected cost plus margin as the Group determined that no observable price is available for any of its performance obligation. The Group considered multiple factors in the process of determining its cost plus margin including consumer behaviors 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, RMB1.72 to RMB10.62 per unit and RMB1.83 to RMB8.40 per unit for the years ended December 31, 2018, 2019 and 2020, respectively. 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 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 years ended December 31, 2018, 2019 and 2020, the Group generated 33.1%, 27.8% and 31.0% 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

Cooperation agreement with one customer

For the years ended December 31, 2018, 2019 and 2020, the Group generated 66.9%, 72.2% and 69.0% 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 21). Under the cooperation agreement with this customer, the Group produces and assembles final product for shipments of wearable devices to that customer, who are then responsible for commercial distribution and sale of the product. The arrangement includes 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.

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Revenue recognition - continued

Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimate of variable consideration which result from the Group’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

The Group periodically provides sales incentives to its customers for self-branded products, including reduced sales prices and volume-based discounts. Volume discounts are negotiated on a contract-by-contract basis with customers and the discount will increase depending upon the volume purchased over the period. The sales incentives are discounts to be applied to future sales to the customer which cannot be exchanged for cash. To the extent that the volume discount or sales incentive represents a material right or options to acquire additional goods or services at a discount in the future period, the material right is recognized as a separate performance obligation at the outset of the arrangement based on the most likely amount of incentive to be provided to the customer. Amounts allocated to a material right are recognized as revenue when those future goods are sold to the customers.

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.

Value added taxes

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

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, 2018, 2019 and 2020, sales returns were insignificant.

Cost of revenues

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

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

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

Advertising expenses are expensed as incurred and included in selling and marketing expenses. Total advertising expenses were RMB25,362, RMB72,269 and RMB136,974 for the years ended December 31, 2018, 2019 and 2020, respectively.

Government subsidies

Government subsidies

Government subsidies represent government grants received from local government authorities to encourage the Group’s technology and innovations and also other subsidies for production.

The Group records such government subsidies as other income or reduction of expenses or cost of revenue when it has fulfilled all of its obligation related to the subsidy.

During the years ended December 31, 2018, 2019 and 2020, the Group recognized RMB9,679, RMB14,723 and RMB13,461 as subsidy income and recognized nil, nil, and RMB10,408 as reduction of expenses or cost of revenue, respectively. As of December 31, 2019 and 2020, subsidies of RMB26,098 and RMB26,158 were recorded as other current liabilities, RMB113,596 and RMB183,920 were recorded as other non-current liabilities as the Group has to meet certain performance conditions required by the government authorities.

Income taxes

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

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. The Group elects to recognize forfeitures when they occur.

Comprehensive income

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

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.

2. SIGNIFICANT ACCOUNTING POLICIES – CONTINUED

Foreign currencies - continued

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, 2018, 2019 and 2020, the transaction (losses) /gains amounted to RMB(7,588), RMB(14,231) and RMB27,451 and were recorded in general and administrative expenses.

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 RMB717,576 and RMB609,679 as of December 31, 2019 and 2020, respectively.

Convenience translation

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, 2020 is solely for the convenience of the reader and were calculated at the rate of US$1.00 = RMB6.5250, representing the rate as certified by the statistical release of the Federal Reserve Board of United States on December 31, 2020. 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, 2020, or at any other rate.

Net income per share

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

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. 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.

Accounts receivable concentration of credit risk is as below:

	As of December 31,
	2019	2020
	RMB	RMB
Company A	13,495 (7.1)%	26,005 (8.7)%
Company B	50,567 (26.8)%	59,987 (20.1)%
Company C	80,024 (42.4)%	108,422 (36.4)%
Total	144,086 (76.3)%	194,414 (65.2)%

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

	As of December 31,
	2019	2020
	RMB	RMB
Company D	1,401,015 (98.6)%	830,871 (96.6)%
Total	1,401,015 (98.6)%	830,871 (96.6)%

Revenue generated from Company D accounted for 76.8%, 73.5% and 69.1% of total revenue during the years ended December 31, 2018, 2019 and 2020, respectively. Company D is subsidiary of a company controlled by one of the Group’s shareholders (see note 21).

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Company D	2,798,824(76.8)%	4,271,135(73.5)%	4,447,957(69.1)%
Total	2,798,824(76.8)%	4,271,135(73.5)%	4,447,957(69.1)%

Supplier Concentration

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, 2019, 13.5% and 10.5% of its raw materials were purchased through Company E and F, respectively, and for the year ended December 31, 2020, 15.1% of its raw materials were purchased through Company E, but numerous alternate sources of supply are readily available on comparable terms.

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ORGANIZATION AND PRINCIPAL ACTIVITIES (Tables)

12 Months Ended

Dec. 31, 2020

ORGANIZATION AND PRINCIPAL ACTIVITIES

Schedule of Subsidiaries and VIEs

		Date of	Percentage
	Place of incorporation	incorporation/acquisition	of ownership
Major subsidiaries of the Company:
Hong Kong Zepp Holding Limited (“Zepp HK”)	Hong Kong (“HK”)	December 23, 2014	100%
ZEPP, INC. (“Zepp Inc”)	United States of America (“U.S.”)	January 15, 2015	100%
Beijing ShunYuan KaiHua Technology Co., Ltd. (“Shun Yuan”)	PRC	February 25, 2015	100%
Huami (Shenzhen) Information Technology Co., Ltd.	PRC	December 7, 2015	100%
Anhui Huami Intelligent Technology Co., Ltd. (“Huami Intelligent”)	PRC	December 28, 2015	100%
Huami North America Inc. ("HNA")	U.S.	June 16, 2016	100%
Galaxy Trading Platform Limited ("Galaxy")	HK	May 8, 2019	100%
Zepp Europe Holding B.V.	Netherlands	June 11, 2020	100%
Variable interest entities of the Company:
Anhui Huami	PRC	December 27, 2013	Consolidated VIE
Beijing Huami	PRC	July 11, 2014	Consolidated VIE
Major subsidiaries of Anhui Huami:
Anhui Huami Healthcare Co., Ltd.	PRC	December 5, 2016	VIE’s subsidiary

Schedule of Financial Statement Amounts and Balances of VIEs

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,
	2019	2020
	RMB	RMB
Total current assets	3,828,544	3,675,394
Total non-current assets	466,774	593,603
Total assets	4,295,318	4,268,997
Total current liabilities	2,361,906	2,696,059
Total non-current liabilities	183,295	309,741
Total liabilities	2,545,201	3,005,800

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Revenues	3,638,560	5,801,405	6,297,534
Net income	643,239	987,672	751,803

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Net cash provided by operating activities	712,210	478,806	165,512
Net cash used in investing activities	(72,862)	(126,887)	(728,797)
Net cash provided by/(used in) financing activities	(13,221)	(20,000)	564,671

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SIGNIFICANT ACCOUNTING POLICIES (Tables)

12 Months Ended

Dec. 31, 2020

Significant accounting policies

Schedule of estimated useful lives:

Software and electronic equipment	3-5 years
Building	20 years
Leasehold improvements	Shorter of the lease term or estimated useful lives

Credit Concentration Risk

Significant accounting policies

Schedule of concentration risk:

	As of December 31,
	2019	2020
	RMB	RMB
Company A	13,495 (7.1)%	26,005 (8.7)%
Company B	50,567 (26.8)%	59,987 (20.1)%
Company C	80,024 (42.4)%	108,422 (36.4)%
Total	144,086 (76.3)%	194,414 (65.2)%

Related parties concentration risk

Significant accounting policies

Schedule of concentration risk:

	As of December 31,
	2019	2020
	RMB	RMB
Company D	1,401,015 (98.6)%	830,871 (96.6)%
Total	1,401,015 (98.6)%	830,871 (96.6)%

Customer Concentration Risk

Significant accounting policies

Schedule of concentration risk:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Company D	2,798,824(76.8)%	4,271,135(73.5)%	4,447,957(69.1)%
Total	2,798,824(76.8)%	4,271,135(73.5)%	4,447,957(69.1)%

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ACQUISITIONS (Tables)

12 Months Ended

Dec. 31, 2020

ACQUISITIONS

Schedule of purchase price was allocation

	RMB	Amortization period
Cash	5,554
Other current assets	4,704
Property, plant and equipment	149	3 years
Intangible assets
Patents	42,495	5 years
Goodwill	67,856
Other non-current assets	261
Other current liabilities	(8,868)
Deferred tax liabilities	(6,374)
Other non-current liabilities	(2,980)
Total	102,797

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INVENTORIES, NET (Tables)

12 Months Ended

Dec. 31, 2020

INVENTORIES, NET

Schedule of Inventories

	As of December 31,
	2019	2020
	RMB	RMB
Raw materials	275,583	373,690
Work in process	176,417	233,274
Finished goods	441,806	610,573
Inventories, net	893,806	1,217,537

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PREPAID EXPENSES AND OTHER CURRENT ASSETS (Tables)

12 Months Ended

Dec. 31, 2020

PREPAID EXPENSES AND OTHER CURRENT ASSETS

Schedule of prepaid expenses and other current assets:

	As of December 31,
	2019	2020
	RMB	RMB
Value-added tax	43,595	100,686
Other receivables	10,252	21,060
Prepaid expenses	9,595	25,863
Advances to suppliers	2,129	874
Rental deposits	1,787	4,415
Total	67,358	152,898

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PROPERTY, PLANT AND EQUIPMENT, NET (Tables)

12 Months Ended

Dec. 31, 2020

PROPERTY, PLANT AND EQUIPMENT, NET

Schedule of property, plant and equipment, net

	As of December 31,
	2019	2020
	RMB	RMB
Software and electronic equipment	36,283	65,288
Buildings	19,342	19,342
Leasehold improvements	26,744	74,209
Total	82,369	158,839
Less: accumulated depreciation	(21,438)	(36,387)
Construction in progress	3,419	2,167
Property, plant and equipment, net	64,350	124,619

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INTANGIBLE ASSETS, NET (Tables)

12 Months Ended

Dec. 31, 2020

INTANGIBLE ASSETS, NET

Schedule of intangible assets, net

	As of December 31,
	2019	2020
	RMB	RMB
Intangible assets with indefinite lives:
Domain name	2,024	2,024
Insurance brokerage license and others	—	37,382
Intangible assets with finite lives:
Patents	92,165	126,423
Less: accumulated amortization	8,436	20,616
Intangible assets, net	85,753	145,213

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LONG-TERM INVESTMENTS (Tables)

12 Months Ended

Dec. 31, 2020

LONG-TERM INVESTMENTS

Schedule of long-term investments:

XML

FAIR-VALUE MEASUREMENT (Tables)

12 Months Ended

Dec. 31, 2020

FAIR-VALUE MEASUREMENT

Schedule of fair-value measurement

	As of December 31, 2019
	Quoted Prices in
	Active Market for	Significant Other	Significant
	Identical Assets	Observable Inputs	Unobservable
Description	Level 1	Level 2	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

11. FAIR-VALUE MEASUREMENT - CONTINUED

	As of December 31, 2020
	Quoted Prices in
	Active Market for	Significant Other	Significant
	Identical Assets	Observable Inputs	Unobservable
Description	Level 1	Level 2	Inputs Level 3	Total
	RMB	RMB	RMB	RMB
Short-term investments:
Convertible bonds	—	18,430	—	18,430
Long-term investments:
Convertible bonds	—	31,218	—	31,218
Redeemable preferred shares	—	38,499	1,934	40,433
Equity securities without readily determinable fair value	—	37,626	—	37,626
Total:	—	125,773	1,934	127,707

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ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES (Tables)

12 Months Ended

Dec. 31, 2020

ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Schedule of accrued expenses and other current liabilities

	As of December 31,
	2019	2020
	RMB	RMB
Accrued payroll and welfare	120,256	38,797
Deferred revenue	59,585	51,780
Product warranty	49,527	32,782
Current operating lease liabilities	32,799	48,120
Accrued expenses	17,688	14,979
Government subsidies	26,098	26,158
Other current liabilities	46,296	39,659
Total	352,249	252,275

Schedule of product warranty

Product Warranty
	RMB
Balance as of January 1, 2018	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
Provided during the year	74,742
Utilized during the year	(91,487)
Balance at December 31, 2020	32,782

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REVENUE AND DEFERRED REVENUES (Tables)

12 Months Ended

Dec. 31, 2020

REVENUE AND DEFERRED REVENUES

Schedule of disaggregated revenue by segment:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Xiaomi Wearable Products	2,439,534	4,193,665	4,438,081
Self-branded products and other	1,205,801	1,618,590	1,995,282
Total	3,645,335	5,812,255	6,433,363

Schedule of deferred revenue and refund liability:

	As of December 31,
	2019	2020
	RMB	RMB
Accounts Receivables	188,940	298,038
Amounts due from related parties	1,421,170	860,213
Deferred revenue	59,585	51,780
Refund liability (sales return)	582	366

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INCOME TAXES (Tables)

12 Months Ended

Dec. 31, 2020

INCOME TAXES

Schedule of current and deferred components of income taxes

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Current tax expenses	84,931	105,663	42,257
Deferred tax benefits	(32,895)	(27,776)	(11,103)
Income tax expense	52,036	77,887	31,154

Schedule of deferred tax assets

	As of December 31,
	2019	2020
	RMB	RMB
Deferred tax assets
Accrued expenses	50,644	60,823
Net operating loss carry forwards	53,989	62,945
Total deferred tax assets	104,633	123,768
Less: valuation allowance	(1,984)	(3,578)
Deferred tax assets, net	102,649	120,190

Schedule of reconciliation between the income tax expense computed by applying the statutory rate and the actual income tax expense

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Income before income tax	386,613	652,370	265,609
Tax expense at PRC enterprise income tax rate of 25%	96,653	163,093	66,402
Income tax on tax holidays	(58,327)	(72,396)	(41,869)
Tax effect of permanence differences	(22,733)	(31,088)	(20,001)
Effect of income tax rate differences in jurisdictions other than the PRC	36,443	16,270	21,625
Change in tax rate	—	—	3,460
Changes in valuation allowances	—	2,008	1,537
Income tax expense	52,036	77,887	31,154

Schedule of increase in income tax expenses and the decrease in net income per share amounts if tax holiday not available

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Increase in income tax expenses	58,327	72,396	41,869
Decrease in net income per share - basic	0.28	0.30	0.17
Decrease in net income per share - diluted	0.26	0.28	0.16

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SHARE-BASED PAYMENT (Tables)

12 Months Ended

Dec. 31, 2020

SHARE-BASED PAYMENT

Schedule of assumptions used to determine fair value of share options granted

	For the years ended December 31,
	2018		2019		2020
Risk-free interest rate	2.04%-2.83	%	2.14	%	0.67%-0.72	%
Expected volatility	36%-52.5	%	50.4	%	51.9%-52.0	%
Expected life of option (years)	1-10		10		10
Expected dividend yield	0.0	%	0.0	%	0.0	%
Fair value per ordinary share	15.03-16.85		12.65		21.60-23.10

Schedule of stock option activity

A summary of the stock option activity under the 2015 and 2018 Plan during the year ended December 31, 2020 is included in the table below.

		Weighted average
	Options granted	exercise price
	Share Number	per option
		US$
Outstanding at January 1, 2020	12,046,236	0.24
Granted	4,030,108	—
Exercised	(1,655,936)	—
Cancelled and forfeited	(139,594)	—
Outstanding at December 31, 2020	14,280,814	0.20

Schedule of share options granted

	December 31, 2020
			Weighted-
			average remaining
		Weighted-	exercise
		average exercise	contractual	Aggregate
	Options Number	price per option	life (years)	intrinsic value
		US$
Options
Outstanding	14,280,814	0.20	7.45	39,387
Exercisable	7,879,179	0.23	6.45	21,512
Expected to vest	6,401,635	0.17	8.69	17,875

Schedule of restricted stock units activity

A summary of the restricted stock units activity during the year ended December 31, 2020 is presented below:

	RSUs
Unvested balance at January 1, 2020	587,684
Granted	2,216,120
Cancelled and forfeited	—
Vested	986,962
Unvested balance at December 31, 2020	1,816,842

Schedule of total share-based compensation recognized

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
General and administrative	87,857	40,684	38,605
Research and development	42,167	11,191	23,978
Selling and marketing	4,271	3,198	2,571
Cost of revenues	414	55	—
Total stock-based compensation expense	134,709	55,128	65,154

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SEGMENT INFORMATION (Tables)

12 Months Ended

Dec. 31, 2020

SEGMENT INFORMATION

Schedule of segment information:

	For the year ended December 31, 2018
	Xiaomi	Self-branded
	Wearable	products
	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	Self-branded
	Wearable	products
	Products	and others	Total
	RMB	RMB	RMB
Revenues	4,193,665	1,618,590	5,812,255
Cost of revenues	3,296,696	1,047,816	4,344,512
Gross Profit	896,969	570,774	1,467,743

	For the year ended December 31, 2020
	Xiaomi	Self-branded
	Wearable	products
	Products	and others	Total
	RMB	RMB	RMB
Revenues	4,438,081	1,995,282	6,433,363
Cost of revenues	3,706,495	1,394,203	5,100,698
Gross Profit	731,586	601,079	1,332,665

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RELATED PARTY BALANCES AND TRANSACTIONS (Tables)

12 Months Ended

Dec. 31, 2020

RELATED PARTY BALANCES AND TRANSACTIONS

Schedule of amounts due:

	As of December 31,
	2019	2020
	RMB	RMB
Amount due from related parties:
Xiaomi Communication (a)	1,401,015	830,871
Yunding (b)	—	2,064
Gongqingcheng Yunding (c)	—	22,500
Youpin Information (a)	9,845	2,278
Xiaomi Information (a)	7,669	—
Others	2,641	2,500
Total	1,421,170	860,213

	As of December 31,
	2019	2020
	RMB	RMB
Amount due to related parties, current:
Xiaomi Technology(d)	(14,186)	(10,293)
Others	(583)	(892)
Total	(14,769)	(11,185)

(a) The amount due from Xiaomi represents receivables from the sales of products and services, which includes an unbilled amount of RMB80,675.

(b) The amount due from Yunding represents prepayment for the purchase of Yunding’ products.

(c) In December 2020, the Group sold 26.7% equity interest in Yunding for a cash consideration of RMB22,500 to Gongqingcheng Yunding, of which 20,000 has been received in January 2021.

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

(e) 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, which represented the principal plus accrued interest to date.

(f) The Group disposed five long-term investments and one long-term investment to Huaying Fund in 2018 and recorded RMB31 gain during the years ended December 31, 2018.

(g) During 2019, Purchase from related parties mainly included the intangible assets purchased from Hefei Huaheng which amounted to RMB11,321. During 2020, the Group made a prepayment of RMB12,000 to purchase a building owned by Hefei Yizhi.

Schedule of transactions:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Sales to related parties:
Xiaomi Communication	2,798,824	4,271,135	4,447,957
Xiaomi Information	17,859	9,870	—
Others	312	—	1,800
Total	2,816,995	4,281,005	4,449,757

Schedule of others:

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Others:
Loan provided to related parties (e)	5,143	—	—
Investments disposed to a related party (f)	3,061	—	—
Purchase from related parties (g)	—	12,183	12,000

(a) The amount due from Xiaomi represents receivables from the sales of products and services, which includes an unbilled amount of RMB80,675.

(b) The amount due from Yunding represents prepayment for the purchase of Yunding’ products.

(c) In December 2020, the Group sold 26.7% equity interest in Yunding for a cash consideration of RMB22,500 to Gongqingcheng Yunding, of which 20,000 has been received in January 2021.

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

(e) 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, which represented the principal plus accrued interest to date.

(f) The Group disposed five long-term investments and one long-term investment to Huaying Fund in 2018 and recorded RMB31 gain during the years ended December 31, 2018.

(g) During 2019, Purchase from related parties mainly included the intangible assets purchased from Hefei Huaheng which amounted to RMB11,321. During 2020, the Group made a prepayment of RMB12,000 to purchase a building owned by Hefei Yizhi.

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NET INCOME PER SHARE (Tables)

12 Months Ended

Dec. 31, 2020

NET INCOME PER SHARE

Schedule of profit attributable to owners

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Basic net income per share calculation Numerator:
Net income for the year attributable to the Company:	340,046	575,196	228,753
Less: Accretion of Series A Shares	177	—	—
Less: Accretion of Series B-1 Shares	368	—	—
Less: Accretion of Series B-2 Shares	4,049	—	—
Less: Deemed dividend to preferred shareholders	209,752	—	—
Less: Undistributed earnings allocated to Series A preferred shareholders	4,521	—	—
Less: Undistributed earnings allocated to Series B-1 preferred shareholders	126	—	—
Less: Undistributed earnings allocated to Series B-2 preferred shareholders	1,319	—	—
Less: Undistributed earnings allocated to participating nonvested restricted shares	6,244	2,450	—
Net income attributed to ordinary shareholders for computing net income per ordinary shares—basic	113,490	572,746	228,753
Denominator:
Weighted average ordinary shares outstanding used in computing net income per ordinary shares – basic	211,873,704	243,648,186	248,470,684
Net income per ordinary share attributable to ordinary shareholders—basic	0.54	2.35	0.92
Diluted net income per share calculation
Net income attributable to ordinary shareholders for computing net income per ordinary shares—basic	113,490	572,746	228,753
Add: adjustments to undistributed earnings to participating securities	648	117	—
Net income attributed to ordinary shareholders for computing net income per ordinary shares—dilute	114,138	572,863	228,753
Denominator:
Weighted average ordinary shares basic outstanding	211,873,704	243,648,186	248,470,684
Effect of potentially diluted stock options, restricted stocks and RSUs	13,160,946	12,310,986	11,881,310
Weighted average ordinary shares outstanding used in computing net income per ordinary shares—dilute	225,034,650	255,959,172	260,351,994
Net income per ordinary share attributable to ordinary shareholders—diluted	0.51	2.24	0.88

Schedule of shares excluded from calculation of net income per share

	For the years ended December 31,
	2018	2019	2020
	RMB	RMB	RMB
Shares issuable upon exercise of share options, restricted stocks and RSUs	705,407	294,352	89,165
Shares issuable upon vesting of nonvested restricted shares	11,657,620	1,042,234	—

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LEASES (Tables)

12 Months Ended

Dec. 31, 2020

LEASES

Schedule of components of lease cost

The following table represents lease costs recognized in the Group's consolidated statements of operation for the years ended December 31, 2019 and 2020. 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	2020
	RMB	RMB
Operating lease cost(1)	30,788	57,080
Sublease income	(1,382)	(537)
Total lease cost	29,406	56,543

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

Schedule of components of leases that are recognized on the Balance Sheets

The following table represents the components of leases that are recognized on the Group’s consolidated balance sheets as of December 31, 2019 and 2020.

	As of December 31,
	2019		2020
	RMB		RMB
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	26,733		42,313
Non-cash Right-of-use assets in exchange for new lease liabilities:
Operating leases	112,513		96,348
Weighted average remaining lease term
Operating leases	3.76 years		3.68 years
Weighted average discount rate
Operating leases	5.21	%	5.25	%

Schedule of maturities of lease liabilities under operating leases, after adoption of ASU 2016-02

The following is a maturity analysis of the annual undiscounted cash flows for the year ended December 31, 2020:

Year ending December 31,	RMB
2021	49,628
2022	52,015
2023	46,114
2024	25,859
2025	8,354
Total lease payments	181,970
Less: imputed interest	17,850
Present value of lease liabilities	164,120

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ORGANIZATION AND PRINCIPAL ACTIVITIES (Details) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥) customer	Dec. 31, 2019 CNY (¥) customer	Dec. 31, 2018 customer	Nov. 03, 2017	Apr. 29, 2015
Organization and principal activities:
Intercompany payable | ¥	¥ 153,190	¥ 43,971
Anhui Huami
Organization and principal activities:
Ownership percentage					100.00%
Beijing Huami
Organization and principal activities:
Ownership percentage				100.00%
Beneficiary shareholder
Organization and principal activities:
Common shares held (as percentage of total shares)	27.80%
Customer Concentration Risk
Organization and principal activities:
Number of customers | customer	1	1	1
Customer Concentration Risk | Sales Revenue Net
Organization and principal activities:
Concentration risk, percentage	69.00%	72.20%	66.90%

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ORGANIZATION AND PRINCIPAL ACTIVITIES - Subsidiaries and VIEs (Details)	12 Months Ended
	Dec. 31, 2020
Anhui Huami
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	Dec. 27, 2013
Variable interest entity, nature of VIE	Consolidated VIE
Beijing Huami
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	Jul. 11, 2014
Variable interest entity, nature of VIE	Consolidated VIE
Anhui Huami Healthcare Co., Ltd. ("Huami Healthcare")
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	Dec. 05, 2016
Variable interest entity, nature of VIE	VIE’s subsidiary
Zepp HK
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	Dec. 23, 2014
Percentage of ownership	100.00%
Zepp Inc
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	Jan. 15, 2015
Percentage of ownership	100.00%
Beijing Shun Yuan Kai Hua Technology Company Limited
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	Feb. 25, 2015
Percentage of ownership	100.00%
Huami (Shenzhen) Information Technology Co., Ltd. ("Huami SZ")
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	Dec. 07, 2015
Percentage of ownership	100.00%
Anhui Huami Intelligent
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	Dec. 28, 2015
Percentage of ownership	100.00%
Huami North America Inc.
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	Jun. 16, 2016
Percentage of ownership	100.00%
Galaxy Trading Platform Limited
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	May 08, 2019
Percentage of ownership	100.00%
Zepp Investment Platform I Ltd.
Details of major subsidiaries and major VIEs
Date of incorporation/acquisition	Jun. 11, 2020
Percentage of ownership	100.00%

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ORGANIZATION AND PRINCIPAL ACTIVITIES - Risks in relation to VIE structure (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)	Dec. 31, 2020 USD ($)
Variable Interest Entity
Total current assets	¥ 4,827,866		¥ 4,392,452		$ 739,903
Total assets	5,903,719		5,174,743		904,785
Total current liabilities	2,789,674		2,481,800		427,536
Total liabilities	3,173,461		2,677,155		$ 486,353
Revenues	6,433,363		5,812,255	¥ 3,645,335
Net income	228,753	$ 35,058	575,196	340,046
Net cash provided by operating activities	157,302	24,107	427,999	707,605
Net cash used in investing activities	(206,880)	(31,705)	(112,703)	(324,841)
Net cash provided by/(used in) financing activities	564,671	$ 86,539	25,609	639,170
Variable Interest Entities
Variable Interest Entity
Total current assets	3,675,394		3,828,544
Total non-current assets	593,603		466,774
Total assets	4,268,997		4,295,318
Total current liabilities	2,696,059		2,361,906
Total non-current liabilities	309,741		183,295
Total liabilities	3,005,800		2,545,201
Revenues	6,297,534		5,801,405	3,638,560
Net income	751,803		987,672	643,239
Net cash provided by operating activities	165,512		478,806	712,210
Net cash used in investing activities	(728,797)		(126,887)	(72,862)
Net cash provided by/(used in) financing activities	¥ 564,671		¥ (20,000)	¥ (13,221)

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SIGNIFICANT ACCOUNTING POLICIES (Details) $ in Thousands				12 Months Ended
	Apr. 01, 2019	May 01, 2018	Apr. 30, 2018	Dec. 31, 2020 CNY (¥) customer installment $ / ¥	Dec. 31, 2019 CNY (¥) customer	Dec. 31, 2018 CNY (¥)	Dec. 31, 2020 USD ($) $ / ¥	Dec. 31, 2017 CNY (¥)
Significant accounting policies:
Goodwill impairment				¥ 0	¥ 0	¥ 0
Allowance for doubtful accounts				0	0
Inventory provision				¥ 4,371,000	23,799,000	0
Lease term				5 years			5 years
Impairment equity securities				¥ 0	2,382,000	0
Impairment equity method				0	218,000	4,133,000
Unrealized gain(loss) on available-for-sale investments				(22,583,000)	3,514,000	12,349,000
Unrealized gain(loss) on available-for-sale investments				2,335,000	(848,000)	1,243,000
Increase to retained earnings due to the cumulative impact of adopting Topic 606				2,730,258,000	2,497,588,000	¥ 1,809,578,000	$ 418,432	¥ 228,164,000
Amounts due from related parties				¥ 860,213,000	1,421,170,000		131,833
Percentage of sales revenue						33.10%
Number of payment installments from customer | installment				2
Value added tax rate	13.00%	16.00%	17.00%
Advertising Expense				¥ 136,974,000	72,269,000	¥ 25,362,000
Government subsidies recognized as income				13,461,000	14,723,000	9,679,000
Government subsidy, cost of revenue				10,408,000	0	0
Government deferred subsidy income, current				26,158,000	26,098,000
Government deferred subsidy income, non-current				183,920,000	113,596,000
Cash and cash equivalents				¥ 2,273,349,000	1,803,117,000		$ 348,406
Foreign currency exchange rate | $ / ¥				6.5250			6.5250
Xiaomi Communication Technology Co. Ltd.("Xiaomi Communication")
Significant accounting policies:
Amounts due from related parties				¥ 830,871,000	1,401,015,000
U.S. Dollar Denominated
Significant accounting policies:
Cash and cash equivalents				609,679,000	717,576,000
General and Administrative Expenses
Significant accounting policies:
Transaction (losses)/gains				¥ 27,451,000	¥ (14,231,000)	¥ (7,588,000)
Xiaomi Wearable Products
Significant accounting policies:
Percentage of sales revenue				69.00%	72.20%	66.90%
Number of customers | customer				1	1
Percentage of second installment payment receivable				50.00%
Warranty term for products sold to one customer				18 months
Product warranty term for one customer				6 months
Additional warranty term to end users for products sold to one customer				12 months
Warranty term for products sold to end users				12 months
Self-branded products and others
Significant accounting policies:
Percentage of sales revenue				31.00%	27.80%	33.10%
Minimum
Significant accounting policies:
Deposit (as percent of face value)				40.00%
Minimum | Software services and software upgrades
Significant accounting policies:
Selling price per unit				¥ 1.83	¥ 1.72	¥ 1.77
Minimum | Trademark and Patents
Significant accounting policies:
Useful lives				5 years
Maximum
Significant accounting policies:
Deposit (as percent of face value)				60.00%
Maximum | Software services and software upgrades
Significant accounting policies:
Selling price per unit				¥ 8.40	¥ 10.62	5.68
Maximum | Trademark and Patents
Significant accounting policies:
Useful lives				10 years
Measurement Input, Discount Rate
Significant accounting policies:
Discount rate					19
Accumulated Retained Earnings
Significant accounting policies:
Increase to retained earnings due to the cumulative impact of adopting Topic 606				¥ 1,133,368,000	¥ 910,612,000	340,046,000		¥ 131,192,000
Cumulative effect adjustment for adoption of ASC 606
Significant accounting policies:
Increase to retained earnings due to the cumulative impact of adopting Topic 606						33,329,000
Cumulative effect adjustment for adoption of ASC 606 | Accumulated Retained Earnings
Significant accounting policies:
Increase to retained earnings due to the cumulative impact of adopting Topic 606						¥ 33,329,000

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SIGNIFICANT ACCOUNTING POLICIES - Estimated Useful Lives (Details)	12 Months Ended
	Dec. 31, 2020
Software and Electronic Equipment | Maximum
Property, plant and equipment
Estimated useful life	P5Y
Software and Electronic Equipment | Minimum
Property, plant and equipment
Estimated useful life	3
Building
Property, plant and equipment
Estimated useful life	P20Y

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SIGNIFICANT ACCOUNTING POLICIES - Account Receivable Concentration of Credit Risk (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2020 USD ($)
Concentration Risk [Line Items]
Accounts receivable	¥ 298,038	¥ 188,940	$ 45,676
Accounts Receivable
Concentration Risk [Line Items]
Accounts receivable	¥ 194,414	¥ 144,086
Concentration risk, percentage	65.20%	76.30%
Company A | Accounts Receivable
Concentration Risk [Line Items]
Accounts receivable	¥ 26,005	¥ 13,495
Concentration risk, percentage	8.70%	7.10%
Company B | Accounts Receivable
Concentration Risk [Line Items]
Accounts receivable	¥ 59,987	¥ 50,567
Concentration risk, percentage	20.10%	26.80%
Company C | Accounts Receivable
Concentration Risk [Line Items]
Accounts receivable	¥ 108,422	¥ 80,024
Concentration risk, percentage	36.40%	42.40%

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SIGNIFICANT ACCOUNTING POLICIES - Related Parties Concentration of Credit Risk (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2020 USD ($)
Concentration Risk [Line Items]
Amounts due from related parties	¥ 860,213	¥ 1,421,170	$ 131,833
Credit Concentration Risk
Concentration Risk [Line Items]
Amounts due from related parties	¥ 830,871	¥ 1,401,015
Concentration risk, percentage	96.60%	98.60%
Credit Concentration Risk | Customer D
Concentration Risk [Line Items]
Amounts due from related parties	¥ 830,871	¥ 1,401,015
Concentration risk, percentage	96.60%	98.60%

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SIGNIFICANT ACCOUNTING POLICIES - Revenue Generated from Related Parties (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Concentration Risk [Line Items]
Revenues	¥ 6,433,363	¥ 5,812,255	¥ 3,645,335
Credit Concentration Risk
Concentration Risk [Line Items]
Concentration risk, percentage	96.60%	98.60%
Credit Concentration Risk | Customer D
Concentration Risk [Line Items]
Concentration risk, percentage	96.60%	98.60%
Sales Revenue Net | Credit Concentration Risk
Concentration Risk [Line Items]
Revenues	¥ 4,447,957	¥ 4,271,135	¥ 2,798,824
Concentration risk, percentage	69.10%	73.50%	76.80%
Sales Revenue Net | Credit Concentration Risk | Customer D
Concentration Risk [Line Items]
Revenues	¥ 4,447,957	¥ 4,271,135	¥ 2,798,824
Concentration risk, percentage	69.10%	73.50%	76.80%

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SIGNIFICANT ACCOUNTING POLICIES - Supplier Concentration (Details) - Supplier Concentration Risk	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019
Company F
Concentration Risk [Line Items]
Concentration risk, percentage		10.50%
Company E
Concentration Risk [Line Items]
Concentration risk, percentage	15.10%	13.50%

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ACQUISITIONS (Details) ¥ in Thousands, $ in Thousands		12 Months Ended
	Jun. 12, 2020 CNY (¥)	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Jun. 30, 2020	Dec. 31, 2019 CNY (¥)
Business Combination
Previously held equity interest		¥ 87,716
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Goodwill		¥ 62,515	$ 9,581		¥ 5,930
Acquisition of PAI
Business Combination
Voting interest (as a percent)				100.00%
Cash consideration	¥ 1,370
Loan deemed effectively settled as a result of the acquisition	¥ 13,711
Percentage of revenue		1.00%
Previously held equity interest	40.49%
Business Combination, Recognized Identifiable Assets Acquired, Goodwill, and Liabilities Assumed, Net [Abstract]
Cash	¥ 5,554
Other current assets	4,704
Property, plant and equipment	149
Patents	42,495
Goodwill	67,856
Other non-current assets	261
Other current liabilities	(8,868)
Deferred tax liabilities	(6,374)
Other non-current liabilities	(2,980)
Total identifiable assets	¥ 102,797
Property, plant and equipment, amortization period	3 years
Patents	5 years
Guoxu
Business Combination
Gross consideration		¥ 67,914
Voting interest (as a percent)		100.00%	100.00%
Cash consideration		¥ 32,839
Loan deemed effectively settled as a result of the acquisition		¥ 35,075

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DISPOSAL OF SUBSIDIARIES (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Gain from deconsolidation of a subsidiary	¥ 56,522	$ 8,663
Yunding
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Gain from deconsolidation of a subsidiary	¥ 56,522
Yunding | Disposal by sale
Income Statement, Balance Sheet and Additional Disclosures by Disposal Groups, Including Discontinued Operations [Line Items]
Ownership interest sold (as a percent)	26.70%	26.70%
Cash consideration	¥ 22,500
Previous intercompany loan, outstanding principal	¥ 24,514
Ownership interest (as a percent)	24.30%

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INVENTORIES, NET (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)
INVENTORIES, NET
Raw materials	¥ 373,690		¥ 275,583
Work in process	233,274		176,417
Finished goods	610,573		441,806
Inventories, net	¥ 1,217,537	$ 186,596	¥ 893,806

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INVENTORIES, NET - Write downs (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
INVENTORIES, NET
Provision and write off for excess and obsolete inventories	¥ 4,371	¥ 23,799	¥ 0
Write down of obsolete inventory	¥ 59,852	¥ 17,739	¥ 0

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SHORT-TERM INVESTMENTS (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)
Schedule Of Investments
Short-term investments	¥ 18,430	$ 2,825	¥ 17,187
Guangzhou Joyrun Technology Co., Ltd. ("Joyrun")
Schedule Of Investments
Short-term investments	12,433		11,591
Others
Schedule Of Investments
Short-term investments	¥ 5,997		¥ 5,596

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SHORT-TERM INVESTMENTS - Additional information (Details) ¥ in Thousands, $ in Thousands	1 Months Ended	12 Months Ended
	Sep. 30, 2018 CNY (¥)	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
Schedule Of Investments
Payments to acquire investment					¥ 41,300
Unrealized loss on available-for-sale investments		¥ (21,340)	$ (3,270)	¥ 2,666	14,684
Unrealized gain on available-for-sale investments and others, tax effect		4,017		620	¥ 2,250
Joyrun
Schedule Of Investments
Payments to acquire investment	¥ 10,500
Interest rate	8.00%
Unrealized loss on available-for-sale investments		842		840
Others
Schedule Of Investments
Unrealized gain on available-for-sale investments and others, tax effect		¥ 401		¥ 400

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PREPAID EXPENSES AND OTHER CURRENT ASSETS (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)
Prepaid Expenses and Other Current Assets
Value-added tax	¥ 100,686		¥ 43,595
Other receivables	21,060		10,252
Prepaid expenses	25,863		9,595
Advances to suppliers	874		2,129
Rental deposits	4,415		1,787
Total	¥ 152,898	$ 23,433	¥ 67,358

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PROPERTY, PLANT AND EQUIPMENT, NET (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)
Property, plant and equipment
Property, plant and equipment, gross	¥ 158,839		¥ 82,369
Less: accumulated depreciation	(36,387)		(21,438)
Property, plant and equipment, net	124,619	$ 19,099	64,350
Software and Electronic Equipment
Property, plant and equipment
Property, plant and equipment, gross	65,288		36,283
Building
Property, plant and equipment
Property, plant and equipment, gross	19,342		19,342
Leasehold Improvements
Property, plant and equipment
Property, plant and equipment, gross	74,209		26,744
Construction in Progress
Property, plant and equipment
Property, plant and equipment, gross	¥ 2,167		¥ 3,419

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PROPERTY, PLANT AND EQUIPMENT, NET - Additional Information (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
PROPERTY, PLANT AND EQUIPMENT, NET
Depreciation expense	¥ 14,949	¥ 9,409	¥ 5,773
Impairment charges	¥ 0	¥ 0	¥ 0

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INTANGIBLE ASSETS, NET (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)
Intangible assets:
Patents	¥ 126,423		¥ 92,165
Less: accumulated amortization	20,616		8,436
Intangible assets, net	145,213	$ 22,255	85,753
Domain name
Intangible assets with indefinite lives:
Intangible assets with indefinite lives	2,024		¥ 2,024
Insurance brokerage license and others
Intangible assets with indefinite lives:
Intangible assets with indefinite lives	¥ 37,382

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INTANGIBLE ASSETS, NET - Additional Information (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
INTANGIBLE ASSETS, NET
Amortization of intangible assets	¥ 12,180	¥ 7,806	¥ 443
2021	16,645
2022	16,645
2023	16,645
2024	16,645
2025	12,180
Thereafter	¥ 8,815

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LONG-TERM INVESTMENTS (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)
Schedule Of Investments
Available-for-sale investments	¥ 71,651		¥ 49,174
Long-term investments	443,986	$ 68,044	406,099
Huaying Fund I
Schedule Of Investments
Equity method investments	53,105		55,557
Huaying Fund II
Schedule Of Investments
Equity method investments	107,633		102,336
GTI
Schedule Of Investments
Equity method investments			93,289
Sifive Inc
Schedule Of Investments
Equity securities without readily determinable fair value	22,279		20,445
AliveCor, Inc., ("Alivecor")
Schedule Of Investments
Equity securities without readily determinable fair value	15,347
Hyperfine Research, Inc. ("Hyperfine")
Schedule Of Investments
Equity securities without readily determinable fair value	32,625
Promaxo, Inc.("Promaxo")
Schedule Of Investments
Equity securities without readily determinable fair value	26,100
Others
Schedule Of Investments
Equity securities without readily determinable fair value	67,684		71,133
Equity method investments	¥ 47,562		¥ 14,165

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LONG-TERM INVESTMENTS - Additional information (Details) $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2019 USD ($)	Dec. 31, 2018 CNY (¥)	Dec. 31, 2016 CNY (¥)	Feb. 29, 2020
Schedule Of Investments
Purchase of long term investments	¥ 82,221,000	$ 12,600	¥ 180,927,000		¥ 109,854,000
Gain/(loss) from equity method investments	(4,749,000)	(728)	(1,112,000)		1,743,000
Gain from fair value change of long-term investments	¥ 12,325,000	$ 1,888			7,860,000
Disposal by sale | Yunding
Schedule Of Investments
Equity method investment, ownership percentage	24.30%	24.30%
Huaying Fund I
Schedule Of Investments
Purchase of long term investments						¥ 50,000,000
Equity method investment, ownership percentage						49.50%
Gain/(loss) from equity method investments	¥ (2,452,000)		(1,342,000)		1,823,000
Huaying Fund II
Schedule Of Investments
Purchase of long term investments			¥ 102,000,000
Equity method investment, ownership percentage			34.00%	34.00%
Gain/(loss) from equity method investments	5,297,000		¥ 336,000
Sifive Inc
Schedule Of Investments
Purchase of long term investments					¥ 12,332,000
Equity interests (as a percent)					1.01%
Gain from fair value change of long-term investments	3,304,000		¥ 0
Alivore
Schedule Of Investments
Purchase of long term investments | $				$ 1,000
Equity interests (as a percent)							0.56%
Gain from fair value change of long-term investments	¥ 7,728,000
Interest rate (as a percent)			3.00%	3.00%
Hyperfine
Schedule Of Investments
Purchase of long term investments | $		$ 5,000
Equity interests (as a percent)	2.27%	2.27%
Gain from fair value change of long-term investments	¥ 0
Promaxo
Schedule Of Investments
Purchase of long term investments | $		$ 4,000
Equity interests (as a percent)	4.05%	4.05%
Gain from fair value change of long-term investments	¥ 0

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FAIR-VALUE MEASUREMENT (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)
Fair Value Assets Measured On Recurring Basis [Line Items]
Short-term investments	¥ 18,430	$ 2,825	¥ 17,187
Long-term investments	443,986	$ 68,044	406,099
Recurring Basis
Fair Value Assets Measured On Recurring Basis [Line Items]
Available-for-sale investments	127,707		66,361
Recurring Basis | Redeemable Preferred Shares
Fair Value Assets Measured On Recurring Basis [Line Items]
Long-term investments	40,433		42,212
Recurring Basis | Significant Other Observable Inputs Level 2
Fair Value Assets Measured On Recurring Basis [Line Items]
Available-for-sale investments	125,773		66,361
Recurring Basis | Significant Other Observable Inputs Level 2 | Redeemable Preferred Shares
Fair Value Assets Measured On Recurring Basis [Line Items]
Long-term investments	38,499		42,212
Recurring Basis | Significant Unobservable Inputs Level 3
Fair Value Assets Measured On Recurring Basis [Line Items]
Available-for-sale investments	1,934
Recurring Basis | Significant Unobservable Inputs Level 3 | Redeemable Preferred Shares
Fair Value Assets Measured On Recurring Basis [Line Items]
Long-term investments	1,934
Recurring Basis | Convertible Bond
Fair Value Assets Measured On Recurring Basis [Line Items]
Short-term investments	18,430		17,187
Long-term investments	31,218		6,962
Recurring Basis | Convertible Bond | Significant Other Observable Inputs Level 2
Fair Value Assets Measured On Recurring Basis [Line Items]
Short-term investments	18,430		17,187
Long-term investments	31,218		¥ 6,962
Recurring Basis | Equity securities without readily determinable fair value
Fair Value Assets Measured On Recurring Basis [Line Items]
Long-term investments	37,626
Recurring Basis | Equity securities without readily determinable fair value | Significant Other Observable Inputs Level 2
Fair Value Assets Measured On Recurring Basis [Line Items]
Long-term investments	¥ 37,626

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FAIR-VALUE MEASUREMENT - Additional Information (Details) - CNY (¥)	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
FAIR-VALUE MEASUREMENT
Fair value assets transferred from level 1 to level 2	¥ 0	¥ 0
Fair value assets transferred from level 2 to level 1	0	0
Fair value assets transferred into level 3	0	0
Fair value assets transferred out of level 3	0	0
Impairment equity securities	¥ 0	¥ 2,382,000	¥ 0

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ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)	Dec. 31, 2017 CNY (¥)
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued payroll and welfare	¥ 38,797		¥ 120,256
Deferred revenue	51,780		59,585
Product warranty	32,782		49,527	¥ 55,599	¥ 8,431
Current operating lease liabilities	¥ 48,120		¥ 32,799
Operating Lease, Liability, Current, Statement of Financial Position [Extensible List]	Total	Total	Total
Accrued expenses	¥ 14,979		¥ 17,688
Government subsidies	26,158		26,098
Other current liabilities	39,659		46,296
Total	¥ 252,275	$ 38,663	¥ 352,249

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ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES - Product warranty (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Beginning balance	¥ 49,527	¥ 55,599	¥ 8,431
Provided during the year	74,742	80,048	68,866
Utilized during the year	(91,487)	(86,120)	(21,698)
Ending balance	¥ 32,782	¥ 49,527	¥ 55,599

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ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES - Warranty costs (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Cost of Revenue
Warranty costs
Warrant cost	¥ 74,742	¥ 80,048	¥ 68,866

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BANK BORROWING (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
Short Term Debt [Line Items]
Bank borrowings	¥ 1,207,793	$ 185,102		¥ 20,000
Repayments of bank debt	¥ 643,122	$ 98,563	¥ 20,000	¥ 30,000
Interest rate (as a percent)	2.85%	2.85%
Minimum
Short Term Debt [Line Items]
Maturity term (in years)	1 year	1 year
Maximum
Short Term Debt [Line Items]
Maturity term (in years)	3 years	3 years

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REVENUE AND DEFERRED REVENUES - Disaggregation of revenue (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
Disaggregation Of Revenue
Revenue	¥ 6,433,363	$ 985,956	¥ 5,812,255	¥ 3,645,335
Xiaomi Wearable Products
Disaggregation Of Revenue
Revenue	4,438,081		4,193,665	2,439,534
Self-branded products and others
Disaggregation Of Revenue
Revenue	¥ 1,995,282		¥ 1,618,590	¥ 1,205,801

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REVENUE AND DEFERRED REVENUES - Contract balances (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)
REVENUE AND DEFERRED REVENUES
Accounts receivable	¥ 298,038	$ 45,676	¥ 188,940
Amounts due from related parties	860,213	$ 131,833	1,421,170
Deferred revenue	51,780		59,585
Refund liability (sales return)	¥ 366		¥ 582

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REVENUE AND DEFERRED REVENUES - Additional Information (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Disaggregation Of Revenue
Amount due from related parties, billed receivable	¥ 779,538	¥ 1,318,483
Amount due from related parties, unbilled receivable	80,675	102,687
Asset impairment charges	0	0	¥ 0
Deferred revenue, revenue recognized	59,585	41,863	17,876
Cooperation Agreement
Disaggregation Of Revenue
Amount due from related parties, billed receivable	¥ 102,687	¥ 33,279
Amount due from related parties, unbilled receivable			¥ 33,329
Minimum
Disaggregation Of Revenue
Payment terms (in days)	30 days
Maximum
Disaggregation Of Revenue
Payment terms (in days)	60 days

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INCOME TAXES (Details) ¥ in Thousands, $ in Thousands		12 Months Ended
	Apr. 01, 2018	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)	Dec. 31, 2020 USD ($)
Income Tax Contingency [Line Items]
Net income		¥ 229,706	$ 35,204	¥ 573,371	¥ 336,320
Operating loss		174,196	$ 26,698	606,484	365,719
Deferred tax assets, valuation allowance		¥ 3,578		1,984
Percentage of withholding tax on dividends paid to foreign investors		10.00%	10.00%
Aggregate undistributed earnings available for distribution		¥ 1,935,920		¥ 1,559,898
Deferred tax liabilities attributable to undistributed earning		0
PRC, Hong Kong, United States and Canada
Income Tax Contingency [Line Items]
Operating loss		(276,137)
Minimum
Income Tax Contingency [Line Items]
Underpayment of tax liability		¥ 100				$ 15
Hong Kong | Minimum
Income Tax Contingency [Line Items]
Net income					¥ 2,000
Income tax rate	8.25%
Hong Kong | Maximum
Income Tax Contingency [Line Items]
Income tax rate	16.50%
United States
Income Tax Contingency [Line Items]
Income tax rate		21.00%	21.00%
Operating loss carry forwards carry forward period					20 years
PRC
Income Tax Contingency [Line Items]
Income tax rate		25.00%	25.00%
Carryforwards		¥ 179,614
Operating loss carry forwards carry forward period		5 years	5 years
PRC | Anhui Huami
Income Tax Contingency [Line Items]
Income tax rate		15.00%	15.00%	15.00%	15.00%
PRC | Anhui Huami Intelligent
Income Tax Contingency [Line Items]
Income tax rate		15.00%	15.00%
Canada
Income Tax Contingency [Line Items]
Operating loss carry forwards carry forward period		20 years	20 years
Operating loss carried back period		3 years	3 years

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INCOME TAXES - Current and deferred (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
INCOME TAXES
Current tax expenses	¥ 42,257		¥ 105,663	¥ 84,931
Deferred tax benefits	(11,103)		(27,776)	(32,895)
Income tax expense	¥ 31,154	$ 4,775	¥ 77,887	¥ 52,036

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INCOME TAXES - Deferred tax assets (Details) - CNY (¥) ¥ in Thousands	Dec. 31, 2020	Dec. 31, 2019
Deferred tax assets
Accrued expenses	¥ 60,823	¥ 50,644
Net operating loss carry forwards	62,945	53,989
Total deferred tax assets	123,768	104,633
Less: valuation allowance	(3,578)	(1,984)
Deferred tax assets, net	¥ 120,190	¥ 102,649

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INCOME TAXES - Tax Expense Reconciliation (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
INCOME TAXES
Income before income tax	¥ 265,609	$ 40,707	¥ 652,370	¥ 386,613
Tax expense at PRC enterprise income tax rate of 25%	66,402		163,093	96,653
Income tax on tax holidays	(41,869)		(72,396)	(58,327)
Tax effect of permanence differences	(20,001)		(31,088)	(22,733)
Effect of income tax rate differences in jurisdictions other than the PRC	21,625		16,270	36,443
Change in tax rate	3,460
Change in valuation allowances	1,537		2,008
Income tax expense	¥ 31,154	$ 4,775	¥ 77,887	¥ 52,036

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INCOME TAXES - Increase in income tax expenses and the decrease in net income per share amounts if tax holiday not available (Details) - CNY (¥) ¥ / shares in Units, ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
INCOME TAXES
Increase in income tax expenses	¥ 41,869	¥ 72,396	¥ 58,327
Decrease in net income per share - basic	¥ 0.17	¥ 0.30	¥ 0.28
Decrease in net income per share - diluted	¥ 0.16	¥ 0.28	¥ 0.26

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ORDINARY SHARES (Details) - $ / shares	1 Months Ended			12 Months Ended
	Apr. 30, 2019	Feb. 28, 2018	Jan. 31, 2018	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2020	Dec. 31, 2017
Class Of Stock [Line Items]
Ordinary shares, shares authorized							405,462,685
Ordinary shares, par value							$ 0.0001
Class B Ordinary Shares
Class Of Stock [Line Items]
Ordinary shares, shares authorized				200,000,000		200,000,000
Ordinary shares, par value				$ 0.0001		$ 0.0001
Ordinary shares, shares issued				156,060,279	184,376,679	121,408,247
Ordinary shares, shares outstanding				156,060,279	184,376,679	121,408,247
Issuance of ordinary shares, shares	28,316,400
Number of ordinary shares granted to preference shareholders			12,064,825
Class A Ordinary Shares
Class Of Stock [Line Items]
Ordinary shares, shares authorized				9,800,000,000		9,800,000,000
Ordinary shares, par value				$ 0.0001		$ 0.0001
Ordinary shares, shares issued				91,459,708	57,303,093	128,736,916
Ordinary shares, shares outstanding				91,459,708	57,303,093	128,736,916
Issuance of ordinary shares, shares	3,174,600
Conversion of Series A, B-1 and B-2 preferred shares		13,359,788
Ordinary Shares
Class Of Stock [Line Items]
Conversion of Series A, B-1 and B-2 preferred shares					94,537,315
Number of ordinary shares granted to preference shareholders					12,064,825
Initial Public Offering | Ordinary Shares
Class Of Stock [Line Items]
Issuance of ordinary shares, shares		41,600,000		3,174,600	41,600,000
Initial Public Offering | Ordinary Shares | Class B Ordinary Shares
Class Of Stock [Line Items]
Conversion of Series A, B-1 and B-2 preferred shares		94,537,315

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SHARE-BASED PAYMENT - 2015 Plan (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018	Oct. 21, 2015
SHARE-BASED PAYMENT
Share-based compensation expense	¥ 65,154	¥ 55,128	¥ 134,709
2015 Plan
SHARE-BASED PAYMENT
Shares authorized (in shares)				14,328,358
PRC Plan | Share Options
SHARE-BASED PAYMENT
Granted	0	0	0
Share-based compensation expense	¥ 480	¥ 1,194	¥ 40,449

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SHARE-BASED PAYMENT - 2018 Plan (Details) ¥ in Thousands	1 Months Ended	12 Months Ended
	Jan. 31, 2018 shares	Dec. 31, 2020 CNY (¥) shares	Dec. 31, 2020 $ / shares	Dec. 31, 2019 CNY (¥) shares	Dec. 31, 2019 $ / shares	Dec. 31, 2018 CNY (¥) shares	Dec. 31, 2018 $ / shares
SHARE-BASED PAYMENT
Share-based compensation expense | ¥		¥ 65,154		¥ 55,128		¥ 134,709
2018 Plan | Share Options
SHARE-BASED PAYMENT
Shares authorized (in shares) | shares	9,559,607
Increase in authorized shares (as percent of outstanding shares)	1.00%
Granted | shares		4,030,108		651,000		6,988,469
Share options granted exercise price | $ / shares			$ 0		$ 0		$ 0.35
Share-based compensation expense | ¥		¥ 41,836		¥ 32,424		¥ 9,523

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SHARE-BASED PAYMENT - Share Options Fair Value Assumption (Details) - ¥ / shares	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
SHARE-BASED PAYMENT
Risk-free interest rate, minimum	0.67%
Risk-free interest rate, maximum	0.72%
Expected volatility, minimum	51.90%
Expected volatility, maximum	52.00%
Share Options
SHARE-BASED PAYMENT
Risk-free interest rate		2.14%
Risk-free interest rate, minimum			2.04%
Risk-free interest rate, maximum			2.83%
Expected volatility		50.40%
Expected volatility, minimum			36.00%
Expected volatility, maximum			52.50%
Expected life of option (years)	10 years	10 years
Expected dividend yield	0.00%	0.00%	0.00%
Fair value per ordinary share		¥ 12.65
Share Options | Minimum
SHARE-BASED PAYMENT
Expected life of option (years)			1 year
Fair value per ordinary share	¥ 21.60	¥ 12.65	¥ 15.03
Share Options | Maximum
SHARE-BASED PAYMENT
Expected life of option (years)			10 years
Fair value per ordinary share	¥ 23.10		¥ 16.85

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SHARE-BASED PAYMENT - Share Options Activity (Details) - 2015 and 2018 Plans - Share Options $ / shares in Units, $ in Thousands	12 Months Ended
	Dec. 31, 2020 USD ($) $ / shares shares
Share number
Outstanding at beginning of year	12,046,236
Granted	4,030,108
Exercised	(1,655,936)
Canceled and forfeited	(139,594)
Outstanding at end of year	14,280,814
Exercisable	7,879,179
Expected to vest	6,401,635
Weighted average exercise price per option
Outstanding at beginning of year (in USD per share) | $ / shares	$ 0.24
Outstanding at end of year (in USD per share) | $ / shares	0.20
Exercisable (in USD per share) | $ / shares	0.23
Expected vest (per option) | $ / shares	$ 0.17
Weighted-average remaining exercise contractual life (years)
Outstanding	7 years 5 months 12 days
Exercisable	6 years 5 months 12 days
Excepted to vest	8 years 8 months 8 days
Aggregate intrinsic value
Outstanding | $	$ 39,387
Exercisable | $	21,512
Expected to vest | $	$ 17,875

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SHARE-BASED PAYMENT - Share Options Other Disclosures (Details) - CNY (¥) ¥ / shares in Units, ¥ in Thousands	1 Months Ended	12 Months Ended
	Jan. 31, 2018	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
SHARE-BASED PAYMENT
Share-based compensation expense		¥ 65,154	¥ 55,128	¥ 134,709
Share Options
SHARE-BASED PAYMENT
Amended and accelerated for vesting and immediately became exercisable (in shares)	6,817,372
Intrinsic value share options exercised		¥ 32,010	¥ 13,608	¥ 6,858
Weighted average grant date fair value of options granted		¥ 22.42	¥ 12.65	¥ 15.12
Unrecognized compensation expenses related to the options		¥ 96,596
2015 and 2018 Plans | Share Options
SHARE-BASED PAYMENT
Share-based compensation expense		¥ 42,316	¥ 33,618	¥ 49,972

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SHARE-BASED PAYMENT - Restricted Stock Units (Details) ¥ / shares in Units, ¥ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥) ¥ / shares shares	Dec. 31, 2020 CNY (¥) ¥ / shares $ / shares	Dec. 31, 2019 CNY (¥) ¥ / shares shares	Dec. 31, 2019 $ / shares ¥ / shares	Dec. 31, 2018 CNY (¥) ¥ / shares shares	Dec. 31, 2018 $ / shares ¥ / shares
SHARE-BASED PAYMENT
Share-based compensation expense	¥ 65,154		¥ 55,128		¥ 134,709
Restricted Stock Units
SHARE-BASED PAYMENT
Exercise price per share | $ / shares		$ 0		$ 0		$ 0
Vesting period (in years)	4 years		4 years		4 years
Reacquisition of non-vested shares, consideration	¥ 0		¥ 0		¥ 0
Recognized compensation expense service period	4 years		4 years		4 years
Aggregate fair value of the restricted shares at the grant dates	¥ 92,715
Weighted average grant-date fair value of non-vested shares | ¥ / shares	¥ 21.38	$ 21.38
Fair value per ordinary share on the grant-date | ¥ / shares	¥ 21,020	$ 21,020	¥ 79	$ 79	¥ 25,592	$ 25,592
Share-based compensation expense	¥ 22,838		¥ 3,598		¥ 25,434
Unrecognized compensation cost	¥ 31,415	$ 31,415
Weighted average vesting period over which unrecognized compensation costs is expected to be recognized	2 years 10 months 9 days
Weighted average grant date fair value (in RMB per share) | ¥ / shares	¥ 22.84		¥ 12.65		¥ 15.75
Restricted Shares
Balance at the beginning of the year (in shares) | shares	587,684
Granted (in shares) | shares	2,216,120		30,000		658,056
Vested (in shares) | shares	(986,962)
Balance at the end of the year (in shares) | shares	1,816,842		587,684
Restricted Stock Units | Share-based Compensation Award, Tranche One
SHARE-BASED PAYMENT
Vesting rights percentage	0.25%		0.25%		0.25%
Restricted Stock Units | Annual Basis Ending on Fourth Anniversary of Grant Date
SHARE-BASED PAYMENT
Vesting period (in years)	3 years		3 years		3 years
Vesting rights percentage	0.75%		0.75%		0.75%

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SHARE-BASED PAYMENT - Restricted Share (Details) ¥ / shares in Units, ¥ in Thousands			12 Months Ended
	Oct. 21, 2015 CNY (¥) ¥ / shares shares	Oct. 21, 2015 ¥ / shares $ / shares	Dec. 31, 2020 CNY (¥)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)	Oct. 21, 2015 $ / shares
Expense
Share-based compensation expense			¥ 65,154	¥ 55,128	¥ 134,709
US Plan | Restricted Shares
SHARE-BASED PAYMENT
Number of restricted shares granted | shares	4,740,777
Exercise price per share | $ / shares		$ 0
Vesting period (in years)	4 years
Reacquisition of non-vested shares, consideration	¥ 0
Recognized compensation expense service period	4 years
Aggregate fair value of the restricted shares at the grant dates	¥ 25,397
Fair value per ordinary share on the grant-date | (per share)	¥ 5.36	$ 5.36				$ 0.84
Fair value of vested shares			0	2,758	6,165
Unrecognized compensation cost			0
Expense
Share-based compensation expense			¥ 0	¥ 118	¥ 3,992
US Plan | Restricted Shares | Share-based Compensation Award, Tranche One
SHARE-BASED PAYMENT
Vesting rights percentage	0.25%
US Plan | Restricted Shares | Annual Basis Ending on Fourth Anniversary of Grant Date
SHARE-BASED PAYMENT
Vesting period (in years)	3 years
Vesting rights percentage	0.75%

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SHARE-BASED PAYMENT - Founders (Details) ¥ in Thousands	1 Months Ended		12 Months Ended
	Apr. 30, 2015 shares	Jan. 31, 2014 installment	Dec. 31, 2020 CNY (¥)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
Expense
Share-based compensation expense | ¥			¥ 65,154	¥ 55,128	¥ 134,709
Founders | Restricted Shares
SHARE-BASED PAYMENT
Number of shareholders | installment		2
Equity interests (as a percent)		50.00%
Number of equal vesting monthly installments | installment		24
Number of restricted shares held | shares	45,567,164
Vesting period (in months)	48 months
Expense
Share-based compensation expense | ¥			¥ 0	¥ 17,794	¥ 55,311

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SHARE-BASED PAYMENT - Share-based Compensation Recognized (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
SHARE-BASED PAYMENT
Total stock-based compensation expense	¥ 65,154	¥ 55,128	¥ 134,709
General and Administrative Expenses
SHARE-BASED PAYMENT
Total stock-based compensation expense	38,605	40,684	87,857
Research and Development
SHARE-BASED PAYMENT
Total stock-based compensation expense	23,978	11,191	42,167
Selling and Marketing Expenses
SHARE-BASED PAYMENT
Total stock-based compensation expense	¥ 2,571	3,198	4,271
Cost of Revenue
SHARE-BASED PAYMENT
Total stock-based compensation expense		¥ 55	¥ 414

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MAINLAND CHINA CONTRIBUTION PLAN (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
MAINLAND CHINA CONTRIBUTION PLAN
Total provisions for employee benefits	¥ 64,734	¥ 63,799	¥ 39,495

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SEGMENT INFORMATION (Details) - segment	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
SEGMENT INFORMATION
Number of operating segments	2	2	2

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SEGMENT INFORMATION - Schedule of Revenues, Cost of Revenues and Gross Profits by Segment (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
Segment Reporting Information [Line Items]
Revenues	¥ 6,433,363		¥ 5,812,255	¥ 3,645,335
Cost of revenues	5,100,698		4,344,512	2,705,885
Gross profit	1,332,665	$ 204,240	1,467,743	939,450
Xiaomi Wearable Products
Segment Reporting Information [Line Items]
Revenues	4,438,081		4,193,665	2,439,534
Cost of revenues	3,706,495		3,296,696	1,883,509
Gross profit	731,586		896,969	556,025
Self-branded products and others
Segment Reporting Information [Line Items]
Revenues	1,995,282		1,618,590	1,205,801
Cost of revenues	1,394,203		1,047,816	822,376
Gross profit	¥ 601,079		¥ 570,774	¥ 383,425

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STATUTORY RESERVES AND RESTRICTED NET ASSETS (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2015	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Statutory Accounting Practices [Line Items]
Profit appropriation made	¥ 1,509			¥ 0
Statutory reserve accrued		¥ 5,997	¥ 92
Restricted net assets		¥ 180,981	¥ 153,943	¥ 153,851
PRC
Statutory Accounting Practices [Line Items]
Required maximum percentage of statutory surplus reserve to registered capital		50.00%
Required minimum percentage of after tax profits to allocate to statutory common reserve		10.00%
Maximum
Statutory Accounting Practices [Line Items]
Percentage of profit appropriation made to reserve fund required amount of registered capital	50.00%

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RELATED PARTY BALANCES AND TRANSACTIONS - Balances (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)
Amount due from related parties:
Amounts due from related parties	¥ 860,213	$ 131,833	¥ 1,421,170
Amount due to related parties, current:
Amount due to related parties, current	(11,185)	$ (1,714)	(14,769)
Xiaomi Communication Technology Co. Ltd.("Xiaomi Communication")
Amount due from related parties:
Amounts due from related parties	830,871		1,401,015
Yunding
Amount due from related parties:
Amounts due from related parties	2,064
Gongqingcheng Yunding
Amount due from related parties:
Amounts due from related parties	22,500
Youpin Information
Amount due from related parties:
Amounts due from related parties	2,278		9,845
Xiaomi Information
Amount due from related parties:
Amounts due from related parties			7,669
Xiaomi Technology Co. Ltd. ("Xiaomi Technology")
Amount due to related parties, current:
Amount due to related parties, current	(10,293)		(14,186)
Others
Amount due from related parties:
Amounts due from related parties	2,500		2,641
Amount due to related parties, current:
Amount due to related parties, current	¥ (892)		¥ (583)

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RELATED PARTY BALANCES AND TRANSACTIONS - Transactions - Related party (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Related Party Transaction [Line Items]
Sales to related parties	¥ 4,449,757	¥ 4,281,005	¥ 2,816,995
Xiaomi Communication Technology Co. Ltd.("Xiaomi Communication")
Related Party Transaction [Line Items]
Sales to related parties	4,447,957	4,271,135	2,798,824
Xiaomi Information
Related Party Transaction [Line Items]
Sales to related parties		¥ 9,870	17,859
Others
Related Party Transaction [Line Items]
Sales to related parties	¥ 1,800		¥ 312

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RELATED PARTY BALANCES AND TRANSACTIONS - Transactions - Others (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
RELATED PARTY BALANCES AND TRANSACTIONS
Loan provided to related parties			¥ 5,143
Investments disposed to a related party			¥ 3,061
Purchase from related parties	¥ 12,000	¥ 12,183

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RELATED PARTY BALANCES AND TRANSACTIONS - Additional information (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥) item	Dec. 31, 2018 CNY (¥) item
Related Party Transaction [Line Items]
Loan provided to related parties				¥ 5,000
Realized gain from investments			¥ 1,822	261
Purchase from related parties	¥ 12,000		12,183
Purchase of intangible assets	1,220	$ 187	11,845	52,017
Hangzhou Yunyou Technology Co. Ltd.("Hanzhou Yunyou")
Related Party Transaction [Line Items]
Loan provided to related parties				¥ 5,000
Recognized impairment loss			¥ 5,640
Loan interest rate				15.00%
Xiaomi Communication, Information, Technology
Related Party Transaction [Line Items]
Receivables from the sales of products and services	80,675
Huaying Fund I
Related Party Transaction [Line Items]
Number of long-term investments disposed | item			1	5
Realized gain from investments				¥ 31
Hefei Huaheng
Related Party Transaction [Line Items]
Purchase from related parties	¥ 12,000
Purchase of intangible assets			¥ 11,321
Yunding
Related Party Transaction [Line Items]
Ownership interest sold (as a percent)	26.70%	26.70%
Cash consideration	¥ 22,500
Proceeds from disposal of equity interest in subsidiary | $		$ 20,000

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NET INCOME PER SHARE (Details) ¥ / shares in Units, $ / shares in Units, ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥) ¥ / shares shares	Dec. 31, 2020 USD ($) $ / shares shares	Dec. 31, 2019 CNY (¥) ¥ / shares shares	Dec. 31, 2018 CNY (¥) ¥ / shares shares
Basic net income per share calculation Numerator:
Net income for the year attributable to the Company:	¥ 228,753	$ 35,058	¥ 575,196	¥ 340,046
Less: Deemed dividend to preferred shareholders				209,752
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares			2,450	12,210
Net income attributed to ordinary shareholders for computing net income per ordinary shares-basic	¥ 228,753	$ 35,058	¥ 572,746	¥ 113,490
Denominator:
Weighted average ordinary shares outstanding used in computing net income per ordinary shares - basic | shares	248,470,684	248,470,684	243,648,186	211,873,704
Net income per ordinary share attributable to ordinary shareholders-basic | (per share)	¥ 0.92	$ 0.14	¥ 2.35	¥ 0.54
Diluted net income per share calculation
Net income attributed to ordinary shareholders for computing net income per ordinary shares-basic	¥ 228,753	$ 35,058	¥ 572,746	¥ 113,490
Add: adjustments to undistributed earnings to participating securities			117	648
Net income attributed to ordinary shareholders for computing net income per ordinary shares-basic	¥ 228,753		¥ 572,863	¥ 114,138
Denominator:
Ordinary share - basic | shares	248,470,684	248,470,684	243,648,186	211,873,704
Effect of potentially diluted stock options, restricted stocks and RSUs | shares	11,881,310	11,881,310	12,310,986	13,160,946
Weighted average ordinary shares outstanding used in computing net income per ordinary shares - dilute | shares	260,351,994	260,351,994	255,959,172	225,034,650
Net income per ordinary share attributable to ordinary shareholders-diluted | (per share)	¥ 0.88	$ 0.13	¥ 2.24	¥ 0.51
Series A Preferred Shares
Basic net income per share calculation Numerator:
Less: Accretion of Shares				¥ 177
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares				4,521
Series B-1 Preferred Shares
Basic net income per share calculation Numerator:
Less: Accretion of Shares				368
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares				126
Series B-2 Preferred Shares
Basic net income per share calculation Numerator:
Less: Accretion of Shares				4,049
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares				1,319
Restricted Shares
Basic net income per share calculation Numerator:
Less: Undistributed earnings allocated to participating preferred shares and nonvested restricted shares			¥ 2,450	¥ 6,244

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NET INCOME PER SHARE - Anti-dilutive Securities Excluded from Calculation of Diluted Net (Loss)/Income Per Ordinary Shares (Details) - shares	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Shares Issuable Upon Exercise of Share Options, Restricted Stocks and RSUs
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from calculation of diluted net (loss)/income per ordinary shares	89,165	294,352	705,407
Restricted Shares
Antidilutive Securities Excluded From Computation Of Earnings Per Share [Line Items]
Anti-dilutive securities excluded from calculation of diluted net (loss)/income per ordinary shares		1,042,234	11,657,620

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LEASES - Lease Costs Included in Statements of Operations (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
Lease Cost
Operating lease cost	¥ 57,080	¥ 30,788
Sublease income	(537)	(1,382)
Total lease cost	¥ 56,543	¥ 29,406
Lease expense
Lease expense			¥ 11,423

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LEASES - Cash Flow from operating leases (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	¥ 42,313	¥ 26,733
Operating leases	¥ 96,348	¥ 112,513
Weighted average remaining lease term, operating leases	3 years 8 months 4 days	3 years 9 months 3 days
Weighted average discount rate, operating leases	5.25%	5.21%

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LEASES - Maturity Analysis (Details) ¥ in Thousands	Dec. 31, 2020 CNY (¥)
Lessee, Operating Lease, Liability, Payment, Due [Abstract]
2021	¥ 49,628
2022	52,015
2023	46,114
2024	25,859
2025	8,354
Total lease payments	181,970
Less: imputed interest	(17,850)
Present value of lease liabilities	¥ 164,120

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SUBSEQUENT EVENT - (Details) ¥ in Thousands, $ in Thousands	1 Months Ended		3 Months Ended	4 Months Ended	12 Months Ended
	Apr. 19, 2021 CNY (¥)	Jan. 31, 2021 CNY (¥)	Mar. 31, 2021 CNY (¥)	Apr. 19, 2021 CNY (¥)	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
Subsequent Event [Line Items]
Repayments of bank debt					¥ 643,122	$ 98,563	¥ 20,000	¥ 30,000
Proceeds from bank used for daily operations					157,302	24,107	¥ 427,999	¥ 707,605
Investment in Yitong					¥ 26,713	$ 4,094
Minimum
Subsequent Event [Line Items]
Maturity term (in years)					1 year	1 year
Maximum
Subsequent Event [Line Items]
Maturity term (in years)					3 years	3 years
2021 Bank loans
Subsequent Event [Line Items]
Proceeds from bank used for daily operations				¥ 450,000
Subsequent Event | 2021 Bank loans
Subsequent Event [Line Items]
Bank borrowing loans	¥ 990,000			¥ 990,000
Repayments of bank debt	¥ 439,688		¥ 439,688
Weighted average interest rate	4.14%			4.14%
Subsequent Event | 2021 Bank loans | Minimum
Subsequent Event [Line Items]
Maturity term (in years)				1 year
Subsequent Event | 2021 Bank loans | Maximum
Subsequent Event [Line Items]
Maturity term (in years)	7 years		7 years
Subsequent Event | Jiangsu Yitong High-Tech Co., Ltd
Subsequent Event [Line Items]
Ownership equity interest acquired		29.99%
Cash consideration		¥ 959,680,000
Subsequent Event | Jiangsu Yitong High-Tech Co., Ltd | 2021 Bank loans
Subsequent Event [Line Items]
Investment in Yitong				¥ 540,000,000

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FINANCIAL STATEMENT SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY - BALANCE SHEETS (Details) ¥ in Thousands, $ in Thousands	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2019 USD ($)	Dec. 31, 2018 CNY (¥)	Dec. 31, 2017 CNY (¥)
Current assets:
Cash and cash equivalents	¥ 2,273,349	$ 348,406	¥ 1,803,117
Term deposit	5,000	766
Prepaid expenses and other current assets	152,898	23,433	67,358
Amounts due from related parties	860,213	131,833	1,421,170
Total current assets	4,827,866	739,903	4,392,452
Total assets	5,903,719	904,785	5,174,743
Current liabilities:
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Group of RMB 236,708 and RMB 168,535 as of December 31, 2019 and 2020, respectively)	252,275	38,663	352,249
Amount due to related parties	11,185	1,714	14,769
Total current liabilities	2,789,674	427,536	2,481,800
Other Liabilities Noncurrent	185,168	28,378	113,596
Total liabilities	3,173,461	486,353	2,677,155
Equity
Additional paid-in capital	1,552,109	237,871	1,478,902
Accumulated retained earnings	1,133,368	173,696	910,612
Accumulated other comprehensive income	44,624	6,841	111,081
Total equity	2,730,258	418,432	2,497,588		¥ 1,809,578	¥ 228,164
Total liabilities and equity	5,903,719	904,785	5,174,743
Class A Ordinary Shares
Equity
Ordinary shares	81	12	57
Class B Ordinary Shares
Equity
Ordinary shares	76	12	98
Parent Company
Current assets:
Cash and cash equivalents	204,637	31,362	398,604	$ 61,089	¥ 458,371	¥ 34,470
Prepaid expenses and other current assets	335	51	402
Amounts due from related parties	656,579	100,627	533,449
Total current assets	861,551	132,040	932,455
Investments in subsidiaries	1,895,011	290,423	1,594,844
Total assets	2,756,562	422,463	2,527,299
Current liabilities:
Accrued expenses and other current liabilities (including accrued expenses and other current liabilities of the consolidated VIEs without recourse to the Group of RMB 236,708 and RMB 168,535 as of December 31, 2019 and 2020, respectively)	688	105	166
Amount due to related parties	24,727	3,790	26,383
Total current liabilities	25,415	3,895	26,549
Other Liabilities Noncurrent	889	136
Total liabilities	26,304	4,031	26,549
Equity
Additional paid-in capital	1,552,109	237,871	1,478,902
Accumulated retained earnings	1,133,368	173,696	910,612
Accumulated other comprehensive income	44,624	6,841	111,081
Total equity	2,730,258	418,432	2,500,750
Total liabilities and equity	2,756,562	422,463	2,527,299
Parent Company | Class A Ordinary Shares
Equity
Ordinary shares	81	12	57
Parent Company | Class B Ordinary Shares
Equity
Ordinary shares	¥ 76	$ 12	¥ 98

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FINANCIAL STATEMENT SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY - BALANCE SHEETS (Details) - $ / shares	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018	Dec. 31, 2017
Ordinary shares, par value				$ 0.0001
Ordinary shares, authorized				405,462,685
Class A Ordinary Shares
Ordinary shares, par value	$ 0.0001	$ 0.0001
Ordinary shares, authorized	9,800,000,000	9,800,000,000
Ordinary shares, issued	128,736,916	91,459,708	57,303,093
Ordinary shares, outstanding	128,736,916	91,459,708	57,303,093
Class B Ordinary Shares
Ordinary shares, par value	$ 0.0001	$ 0.0001
Ordinary shares, authorized	200,000,000	200,000,000
Ordinary shares, issued	121,408,247	156,060,279	184,376,679
Ordinary shares, outstanding	121,408,247	156,060,279	184,376,679
Parent Company | Class A Ordinary Shares
Ordinary shares, par value	$ 0.0001	$ 0.0001
Ordinary shares, authorized	9,800,000,000	9,800,000,000
Ordinary shares, issued	128,736,916	91,459,708
Ordinary shares, outstanding	128,736,916	91,459,708
Parent Company | Class B Ordinary Shares
Ordinary shares, par value	$ 0.0001	$ 0.0001
Ordinary shares, authorized	200,000,000	200,000,000
Ordinary shares, issued	121,408,247	156,060,279
Ordinary shares, outstanding	121,408,247	156,060,279

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FINANCIAL STATEMENT SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY - STATEMENTS OF OPERATIONS (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
Condensed Income Statements Captions [Line Items]
Cost	¥ 5,100,698	$ 781,716	¥ 4,344,512	¥ 2,705,885
Gross profit	1,332,665	204,240	1,467,743	939,450
Operating expenses
Selling and marketing	358,655	54,966	181,975	96,538
General and administrative expenses	261,805	40,123	248,462	213,973
Research and development	538,009	82,453	430,822	263,220
Total operating expenses	1,158,469	177,542	861,259	573,731
Operating loss	174,196	26,698	606,484	365,719
Interest income	46,118	7,068	33,478	11,595
Net income	229,706	35,204	573,371	336,320
Parent Company
Condensed Income Statements Captions [Line Items]
Cost			55	414
Gross profit			55	414
Operating expenses
Selling and marketing	2,571	394	3,198	4,271
General and administrative expenses	54,613	8,370	50,572	99,881
Research and development	23,978	3,675	11,191	42,167
Total operating expenses	81,162	12,439	64,961	146,319
Operating loss	(81,162)	(12,439)	(65,016)	(146,733)
Interest income	1,337	205	6,868	2,185
Other loss			(699)
Equity in earnings of subsidiaries and VIEs	308,578	47,292	634,043	484,594
Net income	¥ 228,753	$ 35,058	¥ 575,196	¥ 340,046

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FINANCIAL STATEMENT SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY - STATEMENTS OF COMPREHENSIVE INCOME (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
Net income	¥ 228,753	$ 35,058	¥ 575,196	¥ 340,046
Other comprehensive income/(loss) net of tax
Foreign currency translation adjustment	(45,117)	(6,914)	11,274	60,357
Unrealized gain on available-for-sale investments and others, (net of tax effect of nil, RMB 1,554 and nil for years ended December 31, 2016, 2017 and 2018, respectively)	(21,340)	(3,270)	2,666	14,684
Comprehensive income attributable to Zepp Health Corporation	162,296	24,874	589,136	415,087
Parent Company
Net income	228,753	35,058	575,196	340,046
Other comprehensive income/(loss) net of tax
Foreign currency translation adjustment	(66,457)	(10,184)	13,940	75,041
Comprehensive income attributable to Zepp Health Corporation	¥ 162,296	$ 24,874	¥ 589,136	¥ 415,087

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FINANCIAL STATEMENT SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY - STATEMENTS OF COMPREHENSIVE INCOME (Details) - CNY (¥) ¥ in Thousands	12 Months Ended
	Dec. 31, 2020	Dec. 31, 2019	Dec. 31, 2018
FINANCIAL STATEMENT SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY
Unrealized gain on available-for-sale investments and others, tax effect	¥ 4,017	¥ 620	¥ 2,250

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FINANCIAL STATEMENT SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY - STATEMENTS OF CASH FLOW (Details) ¥ in Thousands, $ in Thousands	12 Months Ended
	Dec. 31, 2020 CNY (¥)	Dec. 31, 2020 USD ($)	Dec. 31, 2019 CNY (¥)	Dec. 31, 2018 CNY (¥)
Cash Flow from Operating Activities
Net income	¥ 228,753	$ 35,058	¥ 575,196	¥ 340,046
Share-based compensation	65,154	9,985	55,128	134,709
Changes in operating assets and liabilities
Prepaid expenses and other current assets	(79,957)	(12,257)	(32,444)	(5,748)
Accrued expense and other current liabilities	(149,385)	(22,894)	86,221	119,887
Amount due to a related party	(3,584)	(549)	4,074	5,757
Other non-current liabilities	68,739	10,535	57,347	51,309
Cash Flow from Investing Activities
Amount due from related parties	583,457	89,419	(770,976)	(45,116)
Other investing activities	9	1	143	65
Cash Flow from Financing Activities
Cash and cash equivalents at beginning of the year	1,803,117
Cash and cash equivalents at end of the year	2,273,349	348,406	1,803,117
Parent Company
Cash Flow from Operating Activities
Net income	228,753	35,058	575,196	340,046
Equity in earnings of subsidiaries	(308,578)	(47,292)	(634,043)	(484,594)
Changes in operating assets and liabilities
Net Cash provided by (used in) Operating Activities	(12,791)	(1,962)	(764)	(2,232)
Cash Flow from Investing Activities
Amount due from related parties	(123,130)	(18,870)	(218,791)	(196,158)
Investment in subsidiaries	8,411	1,289	2,263	(10,056)
Other investing activities			97,976	(95,085)
Net Cash provided (used in) by Investing Activities	(114,719)	(17,581)	(118,552)	(301,299)
Cash Flow from Financing Activities
Net Cash provided by Financing Activities			45,609	652,391
Net increase/(decrease) in cash and cash equivalent	(127,510)	(19,543)	(73,707)	348,860
Effect of exchange rate changes	(66,457)	(10,184)	13,940	75,041
Cash and cash equivalents at beginning of the year	398,604	61,089	458,371	34,470
Cash and cash equivalents at end of the year	¥ 204,637	$ 31,362	¥ 398,604	¥ 458,371

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FINANCIAL STATEMENT SCHEDULE I CONDENSED FINANCIAL INFORMATION OF PARENT COMPANY - CONVENIENCE TRANSLATION - Additional Information (Details)	Dec. 31, 2020 $ / ¥
Foreign currency exchange rate	6.5250
Parent Company
Foreign currency exchange rate	6.5250